The user, the knower and the clueless A research into the value of extensions

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The user, the knower and the clueless

A research into the value of extensions

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The user, the knower and the clueless

A research into the value of extensions

Author: Dorien Altena

Student number: 1161210 University of Groningen

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Preface

Company X: a brand that in a short time became a huge success worldwide. It was great to do research and work for a brand like this. And it was an inspiring experience that made me even more enthusiastic about marketing.

This thesis is the result of a research into the influence of extensions. An unknown effect of the extensions resulted from this research. It made this study a very interesting research field to me. Next to that I enjoyed working at the marketing department of company X a lot. I worked with wonderful people and because of the freedom and responsibility that was given to me I learned very much about marketing in practice. I would like to thank every member of the marketing and market research team and especially my direct supervisor Christiaan Boer.

Writing this thesis has been an educating period in my life. I am very grateful to Wim Biemans who has been my supervisor of the Faculty of Management and Organization. The contact we had and the way he encouraged me were an enormous support in my entire research process. In addition I would like thank Marjolein Achterkamp for her feedback. We did not meet often but she gave me fresh and good advice.

Special gratitude to my parents, Jeroen, Danielle and Nicole for their unconditional support during this thesis time.

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Summary

This is a research into extensions. The aim was to examine the influence of these extensions on the overall brand equity of company X in order to help company X to improve their marketing efforts.

The background of this research was that company X is losing market share due to the price war and more attractive Private Label. The results were a higher price sensitivity among its consumers, a switch of the consumers to PL and a shift in company X brand image. One of the defence means company X uses is the development of extensions; they should make company X the first choice of consumers again, to keep them loyal to the brand and to support their image. If the extensions do that and what the exact effect of it is, was unknown at company X.

The value of the extensions on the financial side of the brand equity is very positive and that is known at the company. However the development of extensions was not only positive. Therefore it is important for the company to find out if the extensions next to adding value on the ‘hard’ side of Brand Equity also contribute to the other, or ‘soft’ side. If the extensions do that and what the exact effect of it is, was unknown. Furthermore it was not known when the extensions affect the Brand Equity. Is making consumers aware of the extensions enough for the extensions to have influence or should they be actually used? Finding answers to these questions is valuable since the outcome gives extra reasons to develop and launch extensions. Next to that the way the extensions’ influence is brought about can be used in the marketing activities; making consumers only aware of the extensions asks for a different marketing approach than making consumers use the extensions.

To investigate the influence of the extensions on the three elements of brand equity, awareness, image and loyalty, a statistical research was carried out. A questionnaire was made and sent to members of the database of company X. In order to investigate the extensions’ influence the 1046 respondents were divided into three groups: extensions Users, Only Aware of the extensions and No Knowledge of the extensions at all. Their answers were compared and from the differences between the groups the conclusion was drawn that the extensions do not influence the awareness and the loyalty towards company X. However they do influence the brand image: if extensions are used the consumers link more associations to company X. This holds for the Association Groups: Brand Associations, Emotional Values, Quality, Variation, Degree of Expertise and Cheerful/soft.

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variables of 4 Association Groups (Brand Associations, Emotional Values, Variation, Cheerful/soft) more to the brand than the Only Aware and No Knowledge consumers.

Given these results it is recommended to stimulate extensions use at the PL consumers if company X wants to strengthen one of the 4 Association Groups among these consumers. For the company X consumers it is recommended not to use the extensions to strengthen associations; the effort that has to be put in making consumers use the extensions is too small compared to the effect.

To get a better view of the realization of the extensions’ influence several Evaluation Factors1_have

been investigated. Due to that more recommendations can be made to improve company X marketing efforts; future extensions should have a high level of Prestige in order not to dilute the brand image of company X. The brand is very suitable to be differentiated into other products. Lower priced extensions will probably dilute the image and should therefore be introduced under a sub-brand. To create extra moments, the moments right after lunch and dinner should be emphasized in the communication about the extensions.

From the Reasons-to-Buy it appeared that company X consumers value the fact that company X has many different variants, is an expert and innovates a lot. Next to that Taste and Quality are the main reasons to buy company X. To give these consumers reasons to keep on buying company X these five aspects should be emphasized in the communication about the brand. At the PL consumers it appeared that they value the Quality, the Value for its money and the Taste of their Private Label coffee pad. To attract the PL consumers Taste, Value for its Money and Quality should be emphasized in the communication. It should be made clear that the PL consumers can also find the aspects in company X.

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The Evaluation Factors that have been used are Fit, Quality of the overall brand and the extensions and the Degree of Expertise.

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Chapter 1 An introduction to the story of company X

In this chapter the reasoning of carrying out this research will be clarified. In order to give a complete problem description the background and the causes for the research for company X will be illustrated. This is done by a description of company X history, market and its current developments in which the price war in the supermarkets and the power of the Private Labels play a major role. This has several consequences for company X which will then be portrayed. The extensions are one of company X defence means, however there is some lack of knowledge concerning them. The relevance of this knowledge will be illustrated after which the research goal and research question will be given. However this chapter will start with describing the methods used to gather the information in order to formulate the general research goal.

1.1 The methods of information gathering

To come to the central question the situation in which company X was in had to be described first. Information giving insights into the total organization, the overall strategy of Company X, the market situation and its problems was needed. It all started with a secondary data analysis, a desk research by which existing sources were analyzed, subsequently completed by interviews with company X employees.

To begin with, researches conducted by or for company X were analyzed together with internal reports and presentations. Next to that eight semi-structured interviews, a combination of open and closed questions, were held with people from the local and international marketing department of Company X and of the market research department. They were selected because of their responsibility for the product and market development of Company X in The Netherlands and/or on a global level. From this part of the research it became clear that the extensions would have the focus in this study.

1.1.2 Problem formulation

When the general information had been gathered and the focus on the extensions was clear, a general problem could be formulated. To help formulating the problem and clarifying the concepts, discussions took place with managers who are experts in this field. Five interviews were held with the product manager International and the senior and junior brand manager Netherlands. These conversations were mainly focused on the extensions; their development process, introduction on the market, goals and market performances. This resulted in the general research goal:

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The line of thought that is the basis of this research goal will be explained in this chapter. We will now continue with the history of Company X.

