Monday, January 09, 2006

Brand extension and profitability

Voh Furstenberg..the name generated high margins regardless of category. However in a few years profitability plummeted.

Luxury brands increse in profitability when consumers perceive that these goods offer good value than other comparable products. De Beers, Bose, Louis Vuitton, Rolex

A study of 150 brands shows that this rule doesnt always hold..

Luxury brands profitability will usually increase as the premium degree increases but only if the brand is extended in to product categories adjacent to the core brand..

Louis Vuitton & Cartier enjoyed margins as high as 79%. These brands have profitability extended their names to categories adjacent to the core product. However, Pierre Cardin began early extensions into perfumes & cosmetics succeeded. The company began giving licenses indiscriminately. By 1988 it gave more than 800 licenses into unrelated categories genrating profits of $1bn. Pretty soon margins collapsed.

Some luxury brands are valued for functional aspects (Porsche)
Other luxury brands like Louis Vitton are valued for the lifestyle they project.
Symbolic brands can be more easily exported into non adjacent categories than functional brands and can succeed only when they consistently promote their core symbolic attributes.

Von Furstenberg made the mistake of emphasising the technical aspects of non adjacent products when it should have played up the symbolic value of brand name.
However, it shold also be seen weather symbolism can be consistantly promoted.