For companies such as Coca-Cola and Nike, the power of their brand names accounts for a lot of their success. Usually, we call this brand equity. However, sometimes, firms go too far in stretching their brands’ usage. Today, we look at brand dilution, extensions, and cannibalization.
Avoid Diminishing Brand Value: Brand Dilution, Extensions, and Cannibalization
“Brand dilution is when a company’s brand equity diminishes due to an unsuccessful brand extension, which is a new product the company develops in an industry that they don’t have any market share in, like Reese’s Puff Cereal or Gerber’s baby clothes.”
For example, “Cadbury’s expansion into instant mashed potatoes created a new revenue stream and even generated more sales for them, but it damaged their upscale brand as a whole. This phenomena is called brand dilution. When Cadbury started producing low-end food products, like instant mashed potatoes, the association with the finest chocolates weakened.”
“Companies leverage their brand awareness and equity to develop brand extensions that create new revenue streams. However, an unsuccessful brand extension, like Zippo’s perfume for women or Samsonite’s outerwear, can attach undesirable associations to their brand, weaken existing associations, and hurt established products’ perceived quality, which can all lead to brand dilution.”
“This occurs when a company develops a brand extension that competes with one of its established products. And takes a portion of its market share. Even though brand cannibalization sounds like a counter-intuitive business strategy, companies do it because they think their new product’s sales will be greater than their older product’s loss in sales, leading to a boost in total revenue.”
“For instance, when Apple released the iPad, the original Macintosh’s sales decreased. But the iPad’s sales were greater than the Macintosh’s loss in sales. So Apple actually grew its total revenue. However, brand cannibalization can also backfire, prompting customers to purchase the new product instead of the older product, leading to a stagnation or decrease in the company’s total revenue.”