1.2 Company X

In the beginning the products were only sold to the local inhabitants. But when their son entered the company a reputation was built up regionally. Products were distributed to shop owners elsewhere and thereby spreading the brand around the country. Step by step, the company became the Dutch market leader for its core products.

1.3 Company X

At the end of the twentieth century the market had already been stabilized for a couple of years. The companies X and Y were individually looking for possibilities to let this market grow again. Both are authorities and leading players in their respective categories and saw a need to develop a special system to fulfil changing consumer needs.

These needs were changing in such a way that increasing attention was paid to high quality and pampering products. People were looking for the best combination of convenience and pleasure. They were also seeking alternative ways to prepare food and beverages so they would save time and effort. Besides that, consumers wanted more variety in taste depending on the time of day or personal preference. And then there was the trend in society of the growing number of small households.

Company X and Y joined forces to finalize and market a new and revolutionary Company X system. The Company X system fulfilled all the new consumers’ needs.

1.4 The positioning of Company X

Company X values are: Independence, everyday pleasures, simplicity, sociability and trust. The brand personality is fresh, optimistic, outgoing, inquisitive, daring and self confident. The person that feels attracted to DE Company X should recognize himself in the following mindset: ‘I am who I am. I like to make my own choices, depending on the surroundings and my specific mood of that moment. For my coffee it should be the same.’ DE Company X wants to satisfy this need by offering a variety of great tasting coffees. Within this variety the consumers can find a coffee pad that fits their taste and mood statement for each specific moment.

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competitors. Though Company X is the only brand that is strongly supported by the Aroma Lady2_of

Douwe Egberts and Philips: it is the original closed system and the Aroma Lady stands for more than 250 years of knowledge of making good coffee.

To attract and keep loyal customers Company X has two loyalty programs; the general system of Company X and a CRM-program by sending the email newsletter to their database.

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1.5 Different variants

To suit every taste Company X developed different variants. At the moment Company X sells three different ranges, each range is build up by an amount of variants.

1.6 10 million sold

After years of development, the Company X system was launched in the Netherlands in February 2001.The launch was an instant success thanks to the extensive in-store demonstrations and the introduction strategy ‘seeing and tasting = buying’. The positive word-to-mouth from trade and Company X users created a situation where demand was larger than supply. The advertising campaign was stopped for a few months to slow down demand and catch up with production. This success made it clear that the Company X system would definitely appeal to more European consumers. Therefore, one year after the initial start the machine and its specifically developed Company X were launched in other European countries. This was followed by the USA, Australia and China where it has been introduced most recently.

1.7 The battle for the patent

The machine itself is produced by Philips, the original coffee pads by Douwe Egberts. Soon after the launch several competitors started to sell coffee pads suitable for use in the Company X machine to take part in the huge success of the innovation. Initially this happened without any licence since Douwe Egberts was not capable of applying for a patent as the pads were already on the market for espresso machines. Hence the European Patent Office did award a patent to Douwe Egberts in 2001 for the combination of a coffee pad and the accompanying holder. From then on producers of the coffee pads had to pay Douwe Egberts since they were indirectly infringe on the patent. Though the Supreme Court of the Netherlands decided that there was no case of indirect infringement and in August 2006 the European Patent Office declared the patent invalid since it was not innovative enough. With that verdict in all of Europe the road was made clear for competitors to make coffee pads for the Company X machine and put them on the market under a Private Label. 3 4

1.8 Market development

1.8.1 The loss of market share

When Company X was introduced in xxxx the production of machines could hardly meet the demands of the market. Nowadays after the sales of 6 million Company X’s, the machine park is becoming stabile. The sale of Company X has also stabilized but much earlier than expected and much earlier than the total market has stabilized. This resulted in a gap between the total market and the market share of Company X. If everything remains the same this gap will become bigger.

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http://nl.wikepedia.rog/wiki/Senseo (November, 2006)

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The production of Private Labels (PL) is one of the main reasons for the decline; they are sold for a much lower price than company X. The biggest competitors are Albert Heijn Perla and C1000. The sale of their PL in their stores equals or even exceeds the sale of Company X.

1.8.2 Attractive PL products

Not only the price also the taste and quality of PL-products seem to be attractive for the consumer. Especially the difference in taste and quality between A-brand and PL became smaller. That is why the price-quality ratio of PL-products became more attractive. Recently a research of the Dutch newspaper Algemeen Dagblad demonstrated that many PL products are valued the same or even better than A-brand products in blind tests. However when people saw the packaging of the products, they valued the A-brand much higher. Company X, for example, were valued with 8 points in the open test, were all the PL didn’t score higher than ‘5.5’. When it was tasted in the blind tests Company X was equally valued to the PL with ‘5.5’. This indicates the importance of the brand image; people value a brand for its appealing image and not only because of its good taste.

Test results Coffee pads Regular

Amount Price Bought at Valued by: taste, brand, point of sale

Valued by: taste, blind-test Douwe Egberts 18 pads 1.79 A-brand 8 5.5

Plus Huismerk 18 pads 1.45 Plus 5.5 4.5 Markant merk 18 pads 1.69 Golff 5.5 5.5

Kahrel 30 pads 1.99 Dirk 5.5 5.5

Parl 20 pads 1.29 Aldi 5 5.5

Olacy 18 pads 1.39 Jumbo 5 5

Super Huismerk 18 pads 1.49 Super de Boer 5 5 AH Perla 36 pads 2.39 Albert Heijn 5 5 C1000 Huismerk 36 pads 2.32 C1000 5 5

Table 1: Results coffee pad test Algemeen Dagblad (source: Algemeen Dagblad, 13 September 2005)

1.8.3 Price war

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price-changes & introductions5_{. A year later in 2004, Albert Heijn announced another price decrease for}

about 1000 products. By these strategic moves the price difference between PL and A-brands became even larger and the consumers became more aware of prices.

