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 By
George Mikaelian
Managing Director
(Bahrain, Oman, Qatar, Kuwait) The Nielsen Company
The
path to innovation –driving brand growth
While making line extensions part of their new and improved brand-building
strategies, companies need to adopt a dual approach that takes into
consideration the relationship between trade partners and consumers
Today companies need to innovate to generate new revenue. A great way to do that
is to launch a line extension, but the question remains which brand should a
company use from its their extensive brand portfolio to achieve this? More
importantly, what will be the effect of this line extension on sales of the
company’s core products or on the brand as a whole? To compete effectively in
fast-paced and highly competitive markets, marketers must understand the key
strategic drivers at the heart of such questions.
While many marketers tend to focus on trade partner programmes or consumer
campaigns to squeeze the most out of their brand, new research reveals that
separating one from the other can be fatal. Instead, the key to sustained
long-term profitability is to optimise activity with both trade partners and
consumers. Focusing on both sides of the coin will yield growth without harming
the brand’s hard-earned equity. Key success factors for successful line
Key drivers
All brands need to grow, but finding the most profitable path to sustained
long-term revenue is not always easy. To achieve brand growth, marketers must
succeed in:
- Attracting new or past buyers
- Increasing loyalty (or consumption) among existing customers
-
Doing the same with retailers
By gaining a deeper understanding of these key factors, it is possible to
develop strategies to maximise overall brand value. Most crucially, a dual
approach is required that takes into account relationships with both trade
partners and consumers. It is impossible to adjust one without affecting the
other. It is also true that retailers do not measure success in the same way as
marketers do. While retailers are interested in profits per square meter of
store space, marketers concentrate on driving profits for each particular brand.
Failure to understand the nuances of this distinction can be disastrous.
Think incremental
There is one fundamental and obvious rule to follow when launching a successful
line extension – it must make sense to the consumer. There is no point launching
a product or service, no matter how good it is or how well it is designed or
packaged, if potential buyers are unable to establish either a visual or
emotional link with the core product they are already familiar with. Finding the
right balance between consistency, uniqueness and relevance is not easy. Line
extensions that are close to the parent brand may appeal to consumers, but if
the extension is too close, it could lead to cannibalisation of the parent
brand. Conversely, being too far away from the parent brand may dilute its
equity by being too much of a stretch.
To really get incremental sales, the following needs to be done:
- Focus efforts on unique and incremental initiatives
- Drive incremental distribution to avoid weakening the parent brand
- Limit the amount of spending that is borrowed from the parent brand
- Avoid ‘downsizing’ parent brand buyers
- Maintain advertising and promotion support beyond year 1
Mainstream and niche
When considering a line extension, marketers must carefully manage the process
to avoid weakening the core. As part of the puzzle, marketers need to decide
between tackling a broad target versus focusing on a niche variant. While issues
such as marketing spending and transaction size are also variables that need
scrutiny, choosing between a broad or niche target strategy is probably the main
determinant of the risk profile of the entire launch. A broad target strategy
means a higher risk of cannibalisation unlike in a niche strategy. The key is to
emphasise differentiation within the other variants in the range. In case of a
niche strategy, the focus should be on distribution and replacement.
Build your brand equity It can be useful when line extending to verify the
long-term relationship between the line extension and its parent brand. For
instance, the extension must have some drivers of choice in common with the
footprint of its parent brand, or consumers may view its branding as not being
legitimate. The product extension should not put the equity of the parent brand
at risk by being weak on its strengths and ideally, it should be able to enrich
the parent brand by improving – by halo affect at least – one of its brand’s
weaknesses.
Driving incremental sales
As previously stated, the most successful strategies are those that influence
incremental volume potential, not just absolute volume potential. The four
factors that should always be considered are:
- Consumer Substitution – Given that the line extension’s sales drawn from the
parent brand are often more than what the ‘market share’ suggests, cannibalisation is usually the most significant factor affecting potential for
growth. The key is to focus efforts on unique, incremental initiatives.
