The Art of Building Brands and Creating Consumer Surplus

The Art of Building Brands and Creating Consumer Surplus

In the world of retail, there are two distinct strategies that companies employ to achieve their goals. The first strategy focuses on building a brand that can charge a premium, while the second strategy aims to increase volumes by offering lower prices. Both strategies have their merits and can lead to the creation of consumer surplus. Understanding these strategies and their impact on consumers is crucial in today's competitive market.

Building a brand is an art that requires careful consideration and execution. Retailers who adopt this strategy aim to create a positive valence towards their products. Positive valence refers to the subconscious good feeling that consumers associate with a particular brand. This feeling is often achieved through the principle of association in advertising. By aligning their brand with things that evoke positive emotions, retailers can transfer those feelings to their products.

Consider the example of Coca-Cola, which successfully turned its soft drink into an icon of American culture, prosperity, and happiness. Through extensive advertising campaigns featuring smiling people enjoying their product, Coca-Cola created an emotional connection with consumers. When people buy a Coca-Cola, they are not just purchasing a sugary beverage but also buying into a feeling. This emotional attachment is difficult for identically-tasting private label products to replicate.

On the other end of the strategy spectrum, retailers focus on increasing volumes rather than charging higher prices. Their goal is to decrease costs as much as possible and pass on the savings to consumers, thereby stimulating demand. This approach relies on cost efficiency and emphasizes consumer value, often highlighted through low prices. Retailers like Ross, TJ Maxx, and Target position themselves as providers of quality products at affordable prices, appealing to consumers who prioritize value over brand names.

By meeting additional conditions on a Consumer's Hierarchy of Preferences, companies can create consumer surplus. This surplus refers to the additional value that consumers receive beyond their initial expectations. Building a loyal customer base with a unique value proposition that competitors find hard to replicate is essential for long-term success. Companies must ensure that their entire business operations align with their brand and consistently deliver on their value proposition.

A prime example of this is Costco, which intentionally keeps its oversized hot dog + soda combo priced at $1.50. This low price signals the value customers can expect to receive at Costco and reinforces the brand's commitment to affordability. Consistency is key in avoiding brand dilution, as seen in the case of Coach. By expanding into lower-priced products and outlet channels, Coach quickly eroded its luxury brand, making it challenging to sell its high-end bags.

It is important to understand that leaving some consumer surplus intact can offer a competitive advantage. While some companies may be tempted to extract all consumer surplus to increase profits in the short term, this approach can harm the company's longevity. Private equity firms, for instance, have historically extracted consumer surplus by raising prices and cutting services that were not valued. However, this practice sacrifices future value for immediate gains.

By strategically leaving some consumer surplus, retailers can position themselves better against competitors. This surplus acts as a reserve, providing flexibility to adapt to changing market dynamics and consumer preferences. It allows retailers to offer additional value to consumers without compromising their profitability. Balancing the extraction and preservation of consumer surplus is crucial for sustained success.

Actionable Advice:

1. Develop a strong brand identity: Invest in building a brand that resonates with consumers and evokes positive emotions. Leverage the power of association in advertising to create a lasting impression.

2. Prioritize consumer value: Understand your target audience and their preferences. Offer products and services that provide value beyond their expectations. Communicate this value through pricing strategies and clear messaging.

3. Maintain brand consistency: Ensure that every aspect of your business operations aligns with your brand identity. Avoid diluting your brand by expanding into unrelated markets or compromising on quality. Consistency builds trust and fosters loyalty among consumers.

In conclusion, understanding the two retail strategies of brand building and volume-driven pricing can help businesses create consumer surplus. By effectively leveraging brand associations and offering value to consumers, retailers can differentiate themselves in a competitive market. Striking a balance between extracting and preserving consumer surplus is crucial for long-term success. By following actionable advice, businesses can build strong brands, deliver value, and maintain consistency to drive customer loyalty and profitability.