1.9 Consequences for Company X

1.9.1. High price sensitivity

Also in the company X market this higher awareness of prices or to say, price sensitivity is detected. More and more consumers are buying Company X only when the retailers offer them with a discount. It seems that the company X does not add enough consumer relevant added value vs. PL. This probably makes the price advantage the key reason for buying PL. However the retailers are not very willing to offer company X with a discount due to the negative margin they already face when they are selling Company X for the regular price. Fortunately Company X is a strong brand. This means that although retailers make negative margins, they still sell it because if they wouldn’t, they would lose customers. A negative aspect of this is that Company X is losing in some cases the preferred shelf positions. The retailers are placing the Company X products in a negative way (in large baskets) to break the A-brand image down and make them less attractive for the customers.

1.9.2 Switch to PL

Consumers used to start with the Company X when they bought Company X and if they switched to PL, it happened after a while. Currently though, a large part of the consumers does not even start with Company X but are buying PL right from the start. Consumers who are new to the system and make their first purchase, already choose for 1/3 of their volume for PL.6_{Next to that the group of}

consumers that is for one hundred percent loyal to Company X is becoming smaller and smaller, most buyers often switch between Company X and PL; the share of brand switchers represents 2/3 of total volume.

1.9.3 A change in brand image

Next to the previous consequences another problem is occurring; a shift in the brand image. The associations that consumers have with Company X are changing and they change in a negative way for Company X. When consumers are asked what they think when they hear Company X, often they first think about Philips: consumers mainly see Company X as the machine and the coffee feeling consumers should have is fading. The machine is the hero that can make a good coffee with all kinds of coffee pads; it is becoming less important which coffee pad brand is used. The added value of the brand DE Company X to its coffee pads is decreasing. This way of thinking probably makes the consumer, next to the high price sensitivity, less willing to pay a premium price and less loyal to Company X. To the marketing team of Company X it is not clear which direction to take in order to

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Douwe Egberts LRP FY’06-08

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solve the image problems. In conclusion it can be said that Company X has a brand equity problem. This shows it is important for the Company X to have a well thought-out brand equity wherein it is clear which direction to take and which strategy to follow in order to get a positive brand image and loyal customers.

1.10 Extensions as defense?

1.10.1. Adding value by variety

To make Company X the first choice of consumers again, to keep them loyal to the brand and to support their image, one of the things Company X does is developing extensions.

Seen from the product-feature-similarity perspective the extensions of Company X have a different packaging, price and composition. This is on a concrete level, on the abstract level the extensions are meant to create different drinking moments; enlarging the breadth of awareness. These moments can be created by, for example, replacing drip-filter coffee for Company X coffee or another drink, for example Coca Cola for Company X coffee.

Next to that Company X wants to make the extensions more valuable by giving them associations like exclusiveness, indulgement or confidence; the extensions should reflect these on the overall image. Adding up more emotion for example, to the overall brand is part of the battle against PL; added value by the extensions cannot be copied easily since not many PL-producers have these extra products. Company X aims to distinguish itself from its competitors by doing this.

Not only can the extensions add value in such a way that Company X becomes more attractive to the consumers, they can also make the brand more attractive for retailers; due to the larger margins per extension compared to the regular products the extensions are of great value for company X and its retailers.

1.10.2. Points to consider; contrasting opinions in literature

According to Quelch and Harding the introduction of extensions in the battle against PL can be helpful:

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On the other hand literature says that the introduction of line-extensions can also have some negative effects: “Too many line extensions confuse consumers, the trade, and the sales force and reduce the manufacturer’s credibility with the trade as an expert on the category. In addition, if line-extensions fragment the business, the average retail sales per item will decline.” (Quelch and Harding, 1996: 106)

According to the literature the effect of extensions on the brand image can be positive but negative as well. “It is often argued that an extension can help the core brand image by improving the favourability and strength of associations and clarifying the business definition and core benefits for the brand. It has also been argued that successful brand extensions may potentially harm the core brand image if they weaken existing associations in some way.” (Keller, 1993: 16)

1.10.3 Points to consider; the extensions’ performance

Hence according to the literature there are some points to consider for Company X’s management when they come onto the market with extensions. Furthermore also in practice of Company X all that glitters is not gold concerning the extensions. The trial and repeat of the extension are declining, the stand-alone contribution of the extensions is becoming less and the contribution per extension differs a lot. Next to that the development and the introduction costs of extensions are high and it is not guaranteed that the retailer will take up new extensions. Also with every new coffee pad variant another variant has to disappear because of the limited space on the shelf. Therefore when a new extension is introduced the company needs to be convinced that the new extension is more profitable than the one that it is replacing.

1.10.4 Knowledge gap Company X

From the two previous sections it becomes clear that the extensions are not indisputable a good mean of defence. Furthermore Company X does not know what the complete added value of the extensions is. Of the financial side they do have a clear picture: they know what the margins on the extensions are and what they do for the market share of Company X, this is positive. So in figures the added value of the extensions to the brand is known. However the value of the extensions to the soft side of the brand equity of the overall brand of Company X is something the company does not know: do the extensions achieve what they are supposed to do according to their marketing program? Thereby there could be an unknown foundation to develop extensions: do the extensions add value to the brand equity that Company X is not jet aware of? All this is seen as a lack of knowledge of the company. In the current situation this knowledge is especially important since Company X does not have a clear view at the moment, which values and characteristics of the brand to emphasize in their current marketing program.

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Overall it can be said that the main problem for Company X is that they are losing their consumers to PL. The consumer is becoming less loyal to the brand Company X and isn’t willing to pay the price that Company X asks for her products. Price is an important consideration when consumers buy the products. However it is not the only consideration, image still plays a role.

From what is stated above, extensions can have influence on brand image and equity. Yet there is a lack in knowledge by Company X about the influence of their extensions on the overall brand equity and the way this influence is being brought about; do they have influence, if yes, in what way and what makes them have this affect? By making consumers only aware of the extensions or should they actually use the extensions? Answers to these questions will give Company X a more complete picture of the added value of the extensions. It will tell how and when to employ the extensions to profit from their influence on Company X’s brand equity. They will also know what to improve or what has to remain the same about the extensions and its marketing activities; which associations it should focus on and furthermore if the awareness or if the use of the extensions should be promoted. Next to that this knowledge would also make the development and the introduction of new extensions extra valuable since they have a contribution to the overall Company X brand equity. Well-established brand equity is the way for Company X to distinguish themselves from their competitors; this is why this knowledge is useful in their battle against PL.

