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Preference for Brands, Why you Pay More

Harley-Davidson.svgWhy do we prefer brands? If you were to ask a brand guru, he or she will say it is because a brand stands for something in your mind. It conveys a benefit that some other similar commodity with similar functionality does not. Hence, it is a good thing to invest in creating brands. They deliver higher returns. Sure, that’s the proclaimed benefit.

Now if go to any mall and head for the toiletries section, the food section or garments. Now, if you love Kissan jam, you will surely pick it up. If you like Fem hand wash, you will put it into your cart. But do you always do that? What is that bottle of mixed fruit jam with label “X” that looks just the same as Kissan, but which offers you more jam for less? Rs 10 off per bottle? Buy one get one free? Won’t you try it just for a lark to see if it makes any difference? And if, after tasting it, you find no difference, would you still always pick up a Kissan after that? Why are you dumping a brand you earlier loved?

Again, consider another scenario. There is a drinking water shortage in your locality, and your kirana (local grocery ) store, on finding that bottles of Bisleri are moving very fast, starts charging you a premium for his remaining stock. Would you pay more for it? The answer, I suppose, would depend on how desperate you are for that bottle, and what you know (or don’t know) about Bisleri’s availability in the other shops in the vicinity. If you know the next shop has enough stock, you won’t pay more. If you think the stocks are vanishing fast, you will buy more bottles, even at a premium.

Ask yourself: why are you paying less for your jam in the first instance, and more for your Bisleri in the second? Why is the value of the Kissan bottle falling for you and that of Bisleri rising? Remember, both of them are brands, but the value you are attaching to them is different.

This brings me to a key element of Value: Value is derived from two things, relative shortage of a product, and the relative information content of a brand. Very little of it flows from real qualitative difference.

Shortage is, of course, easy to understand since price depends on demand and supply. But in a situation of non-shortage, almost all value derives from information asymmetry.

You pay more if you know less about what goes into a brand, and you pay less if you know more.

Let’s try another example. You can buy a Titan Sonata watch for as little as Rs 500; but prices for higher Titan ranges can go up to many thousands of rupees. A Rolex would begin somewhere above a couple of lakhs.  Why do we prefer brands?  Reuters

Now, all these watches will tell the same time – however ornate they are. Give or take a few seconds, none of them will keep time badly enough for you miss flights and you would want to chuck them into the dustbin. So why would you buy a Rolex rather than a Sonata or a Titan Raga?

Clearly, the value is all in the esoteric, in the implied status or perceived benefits of the product.

But would you pay the same if I were to tell you that the difference in the innards of the watch that costs your Rs. 500 and the one that costs Rs 5,000 is not more than Rs 50 in terms of manufacturing inputs? It’s just the perceived benefit that gets you to pay more. Would you still buy the Rs 5,000 watch? “Probably not”.

So what am I getting at? Almost all value comes from information asymmetry. The manufacturer knows that one watch does not cost more to produce than the other, you don’t. That’s why you pay Rs 5,000, carried away by the ads that paint a sexier picture of that watch.

If we accept that information asymmetry drives value, we can understand why brands cost more.

The true purpose of branding is to ensure an information asymmetry in favour of your product rather than that of your competitors.

The reason why you don’t always buy a Kissan at a mall is that you can get to see comparable products cheek-by-jowl. The information asymmetry vanishes. And you know that a cheaper product is not necessarily worse than the costlier brand.

The growth of mall culture, the internet and other mechanisms that enable us to compare prices and product performance is taking this information asymmetry away from most brands. Customers are getting wiser.This is why we never ever go to a ticketing agent to buy an airline ticket. We buy it from or or – or similar sites – since we get to see all that we need to know before we buy.

This is why we are quite happy buying cheaper private label T-shirts from Shoppers’ Stop or Lifestyle or Pantaloons rather than somewhere else. The earlier information asymmetry – lack of knowledge about other kinds of T-shirts – is more or less gone, and we are happy to buy what we can see and discern.

The collapse of Kingfisher Airlines is also partly attributable to Vijay Mallya’s inability to maintain an information asymmetry in favour of his full-service carrier Kingfisher. He bought Air Deccan and called it Kingfisher Red. Every flyer saw that both looked the same – and opted for the cheaper carrier. Kingfisher was soon in the Red – deep Red. Now it’s almost gone.

Jet Airways managed to do the same silly thing. It had not two, but three, brands – Jet, Jet Konnect and Jet Lite. Apart from the minor difference in names, everybody thought he was boarding a Jet flight. Little wonder, they all bought the cheapest Jet tickets when they had the option.

FordNaresh Goyal also messed up by erasing the difference between one brand and the other. He made information more easily available to his customer – and the customer chose cheap over costly. He destroyed the information asymmetry and drove his customers towards lower-margin seats.

The fight for higher profitability and deriving higher value from a product is thus about maintaining an information skew in your favour. You have to build stories around the brand, and create benefits that go far beyond functionality. Often, generating insecurities in the consumer’s mind – will people think I am a cheapo if I wear Lux undergarments rather than Jockey – helps. But it’s not going to be easy, for this is an information-heavy world, and it is not always possible to maintain this information skew.

More important, as every brand evangelist knows,

The brand is not something you own, but something your consumer thinks is His.

It is an emotion in his mind, a feeling it engenders in him. This is why it is best to treat brands as a partnership with the customer. You may legally own it, but in reality it is the customer who does.

This is why when Coke launched New Coke that was sweeter and better tasting, there was a consumer revolt. How dare you change our Coke? was the angry response. Coca-Cola had to restore the old Coke, even though in blind tests consumers preferred the new concoction.

Harley-Davidson never makes a change in its iconic bikes without talking to a huge chunk of its customers. There are better bikes in the market that can go faster and are more fuel-efficient. They may be better value-for-money in every way. But the company knows it is on a strong wicket since its consumers own the brand – in their minds, the bike is theirs, and this gives it a higher value than it deserves based on pure functionality. You always value yourself more than others.

The key to brand value is to share its ownership with your customer.

This article was first published in The Entrepreneur by By R. Jagannathan

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