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Posts Tagged ‘Perceived Risk’

Dear Readers, In coming days the blog-site Consumer Gateway well be re-dressed. The format applied in the past decade (which I still like) has become outdated, and it also no longer supports new editing and design features. During the transition period disruptions may be caused to the look of some posts and pages; your patience and forgiveness will be much appreciated until I sort these out. I hope you find the new appearance pleasant to view and to read through. 


Brands can be imagined as signposts that help consumers navigate through their purchase decision processes. On many occasions brands simplify and shorten the decision process; a strong brand may show the consumer the route to an easier and safer choice decision. Over the years, symbolic (e.g., self-expression, self-image), social (e.g., status, relationship) and emotional meanings of brands gained more attention and emphasis in research and practice. However, we should not let those latter influences of brands overshadow or mitigate our recognition of the essential and useful role reserved for brands in organising and directing consumer decision-making.

An insightful approach to the function of brands in decision-making draws from the theory of information economics. Consumers are commonly met with imperfect and asymmetric information about products they intend to buy, and under these terms they have to make decisions. ‘Imperfect’ implies that the information is usually partial, and may also be inaccurate; ‘asymmetric’ information in particular means that the producers or suppliers know more about the products they sell (e.g., physical attributes, costs) than the consumers who buy from them.  The brand of a product can function in such settings as a signal of the credibility of the product’s origin. The signal could thus serve as a decision aid that helps consumers make a better or more gratifying choice. Theory and research of the past twenty years suggest that the brand as a signal may have impact not only on the outcome of the choice decision (e.g., its quality) but furthermore on the whole course of the decision process (e.g., consideration, evaluation, choice).

The perspective of information economics is relatively less familiar than other theoretical viewpoints. Reference is made here primarily to cognitive-driven theories of attitudes and information processing that receive greater coverage than information economics in the context of brands. Yet, the information economics viewpoint of the brand as a signal, led by Erdem, Swait and Louviere, can be employed beneficially side-by-side with Aaker’s model of brand assets or Keller’s concept of (differential) brand knowledge. These views offer complementing aspects with respect to the role and effects of brands in decision processes. The efficacy of the brand as a signal for credibility applies especially to strong brands. Moreover, each approach describes how consumer-based brand equity is built-up or materialised through decision processes, and also proposes how to model and measure it.

A more formal definition of the brand as a signal specifies the ability of a brand to act as a credible signal (e.g., trustworthy, believable) reflecting on positioning overall of the branded products. It implies that consumers’ perceptions of the branded product on multiple aspects, primarily perceived quality, would be stronger, more believable, or more reliable. Subsequently, we need to understand what can make the brand a more credible signal. Main drivers that contribute to brand credibility include consistency of the brand owner in delivering on its claims or promises (e.g., in advertising), which would make those claims more trustworthy; consistency in the performance of actions on marketing mix elements (e.g., pricing, product capabilities); clarity of messages (e.g., to support its positioning); and the scale of investment in the brand (e.g., offline and online advertising, website and mobile app, sponsorships).

Greater brand investment directly enhances brand credibility. But consistency in execution of marketing actions seems even more important by contributing directly, and strongly, to brand credibility as well as by supporting clarity, which is likely to further add to credibility of the brand. Consequent benefits of higher credibility to consumers are likely to be support for higher perceived quality, reduced perceived risk, and lower information costs (e.g., less search and validation of information). Perceiving less risk in buying the branded product can in addition free the consumer from looking for more information, and therefore reduce in turn the information costs even lower. [1, 2]

In a multi-attribute choice model, each product alternative is assigned values on a set of attributes according to a consumer’s perceptions or beliefs about those attributes. These perceptions may be ‘coloured’ by associations that the consumer holds with the product’s brand name (some associations would ascribe to physical or functional attributes of the product {or service} whereas others may relate to an intangible image of the brand). Utility weights are added for attributes, as applicable by the decision rule — these weights may differ between brands, for any attribute that may be judged, for example, as more compatible with, important for, or even unique to a specific brand. The brand hence may impact the choice decision from consideration of which brands to include in the choice set, through perceptions about the branded products, to utilisation of the information in the decision rule applied (e.g., by alternative or by attribute). (Note: Details about  random error components of perceptions and utilities are omitted here.)[2]

