Living Economics

May the Best Brand Win!
Because well-known brands can signal quality and integrity amid consumer ignorance, brands could stabilize market share and enhance brand-owners' ability to charge premium prices.

If you need to have lunch while driving on the Interstate to a far-away city, are you more likely to go to a local mom-and-pop restaurant with unknown quality or a nationally known chain restaurant with a standardized menu? Unless you are particularly adventurous, you would go for the brand-name restaurant. The reason is quite simple; a chain restaurant with a well-known brand can be depended upon to do everything reasonable to ensure consistent quality. One incidence of publicized lapse in quality could seriously reduce its brand value.

Branding is a rational response to counter consumer ignorance. A well-known brand conveys quality and integrity. This image in turn allows the brand owner more room to stabilize its market share and charge premium prices. In the absence of brands, consumers would naturally choose according to the lowest price.

The significance of brands may not lie in the practical content of their message, but in its role as a proxy to commitment. A fly-by-night business would not have the means nor would it waste resources on building a brand because it does not stay in business long enough to benefit from it. Not surprisingly, companies with well-regarded brands also enjoy better access to funds at lower cost.

But massive advertising is not the same as brand building. During the Internet boom, startups spent tens of millions of investor money to promote their companies. But many of the dot-com ads never got around to telling consumers what the brands stood for, or even what products the company offered.

On the other hand, the newly successful Starbucks has spent very little on traditional advertising. Instead, it plowed potential ad money into employee benefits. Happy employees are vitally important for the success of Starbucks who sell more of a lifestyle than just coffee. A disgruntled employee or dirty restroom would break the pact Starbucks has with its customers.

Just like businesses, individuals may see some market value in promoting themselves as a brand. A college or graduate degree, for example, may simply be a means to signal one's intellectual ability. A reputation for individual dependability may induce one's peer and superior to entrust one with more important assignments that might lead to career advancement.

  1. Editor's note: The reputation of individuals can also be regarded as a brand. People with good credit records and who are trustworthy are likely to get breaks in credit terms and career advancement.
  2. Editor's note: The reputation of individuals can also be regarded as a brand. People with good credit records and who are trustworthy are likely to get breaks in credit terms and career advancement.
  • Business Week. “The Global Brands.” 8/6/01.
  • The Economist. “Who's Wearing the Trousers?” 9/8/01.
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