Industries With More Customer Data Are More Successful at "Stretching the Brand"

The power of a strong brand is such that consumers will happily pay 37 percent more for their preferred, established brand, according to Simon Broadbent of the Leo Burnett Brand Consultancy. Brand managers are seemingly relentless in their search for new ways of exploiting consumers' voracious appetite for spending. The ubiquitous practice of extending the products or services offered by a company or—in jargon—"stretching the brand," has become an exceedingly popular means of growing both immediate and long-term revenue without the risks and costs associated with creating a new brand from scratch. Yet, approximately one in every two brand extensions fail—better odds than a start-up but worryingly high, nonetheless. So, what is it that makes a brand extension succeed or fail?

In the quest to win an ever-larger share of the consumer wallet, commentators have observed that many brand extensions that have failed have done so because new product development originated in the minds of marketers, instead of beginning with an actual consumer desire or requirement. Nevertheless, the rise of data-driven marketing is ushering in a new marketing era where best practice organizations are adopting a highly customer-centric (as opposed to product-centric) approach to their entire business model. This enables them to base business decisions, not upon assumptions but upon actual information gathered about their customers' behavior, motivations and preferences.

Breadth of data
Our recent research into how successfully major U.K. firms are successfully extending their core proposition into new markets finds that approximately one-third of companies are able to move successfully into new markets. At the top were retailers, banks and travel companies. Fifty percent of retailers, 41 percent of banks and 37 percent of travel companies were shown to be most able to successfully extend their brands. Industry sectors such as these that have a wide product range naturally have a certain breadth of customer data that they are able to mine. Insights gathered in this way can then feed further brand extension. A rich stream of available data appears, therefore, to facilitate successful brand extension.

Retailers, the most successful of all industry sectors at extending their brand, have shown themselves to be pioneering in the use of loyalty schemes and market research—and have clearly used the insights gathered from this activity to intelligently inform the population of new markets.

In the middle ranks were utilities, insurers and telecoms companies; 35 percent of utilities, 36 percent of insurance companies and 37 percent of telecoms successfully extended brands. These sectors, operating in a crowded, commoditized market with little track record of sophisticated customer development, arguably do not perceive of themselves in a manner that allows their brands to be successfully extended. With a limited product range, they lack the richness of data that appears to facilitate successful brand extension.

Least able to move into new markets were hotels (33 percent) and credit card companies (25 percent). The inability of many hotels to successfully extend their brand is probably not because of a lack of customer data (after all, hotels were pioneers of customer loyalty programs), but because the larger hotels tend to move into new markets through overt partnership. This means the hotel effectively loses control over the quality of the delivery when a partner takes over the brand management. While credit card companies also have a rich data pool, regulations prevent them from using any of the information they have on their customers for marketing purposes. This handicap, together with the problems they face in acquiring new, stable customers while stemming the outflow of existing profitable customer to a more competitive rival, makes it difficult for them to break into new markets.

Industry sectors that are customer-centric with significant breadth and depth of available customer data have been shown to be the most able to populate new markets successfully. This is because customer data frees creativity. In the absence of preconceived ideas about how and where the brand extension should be directed, it is the behavior, preferences and feedback of customers, themselves, that shapes corporate growth. Marketers need to analyze customer spend not only by product but also across the whole product/service range to manage revenue effectively. Customer centricity of this kind enables businesses to think not just about product profitability but also about customer profitability and develop brand extensions that are designed to appeal to their best customers. With the most profitable or potentially profitable customers informing the brand extension strategy, the odds of success are markedly increased.

Andy Wood is managing director of GI Insight (formerly Total DM), a full service database marketing company. Wood has run six major loyalty programs, having worked on both the client and the service side. He also created the United Kingdom's first card-based loyalty scheme, Homebase's "Spend and Save."