A wider-angle view will account for additional phases or processes surrounding the framework of choice model described above, for instance: (1) The search for information upon which perceptions are formed or updated and the costs that may be incurred in gathering the information; (2) Learning about products by using a form of hypothesis testing to evaluate and screen information; (3) Mental processes engaged during learning and decision-making (e.g., encoding, search and retrieval from memory, preference formation). When a brand helps to organise the information, it is employed as a basis or reference for testing a hypothesis, or affects the meaning given to attribute information, it exercises, and possibly enhances, its brand equity in the minds of consumers.[2]


  • Swait, Erdem, Louviere, and Dubelaar proposed a measure (metric) of consumer-based brand equity, constructed from the perspective of information economics which regards the brand as a signal for higher quality and reputation. They called their measure the “Equalization Price“. Deriving the EP estimate for a brand is based on a comparison between two settings: (1) A hypothetical market where there is no differentiation between brand alternatives, and total utility for all alternatives is the same (for simplicity, it can be set to 0 for all brands); (2) A simulated market (choice set scenario) where brand alternatives exhibit different total utilities. Their approach is rather different from many others in its reference to a ‘hypothetical alternative’ and to the total utility of an alternative instead of a brand-specific component.
  • The Equalization Price denotes the level to which the price for a brand-product alternative can be raised until its total utility for a consumer in the simulated market (choice scenario) becomes equal to the ‘common’ utility {0} (i.e., the price at which the utilities are equivalent). Weaker brands could be assigned a negative EP. The researchers applied their brand equity estimates to analyse the potential of brands to extend from the ‘mother’ category into a ‘new’ category (e.g., Levi’s extending from jeans to athletic shoes). (Technical note: The EP estimates are derived from a probabilistic multinomial choice model based on a choice experiment — the ‘total utility’ refers to the deterministic portion of utility). [3]

Let us look next in greater resolution at differences in the chain of effects of brand credibility between stages of the decision process. The contribution of brand credibility in reducing perceived risk is more crucial in the early stage of considering which brands are eligible at all to be chosen from. Brands associated with too much risk will be eliminated in this stage of constructing the consideration set, and they will be excluded from any further operations. The savings that can be gained in information costs will also be important at this stage. In other words, “perceived risk and information costs saved play a screening role in the choice process”. On the other hand, enhancing perceived quality, in virtue of greater brand credibility, has greater impact when evaluating alternatives prior to making the choice decision. Therefore, brand credibility can increase the probability of the branded product of both being considered for buying and of being eventually chosen, but there is a difference in how the outcomes are achieved between those decision stages. [1]

It has also been found that this distinction in impact of perceived risk and perceived quality between stages will be more pronounced in product categories characterised by greater uncertainty and higher sensitivity to uncertainty. At the brand level, inconsistency in executing marketing mix elements (e.g., pricing, distribution) is likely to increase consumer uncertainty regarding the brand claims, and thereof hurts the credibility of the brand (see the effect via clarity noted earlier). Erdem and Swait discuss managerial implications of the role of brand credibility for customer relationship management (e.g., cognitive and affective impacts of credibility) and brand extensions. They also review other research in which they substantiated the contributions of specific aspects of brand credibility over choice stages and product categories (e.g., overall and distinct effects of trustworthiness by consistently delivering on brand claims and expertise in execution of elements of the marketing mix, such as technological competence in product development and design).

The Internet opens before the consumers an ocean rich with information at their fingertips on personal computers and mobile devices, in a plethora of commercial and non-commercial websites and mobile applications. So it would seem that a great part of the problems confronted by the field of information economics have been resolved for consumers. Yet, searching and gathering relevant information for a purchase decision in many product categories still takes time and requires cognitive effort, and sometimes also psychic effort or emotional stress.

Different costs may be more significant these days than were in the pre-Internet age but they cannot be discarded. For example, with so many sources of information available and easily accessible, it takes more time to review just several of them, and it is increasingly necessary to cross-check information found on various websites or apps (e.g., direct competitors, online shopping platforms, trade and professional portals). In reality, consumers normally access and review only a small portion of information available in a domain (e.g., how many and how often consumers open a window to read technical specifications).

Furthermore, even if information is less imperfect, there are still issues concerning asymmetric information because a greater part of information on products and services is controlled and provided by interested commercial businesses. In addition, biases and diversions could be luring in online information sources that consumers may not suspect, because they are not directly associated with the companies and brands originally providing the product or service of interest (e.g., search engines, online shopping platforms, social media — younger consumers increasingly stay in the confinements of “closed gardens” of social network platforms and do not explore the Internet enough).

