A Model of Brand Architecture Choice: A House of Brands vs. A Branded House
Published in Marketing Science, January 2021
In new research, Jungju Yu Assistant Professor, Department of Marketing examines a firm’s decision on whether to continue to use the existing brand name or adopt a new one when entering a new product category. The former decision will lead to a “branded house,” whereas the latter will result in a “house of brands.” If the same brand is used, then, through the common brand name, the reputation can spill over across product markets.
The extent of reputation spillover critically depends on how closely related product markets are. Therefore, Yu studies the effect of market-relatedness on a firm’s optimal branding decision on whether or not to use the same brand. In particular, he proposes a conceptual framework of market-relatedness which captures the relationships between different product markets not only in terms of shared supply-side factors (e.g., production technology), but also common demand-side factors (e.g., similar customer tastes). Following the literature on branding, he considers a model where consumers do not observe the product quality until they make a purchase, and hence a brand can potentially and credibly convey information about product quality.
The paper shows that it is optimal for a firm to use the same brand name for different product markets in most cases. However, when the two product markets are closely related (on both the supply-side and demand-side), the firm wants to use different brands. This is because if the same brand were used, then the firm faces a temptation to exert effort to produce a high-quality product in only one of the product markets while relying on the positive reputation spillovers in the other product market. Therefore, consumers do not trust the firm to exert its best efforts in both product markets, which leads them to pay less for the firm’s products. In this situation, the firm can overcome the temptation by using different brands and thereby eliminating the source of reputation spillover. In other words, by using different brands, the firm can credibly communicate to consumers that it will produce high-quality products in both product markets.
Findings in this paper offers a guideline for how firms should develop their branding when they expand their businesses into new categories. Moreover, this paper provides an explanation for why some high-quality firms, such as P&G and Unilever, have adopted a house of brands strategy by introducing new brands in new categories. The main finding from the existing literature was that the mere fact of using umbrella branding can signal high quality, which has left many wondering why P&G and Unilever would deliberately avoid adopting umbrella branding and thus commanding the signaling value. This paper shows that the very decision to use different brands may have provided additional incentives for firms to invest in all of their brands, thereby contributing to their continued success.