A strong brand name is an invaluable asset; managers must know when to exploit it, when to protect it, and how to tell the difference between the two. Because using an established brand name substantially reduces new-product introduction risks, there is an almost irresistable pull to “extend” brand names to new products. Doing so can be enormously profitable, but it can be dangerous, too: In the worst case, an ill-conceived brand extension may seriously damage the original product and preclude the establishment of another brand with its unique associations and growth potential. This article examines both the advantages and potential pitfalls of brand extensions.
Brand extensions have been the core of strategic growth for a variety of firms during the past decade. The power of such a strategy is evidenced by the sheer numbers. Each year from 1977 to 1984, 120 to 175 totally new brands were introduced into American supermarkets. In each of those years, approximately 40 percent of the new brands were actually brand extensions. In 1986, over 34 percent of apparel and accessory purchases involved licensed names, and these were only part of over $15 billion in retail sales of products using licensed trademarks or brand names.1
The attraction of levering the brand name is powerful — often irresistible, when the alternatives are considered. The cost of introducing a new name in some consumer markets can range from $50 million to well over $100 million. And even such spending levels do not guarantee success. In fact, the percentage of new products that are successful is not at all reassuring. In contrast, using an established brand name can substantially reduce the introduction investment and increase the probability of success. A study of 7,000 supermarket products introduced in the 1970s found that fully two-thirds of the ninety-three products that grossed over $15 million were line extensions.2
The most real and marketable assets of many firms are the brand names they have developed. Thus, one growth option is to use those assets to penetrate new product categories or to license them to others for use in new product categories. An-other option is to acquire a firm with a brand name that can provide the platform for future growth via brand extensions.
However, this strategy has its drawbacks. A brand name can fail to help an extension or, worse, can create subtle (or sometimes not so subtle) associations that hurt the extension. Worse still, the extension can succeed, or at least survive, and damage the original brand by weakening existing associations or adding new, undesirable ones. Because the extension can dramatically affect a key strategic asset, both in its original setting and in the new context, the wrong extension decision can be strategically damaging.
This article is an overview of the brand extension decision and its possible outcomes — the good, the bad, and the ugly.