Addressing brand equity from the perspective of information economics highlights a crucial value a brand can offer, brand credibility, with a very practical function in purchase decision-making. There is somewhat an illusion in believing that consumers are far less challenged today by constraints and costs of obtaining and using information for making choice decisions. If only for that reason, brands are promised to continue to play a vital facilitating role in the decision process. Moreover, when consumers can rely on credibility of a brand as a signal, this continues to reinforce the brand equity.

Ron Ventura, Ph.D. (Marketing)

Feel Well. Keep Good Health.

 

References:

[1] The Information-Economics Perspective on Brand Equity; Tülin Erdem and Joffre Swait, 2016; Foundations and Trends in Marketing, 10 (1), pp. 1-59 (DOI: 10.1561/1700000041)

[2] Brand Equity, Consumer Learning and Choice; Tülin Erdem, Joffre Swait, Susan Broniarczyk, Dipankar Chakravarti, Jean-Noël Kapferer, Michael Keane, John Roberts, Jan-Benedict E.M. Steenkamp, & Florian Zettelmeyer, 1999; Marketing Letters, 10 (3), pp. 301-318

[3] The Equalization Price: A Measure of Consumer-Perceived Brand Equity; Joffre Swait, Tülin Erdem, Jordan Louviere, & Chris Dubelaar, 1993; International Journal of Research in Marketing, 10, pp. 23-45

 

 

 

 

 

 

 

 

 

 

 

 

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One of the more difficult and troublesome decisions in brand management arises when entering a product category that is new to the company: Whether to up-start a new brand for the product or to endow it with the identity of an existing brand — that is, extending a company’s established brand from an original product category to a product category of a different type. The first question that would probably pop-up is “how different is the new product?”, acting as a prime criterion to judge whether the parent-brand fits the new product.

Notwithstanding, the choice is not completely ‘black or white’ since intermediate solutions are possible through the intricate hierarchy of brand (naming) architecture. But focusing on the two more distinct strategic branding options above helps to see more clearly the different risk and cost implications of launching a new product brand versus using the name of an existing brand from an original product category. Notably, the manufacturers, retailers and consumers, all perceive risks, albeit from the different perspective of each party given its role.

  • Note: Brand extensions represent the transfer of a brand from one type of product to a different type, to be distinguished from line extensions that pertain to the introduction of variants within the same product category (e.g., flavours, colours).

This is a puzzling marketing and branding problem also from an academic perspective. Multiple studies have attempted in different ways to identify the factors that best explain or account for successful brand extensions. While the stream of research on this topic helpfully points out to major factors, some more commonly agreed upon, a gap remains between the sorts of extensions predicted to succeed according to the studies and the extensions performed by companies that happen to succeed or fail in the markets in reality. A plausible reason for missing the outcomes of actual extensions, as argued by the researchers Milberg, Sinn, and Goodstein (2010), is neglecting the competitive settings in categories that are the target of brand extension (1).

Perhaps one of the most famous examples of a presumptuous brand extension has been the case of Virgin (UK), from music to cola (drink), airline, train transport, and mobile communication (ironically, the origin of the brand as Virgin Music has since been abolished). The success of Virgin’s distant extensions is commonly attributed to the personal character of Richard Branson, the entrepreneur behind the brand: his boldness, initiative, willingness to take risks, and adventurism. These traits seem to have transferred to his business activities and helped to make the extensions more credible and acceptable to consumers.

Another good example relates to Philips (originated in The Netherlands). Starting from lighting (bulbs, now more in LED), the brand extended over the years to personal care (e.g., face shavers for men, hair removal for women), sound and vision (e.g., televisions, DVD and Blue-Ray players, originally in radio sets), PC products, tablets and phones, and more. Still, when looking overall at the different products, systems and devices sharing the Philips brand, they can mostly be linked as members in a broad category of ‘electrics and electronics’, a primary competence of the company. As the company grew with time, launched more types of products whilst advancing with technology, and its Philips brand was perceived as having greater experience and good record in brand extensions, this could facilitate the market acceptance of further extensions to additional products.

  • In the early days of the 1930s to 1950s radio and TV sets relied for operation on vacuum tubes, later moving to electronic circuits with transistors or digital components. Hence, historically there was an apparent physical-technological connection between those products and the brand’s origin in light bulbs, a connection much harder to find now between category extensions, except for the broad category linkage suggested above.

