Brand Equity and Vertical Product Line Extent

Abstract

This paper addresses the question of how the vertical structure of a product line relates to brand equity. Does the presence of “premium” or high-quality products in a product line enhance brand equity? Conversely, does the presence of “economy” or low-quality products in a product line diminish brand equity? Economists and marketing researchers refer to variation in quality levels of products within a category as “vertical” differentiation, whereas variation in the function or “category” of the products is referred to as “horizontal” differentiation. Much of the existing research on the relationship between product line structure and brand equity has focused on the horizontal structure of the product line and has been primarily concerned with —what happens when the product line of a brand is extended horizontally into new categories? Researchers have been concerned primarily with how the extension fares, but the effect of the extension on the products is also important. There is an analogous question of what happens when the product line of a brand is extended vertically, either “up market” or “down market.” This question of vertical extensions is part of the more general issue of how the vertical structure of a product line relates to brand equity. The specific research questions addressed in this paper are: (1) do “premium” or high-quality products enhance the brand equity associated with the other products in the line? (2) Conversely, do “economy” or low-quality products diminish the brand equity associated with the other products in the line? These research questions are relevant to three managerial issues in product-line strategy. First, what are the costs and benefits of including “down market” products within a brand? Second, what are the implications of including high-end models within a brand? Third, when should high-end and low-end products be offered under an existing brand umbrella and when should these products be offered under separate brands? We address these research questions empirically through an analysis of the models and brands within the U.S. mountain bicycle industry. We use price premium above that which can be explained by the physical characteristics of the bicycle as a metric for brand equity. We then test several hypotheses related to the relationship between extension of the product line upward and downward and the price premium commanded by the brand. We further support this analysis with a simple laboratory experiment. The analysis reveals that price premium, in the lower quality segments of the market, is significantly positively correlated with the quality of the lowest-quality model in the brand's product line; and, that for the upper quality segments of the market, price premium is also significantly positively correlated with the quality of the highest-quality model in the brand's product line. The results of the analysis are supported by the outcome of an experiment in which 63 percent of the subjects preferred a product offered by a high-end brand to the equivalent product o...

Brand Portfolio Strategy and Firm Performance

“…Much of the value of a brand is related to its ability to reduce consumer risk, and brands that are perceived as high quality deliver greater consumer riskreduction value (Aaker and Keller 1990;Smith and Park 1992) and superior financial returns to their owners (e.g., Aaker and Jacobson 1994). High-quality brands also enjoy greater price premiums (e.g., Sivakumar and Raj 1997), and the perceived quality of multiple products bearing the same brand name affects the overall value of the brand (e.g., Randall, Ulrich, and Reibstein 1998). As a result, marketing actions, such as price promotions, provide greater returns for high-quality than low-quality brands (e.g., Allenby and Rossi 1991;Blattberg and Wisniewski 1989;Kamakura and Russell 1989), and high-quality brands suffer less negative demand impact from price increases (Sivakumar and Raj 1997) and require less advertising expenditure and fewer price reductions (Agrawal 1996).…”

The Length of Product Line in Distribution Channels

“…Longer product lines may help firms achieve higher total demand and market shares (Kotler 2002), target different customer segments (Villas-Boas 2004), and obtain more retail space or better utilization of manufacturing capacity (Lancaster 1979, Quelch and Kenny 1994, Aaker 1996. In addition, more products can also satisfy consumers' needs for "something different" (Klemperer 1992, Randall et al 1998, and help a firm preempt the market entry of a competitor (Schmalensee 1978). This paper is particularly related to previous research on the effects of market structure on firms' product line extensions.…”

Can Online Decision Aids Support Non-Cognitive Web Shopping Approaches?

“…Their goal is to conform to behavioural norms or to avoid undesirable social consequences, or to benefit from the advantages of belonging to the group (Burnkrant & Cousineau, 1975, Calder & Burnkrant, 1977, Fisher & Price, 1992, Olshavsky & Granbois, 1979. Some commercial brands are perceived as prestige-conferring, for example luxury cars or certain brands of athletic shoes (Randall et al, 1998). Shoppers seeking to "keep up with trends and to create a new image" are motivated by e-stores that are attractive and offer merchandise variety (Ganesh et al, 2010, p. 111).…”

“…The brand ensures a constant level of quality to consumers (Alba et al, 1997, Ha, 2002, Randall et al, 1998. For consumers, shopping at a website with a well-established brand store, either offline or online, reduces perceived risks (Ha, 2002, Tan et al, 2009.…”