Research goal

Evaluation of the influence of the current extensions on the overall brand equity of Company X in order to help Company X to improve their marketing efforts.

Research question

What is the extensions’ influence on the overall brand equity of Company X and what can Company X do with this affect in order to improve their marketing efforts?

The research question will be specified into sub-questions, this will become clear in chapter 2. How the research is conducted will be described in the research outline.

1.12 Research outline

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more detailed conceptual model. The results of the actual examination of the last three research sub-questions can be found in chapter 5 after which a conclusion and recommendations will be given in the last chapter.

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Chapter 2 Theoretical framework

From the previous chapter it appears that brand equity, Private Label products and extensions are the main concepts in this research. In this chapter all these elements will be described profoundly on the basis of literature. Brand equity will be illustrated first, then the issues concerning Private Label products will be depicted after which extensions and their relation to brand equity will be described. To have a better understanding about this relationship extension Evaluation Factors will be introduced. The brand equity concept together with the factors to evaluate the extensions will lead to a conceptual model. The conceptual model together with the research sub-questions will conclude this chapter.

2.1. Brand equity

2.1.1 Brand equity in general

‘Basically, brand equity stems from the greater confidence that consumers place in a brand than they do in its competitors. This confidence translates into consumers’ loyalty and their willingness to pay a premium price for the brand.’ (Lassar et al, 1995; 11) This definition already gives two important advantages of brand equity; loyalty and willingness to pay a premium price. Next to this it imparts other competitive advantages to a firm. A brand with strong brand equity gives a platform for new products, has the resiliency to endure crisis situations and provides resistance from competitive attack when it becomes the ‘owner’ of a product category. (Farquhar, 1990)

In general brand equity has been examined from two different perspectives, the financial based and the customer-based one. The financial aspects of brand equity can determine a brand’s valuation for accounting, merger, or acquisition purposes. The financial based perspectives will not be used in this research since we are not interested in the financial value of the brand Company X; we want to evaluate the consumer response to Company X, which is the customer-based perspective.

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Awareness

Image

Loyalty

Figure 1: Brand equity

2.1.2 Brand awareness

Depth and breadth characterize brand awareness (Keller, 2003). Depth is about the likelihood and ease with which a brand will come to the consumers’ mind or by which it is recognized and recalled. The recognition and recall performance represent the ability of consumers to recognize or remember a brand with or without help. Breadth is about the range of purchases and usage situations where brand comes to mind. This does not only make the capability of the consumers to recall the brand important, but also that he recalls it at the right time and place.

The level of brand awareness plays a role in the consumer decision making process. When it is high, a brand becomes a member of the consumers consideration set which means that there is an increasing chance for the brand of being considered when a purchase is made. (Hoyer and Brown, 1990; Macdonald and Sharp, 2000; Keller, 2003). It could be that in low-involvement decision setting the high awareness of a brand is sufficient for the actual product choice, consumers then base their choice on the familiarity with a brand. However most of the time the brand should also have associations which distinguish it from other brands; awareness plays an important role but the product choice is not exclusively based on it. Promotion and communication increase brand awareness. When consumers are exposed to the brand name, symbol, logo, character, packaging, or slogan this can enlarge familiarity and awareness of the brand.

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As said, before a consumer is able to make a choice and before a certain brand attitude occurs, the consumer has to be aware of the brand first. A basis of brand awareness is necessary to form brand associations.

2.1.3 Brand image by brand associations

Brand image can be defined as the perceptions and beliefs held by consumers, as reflected in the associations held in consumer memory (Keller, 1993) ‘To create the differential response that leads to customer-based brand equity, it is important that some of the strongly held brand associations are not only favorable but also unique. Unique brand associations are distinct associations not shared with competing brands. Beliefs about unique attributes and benefits for brands that consumers value more favorably than competitive brands can lead to a greater likelihood of the consumers choosing the former brands.’ (Keller, 2003; 74)

The strong, favorable and unique brand associations can be subdivided into attributes. Attributes are related to product performance and characterize a product. Keller (2003) divides it further into product related and non-product related attributes. Product related attributes are the product’s physical characteristics that are necessary for performing the product function sought by consumers; the product’s physical composition. Non-product related attributes can be defined as external aspects which relate to a product’s purchase or consumption; they do not directly influence the product performance. Originally the non-product related attributes cover four types of information; price, packaging, the identity of the typical consumer and where and in what situations the product is used. The identity of the typical consumers, or user imagery, concerns the perception of the type of person who uses the product or service. Driving a Hummer for example, can give the consumers a feeling of importance or exhilaration. The user imagery is formed when a consumer use a product, has contact with another brand users or through the image portrayed via marketing communication.

Figure 3: Brand image by associations

The associations, by which brand image is built up, contain the meaning of the brand in the mind of the consumers. Brand image is the result of the decoding of all the signals emitted by the brand

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through its product, services and communication program by consumers: it is how they evaluate and judge the brand by all this. The actual behavior stems from this; if positive, the consumer can become loyal.

2.1.4 Brand loyalty

When the consumer has a certain level of awareness and evaluates the brand positively, loyalty to the brand can be the result. Having loyal customers is important for a company, especially for products that are frequently bought: ’long-term success of a particular brand is based, not on the number of consumers who purchase it only once, but on the number who become repeat purchasers’ (Jacoby and Chestnut, 1978; 1) The cause of this long-term success is the higher profitability for a company of loyal customers. Whatever the industry is, it always costs money to get new customers. These acquisition costs do not have to be made for loyal customers. All these customers buy a product or service by which a company earns a base profit. When they become loyal, customers tend to accelerate their spending over time and the revenue per-customer growths. After a while they also know the company better which gives fewer operating costs due to a less laborious customer. And what is more, a satisfied customer will recommend a brand or company to others and this personal recommendation is stronger than any marketing tool. At last there is the price premium which means that in most industries old customers are less price sensitive and pay effectively higher prices than new ones. (Reichheld, 1996) But to get and keep loyal customers is becoming more and more difficult, this will be discussed more thoroughly in one of the next sections. A way to keep customers is by using loyalty programs.