Academic research has examined a range of ‘success factors’ of brand extensions, such as: perceived quality of the parent-brand; fit between the parent-brand and the extension category; degree of difficulty in making an extension (challenge undertaken); parent-brand conviction; parent-brand experience; marketing support; retailer acceptance; perceived risk (for consumers) in adopting the brand extension; consumer innovativeness; consumer knowledge of the parent-brand and category extension; the stage of entry into another category (i.e., as an early or a late entrant). The degree of fit of the parent-brand (and original product) with the extension category is revealed as the most prominent factor contributing to better acceptance and evaluation (e.g., favourability) of the extension in consumer studies.

Aaker and Keller specified in a pioneer article (1990) two requirements for fit: (a) the extension product category is a direct complement or a substitute of the original category; (b) the company, with its people and facilities, is perceived as having the knowledge and capability of manufacturing the product in the extension category. These requirements reflect a similarity between the original and extension product categories that is necessary for successful transfer of a favourable attitude towards the brand to the extension product type (2). A successful transfer of attitude may occur, however, also if the parent-brand has values, purpose or image that seem relevant to the extension product category, even when the technological linkage is less tight or apparent (as the case of Virgin suggests).

  • Aaker and Keller found that fit, based especially on competence, stands out as a contributing factor to higher consumer evaluation (level of difficulty is a secondary factor while perceived quality plays more of a ‘mediating’ role).

Volckner and Sattler (2006) worked to sort out the contributions of ten factors, as retrieved from academic literature, to the success of brand extensions; relations were refined with the aid of expert advice from brand managers and researchers (3). Contribution was assessed in their model in terms of (statistical) significance and relative importance. The researchers found  fit to be the most important factor driving (perceived) brand extension success in their study, followed by marketing support, parent-brand conviction, retail acceptance, and parent-brand experience. The complete model tested for more complex structural relationships represented through mediating and moderating (interacting) factors (e.g., the effect of marketing support on extension success ‘passes’ through fit and retailer acceptance).

For brand extensions to be accepted by consumers and garner a positive attitude, consumers should recognise a connectedness or linkage between the parent-brand and the category extension. The fit between them can be based on attributes of the original and extension types of product or a symbolic association. Keller and Lehmann (2006) conclude in this respect that “consumers need to see the proposed extension as making sense” (emphasis added). They identify product development, applied via brand (and line) extensions, as a primary driver of brand growth, and thereby adding to parent-brand equity. Parent-brands do not tend to be damaged by unsuccessful brand extensions, yet the authors point to circumstances where greater fit may result in a negative effect on the parent-brand, and inversely where joining a new brand name with the parent-brand (as its endorser) may protect the parent-brand from adverse outcomes of extension failure (4).

When assessing the chances of success of a brand extension, it is nevertheless important to consider what brands are already present in the extension category that a company is about to enter. Milberg, Sinn, and Goodstein claim that this factor has not received enough attention in research on brand extensions. In particular, one has to take into account the strength of the parent-brand relative to competing brands incumbent in the target category. As a starting point for entering the extension category, they chose to focus on how well consumers are familiar with the competitor brands vis-à-vis the extending brand.  Milberg and her colleagues proposed that a brand extension can succeed despite a worse fit with the category extension due to an advantage in brand familiarity, and vice versa. Consumer response to brand extensions was tested on two aspects: evaluation (attitude) and perceived risk (5).

First, it should be noted, the researchers confirm the positive effect of better fit on consumer evaluation of the brand extension when no competitors are considered. The better fitting extension is also perceived as significantly less risky than a worse fitting extension. However, Milberg et al. obtain supportive evidence that in a competitive setting, facing less familiar brands can improve the fortune of a worse fitting extension, compared with being introduced in a noncompetitive setting: When the incumbent brands are less familiar relative to the parent-brand, the evaluation of the brand extension is significantly higher (more favourable) and purchasing its product is perceived less risky than if no competition is referred to.

  • A reverse outcome is found in the case of better fit where the competitor brands are more highly familiar: A disadvantage in brand familiarity can dampen the brand extension evaluation and increase the sense of risk in purchasing from the extended brand, compared with a noncompetitive setting.

Two studies performed show how considering differences in brand familiarity can change the picture about the effect of brand extension fit from that often found without accounting for competing brands in the extension category.

