It’s Thanksgiving week and, if you are luckier than me, you might be spending your time looking for a great hotel where you will spend the holidays. If so, are you a “luxury boutique” type of guest? Would you consider staying at hotels by West Elm, Restoration Hardware or even by Equinox? You might be thinking: These are all non-hospitality brands so why should I consider them for my hotel selection? The answer is simple, and yet exciting: Brand extension.
In a widely competitive environment, companies are trying to expand their reach to new customers, reinforce their value, and efficiently grow their business. Among the various types of organic growth strategies, a brand development approach highlights existing and new brand and product opportunities. The Brand extension strategy (found at the #TopRight corner of the matrix), leverages the parent brand to enter a new product category. When compared to the launch of a new brand, this approach adds incremental value and reduces risk and costs. This strategy is more common for firms whose current brand equity is strong enough to influence existing customer base and brand loyalty to increase profits with the new product category offering.
Recently, we came to find that Equinox (a luxury fitness gym operator), West Elm and Restoration Hardware (home good retailers) are planning to enter the hospitality industry. These brands are venturing into the risky world of brand extensions, planning to launch boutique hotels in different locations in the U.S. by 2018-2019.
Are they going to become successful brand extensions?
Well, there are many variables involved in having a successful brand extension. The general consensus is that when brand equity is high, the chances of a successful brand extension increase. Based on this fact, there are higher chances of a positive launch for these renowned brands. On the other hand, there are a number of examples in the market of how even the most well-known and positioned brand might fail in this adventure. Almost 84% of brand extensions fail and, of the successes, only 54% survive after the third year, proving that the success relies on a number of factors.
Brand extensions in the hospitality industry provide a good example of these statistics.
Do you remember when McDonalds launched the “Golden Arch”? A four-star hotel located in Zurich that closed two and a half years later? Well, we can attribute one of the reasons of the failure to a low brand association between the parent brand and a four-star type of hotel.
Although the venture related to the company’s food business and relied on many of its core competencies, such as franchising and real estate management, the McDonald’s brand doesn’t square with the image of a four-star hotel. – Stefan Michel, The Upside of Falling Flat
What about luxury brands like Armani, Versace, Bulgari and Ferragamo? All of these companies possess very high brand equity and they are relevant in a luxury niche that could succeed in the hospitality industry. Yet their potential for success might also be questioned. One of the key reasons: all of them are strong luxury brands, but operating hotels is clearly not their core competency. Bulgari, on the other hand, had a different strategy, which set them apart from the pack and made their brand extension more successful. The difference? The company created a joint venture with a hospitality expert: Marriott hotels, which reduces their risk and increase the probability of success.
The reality is that there are many examples of successful brand extensions, and the benefits from the extensions are huge. Beyond offering new sources of revenue, a successful brand extension can create business diversification, achieve marketing efficiencies between categories, increase brand equity, enhance brand associations and accelerate the speed to market the new category.
So, coming back to our furniture and wellness brands. Are they going to have a successful brand extension?
To increase the probability of success, any brand should follow a few best practices.
1. Measure Brand Equity
One of the biggest concerns when implementing brand extensions is the risk of causing brand dilution, that is, when the new product category fails and presents a negative impact on the brand as a whole. Thus, the first step is to have a Brand Equity measurement in place in order to track possible future impacts.
2. Measure the potential risks
Run a scenario analysis to identify the positive or negative effects on the business and brand equity. The goal is to implement a brand extension whose risk of failure does not exceed any marketing efficiencies.
3. Leverage from business core competency
The new product should leverage all the skills and know-how from the current business and marketing operations in order to gain a competitive advantage in the new category. By identifying the business key competencies, the brand will be able to gain efficiencies and create market differentiation.
4. Invest in Marketing Research
In the eagerness to grow the business, brands forget about making sure the new category has market potential, that there are clear opportunities or unmet customer needs. When identifying key opportunities, make sure to understand prospect and current customers and estimate their acceptance for potential brand acceptance. Use marketing research also to test the possible new brand extensions.
5. Make the brand extension a logical fit
The new product must be a logical fit to the brand, compatible, expected and follow the current brand story. The link between the new product and the parent brand should be easily tracked. The biggest brand extension pitfalls fall into this category.
6. Create a Brand Extension Strategy
After making sure the story follows a smooth path between both categories, make sure you develop a brand management plan and a compelling go-to-market strategy that will connect with your audience across multiple touchpoints on the Customer BuyWay.
There will always be uncertainty about how successful a brand extension can be. Will West Elm and Restoration Hardware leverage its furniture know-how and integrate it successfully in the hospitality industry? And, will Equinox have a successful connection between the hospitality industry and its health and wellness experience? These brands plan to launch the new hotel locations by 2018-2019. Until then, we will continue analyzing whether their adventure will be successful or not.
Moving your business to the #TopRight with a successful brand extension requires a deep understanding of your brand and your customers to not only assess if it is a logical fit but also to communicate it to the consumers in formats and channels that they consume. Learn how to create the right Story, Strategy, and Systems in our new eBook Transformational Marketing: Moving to the TopRight.
Photo credit: Bulgari Resort Bali Main Pool, Flickr