There are two kinds of brand loyalty: attitudinal and behavioural loyalty. Jacoby and Chestnut (1978) define attitudinal loyalty as the consumers’ predisposition towards a product or service as a function of psychological processes. This includes commitment and attitudinal preference towards the product or service. Behavioural loyalty refers to the consumer’s behaviour of repeatedly purchasing a specific brand over a certain period of time. The different types of loyalty are measured on two different levels; the individual level and the aggregate level.

Attitudinal

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Behavioural

At the aggregate level it is not about the understanding of the purchase but about the number of purchases measured across some number of consumers. It is more the stochastic view of purchase behaviour, or to say behavioural loyalty. Behavioural data refer to what consumers actually do (Colombo and Morrison, 1989). Also Ehrenberg (1972) defines loyalty as behaviourally in terms of the frequency with which people repeat their purchase of the same brand. Is it often of managerial relevance since it is made operational in terms of market share and sales, it does not give information about the way people think about the brand; the attitude. Nevertheless Bass (1974), who also characterizes loyalty stochastically, concludes that ‘attitude studies in particular and the study of the important dimensions of the choice process do contribute to an understanding of consumer behaviour and are managerially relevant with respect to product strategy’ (p. 18)

Brand loyalty can be evaluated with both attitudinal as well as behavioral criteria:

Attitudinal

Loyalty

Behavioral

Figure 4: Brand loyalty

2.2 Brand switcher or loyalist?

Most marketing strategies have the goal to either increase customers’ loyalty or to attract the competitors’ customers. One of the goals of this research is to measure the influence of the extensions on loyalty. To measure the results of the marketing strategy in purchase behaviour different brand switching models can be found. However to measure the effect of the use or awareness of Company X’s extensions on loyalty, no existing model can be found, they are all too simplistic.

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way it will be measured in this research will be decided in consultation with Company X in order to adjust the measurement and its results to their information needs.

2.3 The threat of private-labels and strategies against it

As said before, it is becoming more and more difficult to get and to keep a loyal customer. Brand loyalty is often replaced by price loyalty (Discount Merchandiser, 1993) and Private Label products (PL’s) have become increasingly popular. Especially in the Fast Moving Consumer Goods sector consumers often switch between and to A-brands and PL products. Consumers are having a more positive attitude towards PL’s due to their increased quality and their lower price; they are usually priced 15 percent to 40 percent lower than branded products. A-brand innovations are imitated quickly by PL’s and the differences in outward appearances are also becoming smaller by the use of the same format and colours in the packaging. For retailers PL products have many advantages too. They have a higher profit margin and retailer’s negotiation position vis-à-vis the manufacturer is strengthened by Private Labels. The influence retailers have on the shelf height and in-store position of products makes them positively affect the sales of their own products. All these things together make Private Label products strong competitors for A-brands. (Steenkamp and Dekimpe, 1997; Ashley, 1998; Dekimpe et al. 2002)

In the battle against Private Label products, A-brands manufacturers can follow several strategies: product-quality improvement and product innovation (Hoch, 1996; Steenkamp and Dekimpe, 1997), advertising brands associations to build and an image of quality and strengthen brand loyalty (Ashley, 1998), producing PL’s (Dunne and Narasimhan, 1999) or a me-too strategy where a lower priced item is introduced to crowd out the Private Label. And finally, they can wait and do nothing (Waarts and Wierenga, 2000). Except for the production of PL’s, Company X practises all these strategies. Yet the line of attack that is central in this research is the extension strategy: extending the brand name to other product.

2.4 Extensions

As mentioned, one way to fortify brand equity and fight against PL’s is by extending the brand name to other products. Extensions will be discussed in the subsequent part.

When firms’ use established brand names for new products they are extending a brand. This can be done in two ways; a current brand name can be used to enter a completely different product class. And a current brand name can be used to enter a new market segment in its product class (Aaker and Keller, 1990)

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positive feedback on the parent brand or the entire organisation. They can also block the entry opportunities or raise the price for competitors to enter. Other advantages can be classified in these two categories:

Facilitate new product acceptance: • Improve brand image;

• Reduce risk perceived by customers;

• Increase the probability of gaining distribution and trial; • Increase efficiency of promotional expenditures;

• Reduce costs of introductory and follow-up marketing programs; • Avoid cost of developing a completely new brand;

• Allow for packaging and labelling efficiencies; • Permit consumer variety-seeking.

Provide feedback benefits to the parent brand and company: • Clarify brand meaning;

• Enhance the parent brand image;

• Bring new customers into brand franchise and increase market coverage; • Revitalize the brand;

• Permit subsequent extensions. (Keller, 1993: 582)

But extensions might also have effects that are less positive. The two main negative effects that they can bring about are cannibalisation of sales and a dilution of the brand image. According to John et al (1998) the probability of these effects increases when the extensions

are inconsistent with the brand image or that they fail with regard to consumer expectations. Other disadvantages of extensions are that they can:

• Confuse or frustrate consumers; • Encounter retailer resistance;

• Diminish identification with any one category;

• Cause the company to forgo the chance to develop a new brand. (Keller, 1993)

2.5 Extensions and their relation to brand equity

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awareness that the extensions already have among consumers, provides a relatively quick and cheap way to enter the market. On the other hand the parent brand may capitalize on the extensions. The introduction of an extension can increase sales for the parent brand, due to the enhancement of consumers’ perceptions of brand values and image through increased communication (Tauber, 1988) Swaminathan et al. (2001) found evidence that especially for non-users of the parent brand, a positive experience with an extension will increase trial of the parent brand. To take full advantage of this reciprocal effect, it is important to know how information about one product affects the demand for other products with the same brand name. In this brand equity is one of the major factors and extensions may enhance the brand equity or dilute the brand image.