When comparing different competitive settings, the research findings provide a more constrained support, but in the direction expected by Milberg and colleagues. The conditions tested entailed a trade-off between (a) a worse fitting brand extension competing with less familiar brands; and (b) a better fitting brand extension competing with more familiar brands. In regard to competitive settings:

The first study showed that the evaluation of a worse fitting extension competing with relatively unfamiliar brands is significantly more favourable than a better fitting extension facing more familiar brands. Furthermore, the product of a worse fitting brand extension is preferred more frequently over its competition than the better fitting extension product is (chosen by 72% vs. 6%, respectively). Also, purchasing a product from the worse fitting brand extension is perceived significantly less risky compared with the better fitting brand. These results indicate that the relative familiarity of the incumbent brands that an extension faces would be more detrimental to its odds of success than how well its fit is.

The second study aimed to generalise the findings to different parent-brands and product extensions. It challenged the brand extensions with somewhat more difficult conditions: it included categories that are all relevant to respondents (students), and so competitor brands in extension categories are also relatively more familiar to them than in the first study. The researchers acknowledge that the findings are less robust with respect to comparisons of the contrasting competitive settings. Evaluation and perceived risk related to the worse fitting brand competing with less familiar brands are equivalent to the better fitting brand extension facing more familiar brands. The gap in choice shares is reduced though in this case it is still statistically significant (45% vs. 15%, respectively). Facing less familiar brands may not improve the response of consumers to the worse fitting brand extension (i.e., not overcoming the effect of fit) but at least it is in a position as good as of the better fitting brand extension competing in a more demanding setting.

  • Perceived risk intervenes in a more complicated relationship as a mediator of the effect of fit on brand extension evaluation, and also in mediating the effect of relative familiarity in competitive settings. Mediation implies, for example, that a worse fitting extension evokes greater risk which is responsible for lowering the brand extension evaluation; consumers may seek more familiar brands to alleviate that risk.

A parent-brand can assume an advantage in an extension category even though it encounters brands that are familiar within that category, and may even be considered experts in the field: if the extending brand is leading within its original category and is better known beyond it, this can give it a leverage on the incumbents if those brands are more ‘local’ or specific to the extension category. For example, it would be easier for Nikon leading brand of cameras to extend to binoculars (better fit) where it meets brands like Bushnell and Tasco than extending to scanners (also better fit) where it has to face brands like HP and Epson. In the case of worse fitting extensions, it could be significant for Nikon whether it extends to CD players and competes with Sony and Pioneer or extends to laser pointers and faces Acme and Apollo — in the latter case it may enjoy the kind of leverage that can overcome a worse fit. (Product and brand examples are borrowed from Study 1). Further research may enquire if this would work better for novice consumers than experts. Milberg, Sinn and Goodstein recommend to consider additional characteristics that brands may differ on (e.g., attitude, image, country of origin), suggesting more potential bases of strength.

Entering a new product category for a company is often a difficult challenge, and choosing the more appropriate branding strategy for launching the product can be furthermore delicate and consequential. If the management chooses to make a brand extension, it should consider aspects of relative strength of its parent-brand, such as familiarity, against the incumbent brands of the category it plans to enter in addition to a variety of other characteristics of product types and its brand identity. However, the managers can take advantage as well of intermediate solutions in brand architecture to combine a new brand name with an endorsement of an established brand (e.g., higher-level brand for a product range). Choosing the better branding strategy may be helped by better understanding of the differences and relations (e.g., hierarchy) between product categories as perceived by consumers.

Ron Ventura, Ph.D. (Marketing)

Notes:

1. Consumer Reactions to Brand Extensions in a Competitive Context: Does Fit Still Matter?; Sandra J. Milberg, Francisca Sinn, & Ronald C. Goodstein, 2010; Journal of Consumer Research, 37 (October), pp. 543-553.

2.  Consumer Evaluations of Brand Extensions; David A. Aaker and Kevin L. Keller, 1990; Journal of Marketing, 54 (January), pp. 27-41.

3.  Drivers of Brand Extension Success; Franziska Volckner and Henrik Sattler, 2006; Journal of Marketing, 70 (April), pp. 18-34.

4. Brands and Branding: Research Finding and Future Priorities; Kevin L. Keller and Donald R. Lehmann, 2006; Marketing Science, 25 (6), pp. 740-759.

5. Ibid. 1.

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