- Marketing Spending – Because new products need funding, marketing support is too
often sourced from the parent brand’s advertising and promotion budget,
resulting in a decline in parent brand volume. The key is to persuade the
management to approve incremental support without overly neglecting the parent
brand.
- Distribution – Experience has shown that new product releases often lead to
reduced distribution or shelf space of some parent brand SKUs causing sales to
decline. The key is to drive incremental distribution and facings.
- Transaction Size – Nielsen experience shows that transaction size for new
products is often lower than that of the parent brand and can worsen the impact
of consumer substitution. The key is to avoid downsizing buyers of the parent
brand.
Stretching the fixed factors
Every marketer has to deal with fixed factors. What is important is that rather
than accepting fixed factors as unmovable, it is possible to improve ROI through
creative thinking. Fixed factors that line extensions can unlock are:- Size of target market population – While the total population in a market may be
fixed, the total pool of potential buyers may vary. The introduction of line
extensions may attract new or lapsed buyers to your brand. The key is to develop
extensions that are unique and can be readily associated with your brand. This
is specially true in categories with far less than 100 per cent penetration
where it may be possible to attract new users to the category through clever
adjustment of the marketing mix, while convincing consumers that they have a
need for a product they did not think they had.
- Number of stores – Although the number of stores selling your brand may be
fixed, line extensions that are highly unique and offer a higher margin for
channel partners offer growth potential for smart marketers. What’s more,
popular variants with healthy trade margins are more likely to stay in
distribution, so once the stores or pharmacies have been enticed to partner with
you, they are likely to be locked in. To really drive brand growth, marketers
should consider ways to exploit underserved or secondary channels, which can be
highly incremental for the brand in the
long run.
Category shelf space per store – Retailers prefer to maximise returns by
stocking SKUs with good margins. The strategy for marketers is to steal shelf
space from competition before they steal it from them. The job is to convince
retailers through accurate sales forecasting techniques that their line
extensions will lead to higher profits. This can be done by developing variants
that grow the category enough so that retailers increase share of store for it,
or by developing variants or formats suitable for dual placement to compete on a
second shelf.
- Consumer habits or routines – While habits and routines displayed by consumers
are not truly ‘fixed’, they are difficult to change. It is unlikely a line
extension will be sufficient to break longstanding habits. A better approach is
to develop brand concepts and products that are powerful enough to capture a
higher share of existing uses and purchases. One way of doing this is by
managing transaction size. For example, offering a product in various sizes or
bundling it in high volume packs.
Total brand marketing support – Manufacturers often aim to extend their brands
without increasing total marketing support. This seldom works because it limits
prospects for incremental growth. Instead, marketers should compete internally
for budget and sales force attention, and externally for share of voice and
shelf. It helps if it can be shown how a line extension will increase the user
pool or profitability per use.
When to stop extending?
It is also important to know when to stop extending your products. There is
simply no point pursuing a line extension strategy when:
- The extension has insufficient appeal to compete effectively
- The new item will not help to build or strengthen the franchise’s brand equity
- The worst item in the existing line will continue to do better than the best
line
- Leakage from the parent brand is too high
- The line extension does not grow the category
- The company is unable to secure incremental shelf space or find new outlets
- There is insufficient incremental marketing support
Choosing the right strategy
Given the complexity of today’s retail world, there are no magic solutions –
there is a time and place for line extensions as well as re-launches, and the
challenge is in knowing which strategy to choose and when.
A re-launch is preferred when:
- The idea offers unambiguous, broadly appealing performance improvements without
significant trade-offs
- Cost can be reduced and prices can rise for a full range
- Incremental shelf space is difficult to achieve
- Incremental marketing support can not be provided
- A line extension strategy is advisable when:
- Ideas may alienate parent brand buyers or appeal to a fairly narrow sub-segment
of the market
- Premium pricing is required to maintain margins
- Incremental shelf space can be secured
- Incremental marketing support can be provided.
- The parent brand is too small to re-launch effectively!
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