As illustrated in section 2.1 brand equity exists of three components; awareness, image and loyalty. To find out if and how an extension is capable to enlarge the advantage and minimize the disadvantage on brand equity, the influence of the extensions on the three components should be measured separately. In this research only the influence of extensions on the brand equity will be investigated and not the opposite way. This is in accordance with the information need of Company X and the research question as a result of that; the contribution of the extensions to the overall brand equity needs to be given and not, for example, an explanation of the performance of the extensions for which the influence of brand equity on extensions would be of importance.

Extensions and the Evaluation Factors

Not only should it be clear if the extensions have influence on brand equity, it should also be clear how this influence is realised. To find this out it should be known how the consumers evaluate the extensions (features). Examples of these Evaluation Factors are what consumers think of the quality, the difficulty to make the extensions or if the see similarities between the extensions and the mother brand. The chance that an extension influences the overall brand in a positive way increases for example, when a consumer perceives a high level of quality. With the knowledge about how consumers evaluate the extensions, a company knows what has to be changed, what should remain the same, what should be emphasized or brought to the background in its marketing strategy in order to get the best out of the extensions’ influence. This information can be taken into account in the marketing/extension strategy and it will be obtained by asking the consumers how they evaluate the extensions.

Many research and literature concerning the factors can be found. But not every factor is suitable for every company, its product and every research goal. Due to this a selection of the Evaluation Factors had to be made for this research. The methodology of this selection and of the remaining parts of this research will be described in the following chapter. After which the actual reasoning behind the selection of the Evaluation Factors and the final used factors are described in chapter 4.

2.6 Conceptual model

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Evaluation of the influence of the current extensions on the overall brand equity of Company X in order to help Company X to improve their marketing efforts.

The relationships and factors that play a role in this research goal are visualized in a conceptual model:

Figure 5: Conceptual model

Awareness Image Loyalty

Extensions Evaluation factors Breadth Depth Strong, favorable, unique associations Attributes Non-product related Product related Behavioral Attitudinal Recall & Recognition

Price Packaging User imagery

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This model illustrates the relationship of the extensions with awareness, image and with the loyalty as a result of the previous parts. The elements extensions, brand awareness and brand image can be almost managed directly by the company. Loyalty can be managed by the company as well, given that it is to a certain extent the result of the company specific loyalty programs. Yet the company controls it only partly since other external factors, similar to competitors and distributors, have influence on loyalty as well.

To know the effect of the relationship between the extensions and the brand equity, the elements of brand equity can be measured. The Evaluation Factors can be used to explain this effect. The results of these measurements give an indication about how to regulate the relationship in such a way that the extensions successfully influence the brand equity. As said, in the chapter 4 the selection for the Evaluation Factors will be made when they are applied to Company X. The attributes of the brand equity will be applied to Company X through which the conceptual model in chapter 4 will only represent those elements that are going to be investigated in this research.

2.7 The research sub-questions

The conceptual model in the previous section shows which relationships need to be investigated in order to gather the knowledge necessary to accomplish the research goal. On the basis of this information the following sub-questions are formulated:

1. Which factors do consumers use to evaluate Company X’s extensions?

2. What is the influence of the Company X extensions on the Company X overall brand equity? 3. According to the Evaluation Factors, how are the Company X extensions evaluated?

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Chapter 3 Methodology

In this chapter the research methods will be described by which the conceptual model from the previous chapter will be examined. The description is made on the basis of the sub-questions of the research. The first sub-question, which is about the selection of the Evaluation Factors, will be discussed separately since it requires another research method than the other three; it is answered by a discussion with and a practical experience at Company X. The last three sub-questions are answered by analyzing questionnaires filled in by consumers. The design of this questionnaire together with its respondents is depicted in this chapter as well. The exact reasoning behind the different methods that are chosen to gather all the data in order to answer the questions is illuminated in chronological order.

3.1. The research’s sub-questions

The first sub question that will be investigated is as follows:

1. Which factors do consumers use to evaluate Company X’s extensions?

Out of the literature research several Evaluation Factors emerged. In order to answer the central research question it is not necessary to investigate them all. This is due to the content of some of the factors; not every factor is of equal relevance to Company X and there is no existing theory that prescribes that all factors should be evaluated. Besides that it is not possible to investigate all the factors due to time and other research restrictions. Therefore a selection had to be made.

To make this selection all these factors are applied to Company X. The researcher and a market researcher of the company first do this separately to make their application more objective. The marketing manager of Company X received all the unselected Evaluation Factors. From the list he selected those factors that provided to the company relevant information about the brand Company X. The researcher of this study made the selection with information and observations obtained during the internship. And by taking into account the available possibilities to investigate the factors. Subsequently the two lists of factors that came from those applications were compared and the non-overlapping factors were discussed. The actual selection and the factors that stem for this can be found in chapter 4.

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2. What is the influence of the Company X extensions on the Company X overall brand equity? 3. According to the Evaluation Factors, how are the Company X extensions evaluated?

4. What are the implications for Company X of the extensions’ influence and the way the extensions are evaluated?

By answering the last three sub questions it will become clear if the extensions have influence on the overall brand equity of Company X and how this is realized. This will result in recommendations that can be useful to help improve Company X’s its marketing efforts. The measuring instrument that will be used to conduct this part of the research will now be described.

3.2 The measuring instrument

3.2.1 The questionnaire

The last three sub-questions have both a descriptive as well as an explanatory character. Descriptive in the sense that the way the consumers drink and buy their coffee will be investigated; it will be described to give an accurate profile on these features of the consumers. And explanatory in a way that it will be examined if there is a cause-and–effect relationship in the awareness and/or use of extensions and the image and/or loyalty of Company X. This results in two kinds of variables that are being examined: the awareness and/or use of extensions which are the independent variables and the image and/or loyalty of Company X which are the dependent variables.

Questionnaires are particularly good for descriptive or explanatory research since they can collect opinion and behavior variable. Opinion variables describe how respondents feel about something; the dependent variable in case of Company X. Behavior variables record what they actually do; the dependent variable in case of Company X. Hence the types of research required and the types of data needed to be gathered to answer the research questions make the questionnaire a very suitable way to obtain the data in this research. The way the variables are made operational in this research can be found in appendix 1.

