Branding should be a familiar concept to most of us. One glib definition of branding is “the amount of money a consumer would pay for a brand above and beyond functional equivalents.”
What lies at the heart of a good Brand? In 7 Powers, investor Hamilton Helmer decomposes this power into:
Benefit: A business with Branding is able to charge higher prices for its products due to one or both of the following two reasons: 1) affective valence — the built-up associations with the brand elicit good feelings about the product, distinct from the objective value of the good. You’re willing to pay more for Coca Cola compared to an unbranded coke, even if they taste the same. 2) uncertainty reduction — a customer has peace of mind knowing that the branded product will be just as expected. Some buyers are more willing to pay for Bayer aspirin compared to a generic, locally made alternative, purely as a function of their trust in the Bayer brand.
Barrier: The barrier here is time. A challenger would need to spend a huge amount of resources over a long period of time in order to cultivate a new brand name. Why? Simple: a strong brand can only be created over a lengthy period of reinforcing actions (which Helmer terms ‘hysteresis’). Surviving a long period of time is itself difficult.
Brands have interesting characteristics. Like Counter-Positioning and Switching Costs before it, Branding is not an exclusive Power — multiple companies may have strong Brands in the same market. (e.g. Prada, Hermès and Louis Vuitton all co-exist in the luxury market).
There are other nuances:
Brand dilution is a thing — Firms require focus and diligence to guide Branding over time, so that the reputation created remains consistent with the valences that its products generate. Companies that have strong brands usually evolve unique cultures that reinforce the protection of that brand. (Disney’s managers, for instance, are famous for the fierceness with which they protect the company’s reputation).
Counterfeiting — One challenge that is unique to Branding is the risk of counterfeiters. Since the label is what confers pricing power, counterfeiters may free-ride by falsely associating a powerful brand with their product, undermining the repeated, positive interactions that consumers need to have to sustain the brand.
Changing consumer preferences — Once upon a time, the Marlboro Man was a thing. Now it is not.
Geographic boundaries — Brands that confer Power in one region may not translate to another.
Brand recognition is not Branding — Perhaps the most important point is that brand recognition is not branding. As many others have argued over the years: branding is only a moat when it confers pricing power to the business. You may have a well-known brand, which reduces search costs and perhaps leads to customer selection over competitors. But if you have no ability to charge higher prices than functionally-equivalent alternatives, your brand is not a durable source of competitive advantage.