Quick Take: Exploring brand extensions: Balancing risk and reward with marketing research

Editor's note: Tracy Tuten is vice president of qualitative research at Illuminas. 

Brand extensions are a strategic move by a well-known brand to introduce new products or enter different markets beyond its original offerings. The strategy can be effective when the brand extension reinforces the parent brand’s positive associations but it is not without risk. In this article, we’ll review the potential benefits and risks associated with a strategy of expanding a product portfolio for a premium brand into lower-price bands. While the strategy holds promise in tapping into a broader consumer base, it necessitates careful consideration to mitigate the inherent risks of brand dilution. Fortunately, market research can inform tactics designed to minimize the likelihood of brand dilution. 

Rewards versus the risks

Let's kick things off with a quick primer. Brand extensions – those strategic moves where a brand introduces new products or ventures into new markets – potentially open new revenue streams alongside other rewards: 

• Revenue diversification: Casting your net wider with products at lower price points can reel in a whole new audience and boost revenue streams.
• Customer acquisition: Attracting those entry-level consumers sets the stage for long-term brand loyalty, especially as they climb the price ladder over time.
• Market share expansion: Penetrating the sales of lower-price bands may help the brand gain market share and compete with mid-range competitors. 

But let's not overlook the risks:

• Brand dilution: The primary concern is the risk of diluting the brand's image of exclusivity, innovation and prestige, resulting in lower brand equity.
• Cannibalization: Lower-priced offerings may cannibalize sales of premium products, impacting overall profitability.
• Consumer perception shift: The brand may face challenges in maintaining a consistent image across different price segments.

A deeper look at brand dilution

Brand dilution is the diminishment of a brand’s image and perceived associations related to quality, exclusivity and desirability that can occur when the parent brand follows a vertical brand extension strategy of adding lower-priced, lower-quality products to the product portfolio. Prestige brands, especially those providing self-expression benefits, face a higher dilution risk when launching products at lower price/quality levels. Premium brands, known for exclusivity, face a higher risk of dilution when offered at significantly lower prices, potentially leading to a loss of rarity factor and exclusivity.

The price discount level, reflecting the difference between the parent brand's typical price and the price of the new extension, is a contributing factor. Consumers use price/quality perceptions to evaluate the distance between parent brands and vertical-downward extensions. A closer proximity in price points between the parent brand and the extension leads to less dilution, while substantial price differences lead to more dilution.

Brand fit – the alignment and coherence between the attributes, values and essence of a brand and its product extensions – is also a mitigating factor. Low-fit extensions are more likely to result in dilution. 

To minimize the potential for brand dilution, the following best practices are recommended. 

• Evaluate market success indicators with caution: Instead of relying solely on the typical success indicators of the brand extension, measure and prioritize perceived brand fit to avoid damaging the parent brand’s brand equity.
• Maintain brand fit across the product portfolio: Ensure that the extension is perceived to mesh well with the brand's image and values to minimize the likelihood of dilution. 
• Calibrate the pricing strategy for the brand extension to manage price discount levels: Because dilution is more likely when the price discount level is high, carefully align price points across the product portfolio. 
• Communicate the reason for the extension: Clearly explain its rationale to consumers, emphasizing a commitment to maintaining quality and exclusivity.
• Reinforce the parent brand’s premium essence in marketing communications: Protect the parent brand from potential dilution by reminding the market of the brand’s positive association.

Inform your strategy with research 

• Market research can further inform the execution of brand extension strategies by exploring opportunities to align the extension to the parent brand on brand fit, evaluating price sensitivity in order to minimize the price discount level and assessing the potential for brand dilution. 
• Market perception and brand dilution risk: Assess how the target audience perceives the brand and its potential extension into lower-price bands. Include assessments in the marketing research study to gauge consumer reactions based on the direction of extension (vertical-downward vs. horizontal) and its impact on brand perceptions.
• Price sensitivity: Integrate a detailed analysis of price discount levels to understand consumer reactions and the potential impact on perceived brand quality and exclusivity.
• Communication strategy and message testing: Examine messaging tactics to determine optimal approaches for protecting parent brand equity and preventing brand dilution.

Proceed with caution

Brand extensions can be the ticket to growth and glory but proceed with caution. With a dash of strategy informed by market research, companies will be ready to navigate the twists and turns of expansion opportunities while also protecting their established brands.