3.2.2 Type of questionnaire and the database

There are several types of questionnaire; face-to-face, by telephone, by post or by email. Since many variables need to be investigated in a large group of consumers who know or use coffee pads and a limited budget and time are the two restrictions, email is the most obvious option. Further more Company X has the disposal of an up-to-date database with these specific consumers.

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research, and that they are geographically dispersed. Because of this the questionnaire was sent by email to a part of the database of Company X.

3.2.3 The questionnaire and database its disadvantages

A specific disadvantage or consequence that comes along with the use of this type of questionnaires is that it restricts the possibility of investigating all the Evaluation Factors. When all factors would be made operational and put into questions, the questionnaire would be too long. This would be at the expense of the willingness of the respondents to cooperate. Consequently some factors have to be excluded. Also the use of the database involves the exclusion of some factors due to the high brand involvement that the members of the database have. Yet, as already explained at the description of sub-question 1, leaving out some of the Evaluation Factors was also a requirement in a certain way; not all factors are relevant for Company X as a company as well as its product.

3.3 Design of the questionnaire

To make the results of the measurement interpretable and valuable extra attention was given to reliability and validity in the research design. A research is reliable when the measures generate the same results on other occasions or by other observers. Validity is about whether the conclusions are what they appear about to be. Next to that it can be possible to generalize the research results. This relates to what extent the conclusions are applicable in a general way (Saunder ed, 2003)

3.3.1 The generalisability of the research

The research only concerns the Dutch market. Furthermore only the extensions City Sensations and Selection will be taken into the research. In line with the research goal, exploring and describing the situation for Company X, the findings of this research will only concern Company X and therefore cannot be generalized. However the choices of method are described and argued accurately and the methods of data collection and analysis will be executed systematically.

3.3.2 The validity of the research

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and comprehension the questionnaire was modified. Above all the questionnaire was composed under strong supervision by a professional market researcher of Company X.

3.3.3 The reliability of the research

As mentioned, the respondents of the questionnaire are all member of a database of Company X. The use of this database has some implications for the reliability of this research. All the members voluntarily subscribed to this database this makes it plausible that their involvement to the brand Company X is higher than the average consumer. Consumers with a high brand involvement are often more sensitive to any kind of activity of the concerning brand; this is reflected in their opinion and attitude towards the brand. Since the members of the database are well informed by the newsletter about all the activities concerning Company X and especially about the extensions, it is reasonable to think that their ideas about the brand are influenced by this.

3.4 The respondents

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Chapter 4 The Evaluation Factors in case of Company X

When the influence of the extensions on the brand equity is known Company X should also know how this influence is realised. How come the extensions have influence; which elements, characteristics or features of the extensions created an effect on the overall brand? An answer to this question can be obtained by examining how consumers evaluate extensions. This information can then be used in the marketing program of the company; they know what has to be changed, what should remain the same and what should be emphasized or brought to the background in order to make best use of the extensions influence. As illustrated in the model in chapter 2, consumers evaluate extensions on the basis of Evaluation Factors.

There are many different factors that consumers may use; it depends on the type of product and the information that the researcher wants to get, if an evaluation factor is relevant to investigate. In this chapter the factors that are applicable in this research will be selected. It will be argued which factors are relevant from a theoretical point of view as well as a practical point of view. All this information will make the conceptual model of chapter 2 more detailed. This chapter will end with the new conceptual model.

4.1 Evaluation Factors in case of Company X from the theoretical perspective

In 1990 Keller and Aaker published their joint work ‘Consumer evaluations of brand extensions’ in the Journal of Marketing. Since that time this publication has been debated and analysed many times by other researchers. Aaker and Keller can be seen as founders of these discussions. Their model has also been applied in other perspectives and with other samples. The extension Evaluation Factors that can be concluded out of the research in 1990 together with the conclusions of new analysis, discussions and applications have been summarized by Keller in his book, Strategic Brand Management: Building, Measuring and Managing Brand Equity, in 2003. This book has been used as a directive to generate the Evaluation Factors for this research. It is amplified by more recent work of other authors in order to provide an overview of the factors. After an extensive literature research also an elaborate characterization of the factors has been made. This can be found in appendix 3. In this section only a short description per factor will be given after which it is explained why it is relevant for this research from a theoretical perspective. At last it should be remarked that the factors will be investigated individually but when conclusions are drawn it will be taken into account that the factors are interwoven with each other.

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An ownership effect occurs when owners or users of a product have a more favourable response than non-owners or non-users of that product to the overall brand and to the extensions of this brand. The ownership effect can be measured by dividing the respondents in an owners and a non-owners group of the extensions. This division is the basic principle for the entire research and will be discussed more elaborately in chapter 5.

The number of extensions

Concerning the number of extensions that are in the market and its influence on the evaluation, some contradictions can be found. Some believe that adding products rather dilute than increase brand strength. Others concluded that adding products does not necessarily weaken the brand, it may even strengthen it. These contrasts exist due to the fact that the influence of this factor on the brand strength is not isolated. It is also depends on the consistency between the extensions and the other products. However to measure this individual factor it will be explored if the number of Company X extensions that consumers use (or only CS, or only Selection, or the two extensions together) makes a difference in the way they perceive Company X’s brand equity.

The perceived fit

Fit is the extent in which consumers perceive similarities between the parent brand and the extension. If the consumers perceive some basis of fit it is likely that the extensions are favourably evaluated. Therefore perceived level of fit is very important for a successful extension. In case of Company X and its extensions the general question for this factor is if consumers think the extensions match with the overall brand. This can be in two ways; between the parent brand & the extensions’ product class and on the brand level. When there is a high similarity in the moments the BR and the extensions are being consumed and when there is a possibility to interchange the Base Range with the extensions, then there is a matter of fit between the parent brand & the extensions’ product class. When consumers do see a match between the different brand concepts of the BR and the extensions, then there is a matter of good fit on the brand level. The presence or absence of fit could be one of the explanations for the presence or absence of the extensions’ influence to the overall image.

Perception of the quality of the parent brand

A high quality parent brand can take away the feeling of risk that consumers may have in the extension. This is especially the case when there is a matter of ‘fit’ between both. The perception of the quality of the parent brand will be measured in order to find out if the quality level is of such a level that the extension is easily tried and accepted. If that is the case the possibility of the extensions’ influence increases.

Perception of quality of the extension

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image of prestige and exclusiveness. If the overall brand is perceived as prestigious the extension should not stretch downward, this will dilute the brand image. It will be measured if the consumers perceive the extensions as an upward or a downward stretch.

Perception of the difficulty to make an extension

When consumers do not see for example any innovation or specialized knowledge to make the extension, a consumer perceives the product as easy-to-make. When a consumer is convinced that a manufacturer must have a lot of knowledge and skills to produce an extension, the perceived difficulty to make the extension is high. This can upgrade the overall image of the manufacturer concerning expertise. The success of a brand extension is higher and has a larger opportunity to differentiate itself, when the extension is not perceived as easy-to-make.

4.2 Practical relevance of the Evaluation Factors for Company X

Now it is explained for every factor why it was selected to evaluate the extensions’ influence from a theoretical view, the practical relevance of the Evaluation Factors for Company X will be described.

The number of extensions

Company X has more products in the market than its competitors. This could make the number of extensions a point of difference compared to the competitors. It will be tested to what extent consumers value the variation Company X offers; do they perceive it as a reason to buy the brand?

The perceived fit

Perception of fit between the parent brand and the extension product class;

One of the reasons for Company X to bring the extensions into the market is to create extra consuming moments. With the investigation of this factor it will become clear if the extensions are used as a substitute of the BR or as complementary: do the extensions cannibalize the base range pads or are they an expansion on the consumers’ current use. Furthermore the company is also interested in the times of day the extensions are being consumed; do these moments match the moments the other products are being drunk or do they differ.

A second type of fit: fit on the brand level;

In case of Company X the objective of the extensions is to give the overall brand image some of their associations. This implies that the extensions should have associations that the overall brand does not have from itself; the extensions and the overall brand are brought onto the market in such a way that they should have different associations. For the company it is interesting to know if these associations are also perceived by the consumers.

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Company X positioned its Base Range coffees and its extensions as more premium than its competitors. They would like to know if this is also the way the consumers perceive the products. Next to that this knowledge can be important when future extensions are considered; if Company X is not perceived as a prestige brand, a downward stretch will not have impact on the overall brand. If it is perceived as a prestige brand, then the perception of the extensions should play a role. This is due to the fact that a downward stretch is likely to dilute the prestige of the parent brand and is therefore not recommended.

Perception of the Degree of Expertise (difficulty to make an extension)

Expertise is one of the associations that should distinct Company X from its competitors. Selling a wide variety of products is one of the things the company does to get this association; Company X is the only brand, besides the Albert Heijn, that offers different products. However for Company X it is very interesting to know if the consumer sees this difference as well and if the extensions thereby contribute to a higher level of expertise.

Moreover the extensions are positioned as more special and premium and are being sold at a higher price. When consumers do perceive the extensions as really easy-to-make, this could be a reason why they are not be willing to pay a higher price for the extensions. However it is not known at Company X if the consumers see the expertise that is necessary to make the extensions, if they value it and if the extensions thereby contribute to a higher level of expertise. This makes the perceived difficulty to make the extensions, or in case of Company X, the Degree of Expertise relevant to examine for the company.

4.3 Unusable Evaluation Factors

Out of the extensive literature research more factors came up. However there is no previous research or existing theory that dictates that all Evaluation Factors are required when extensions are investigated. In this research not every factor will be used as well. When one of the factors would have had the specific interest of Company X, then of course they could have been added to the questionnaire. However in consultation with Company X it was decided not to investigate these factors. Three decisive reasons for this exclusion can be found: the product, the questionnaire and the used database. For a complete and elaborate overview of the reasoning behind the exclusion of several factors, more information can be found in appendix 4.

4.4 Conceptual model applied to Company X

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are going to be investigated in this research are shown. The reasoning behind the choice of the features will be given after the model.

Figure 1: Conceptual model applied to Company X

4.4.1 Clarification of the conceptual model; the choice of the features

The actual purchase of the products of Company X by consumers forms a problem. As explained in the consumer decision making process, the step before the purchase is the consideration; a consumer has to think of purchasing or consuming Company X in those situations in which it can satisfy consumers’ needs. This is the breadth of brand awareness. Since the extensions should enlarge the breadth of Company X’s awareness, the breadth will be the central vision on awareness

Awareness Image Loyalty

Extensions

Evaluation factors - Ownership

- Number of extensions - Fit on product class - Fit on brand level

- Quality of the overall brand - Quality of the extension - Degree of coffee expertise

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in this research. For Company X the depth of brand awareness is not the problem; previous research shows this is already relatively high.

The choice to examine the user imagery part of the non-product related attributes of the brand associations was due to fact that this is what the marketing department of Company X is mainly interested in; the user imagery part is what this department is responsible for and what it can control. Results of the examination of this component and the recommendations that follow from that, are applicable for their part of the processes around Company X. The other parts like price, are less relevant for the marketing department since many other parties as Sales and account managers are involved when the price is determined. The same goes for packing; it is mainly controlled by the Product Development department. Also the composition of the product and other product related attributes are the responsibility of other units than the marketing department and therefore not interesting to investigate in this research. The usage imagery depicts the situational factors in which the brand is used as time of the day or location. This will be examined at the breadth of brand awareness in this research.

The user, the knower and the clueless A research into the value of extensions

The user, the knower and the clueless

A research into the value of extensions

The user, the knower and the clueless

A research into the value of extensions

Preface

Summary

Table of Contents

Chapter 1 An introduction to the story of company X

Chapter 2 Theoretical framework

Awareness

Image

Loyalty

Chapter 3 Methodology

Chapter 4 The Evaluation Factors in case of Company X