branding

The battle of the brands is in flux. Once, the situation was simple. The highest market share won the highest profits, commanded the leading prices, and deserved its lion's share of the shelf space. But the link between volume and value is now wobbling, to judge by research in the US.

A fascinating study in the Harvard Business Review tells what happened when Procter & Gamble bought a premium coffee brand called Folgers. Because higher market share supposedly meant more profit, P&G started a price war. It gained and retained market share: but in the process, destroyed profitability for everybody. It hadn't recognised that Folger's was a 'hitchhiker'.

That's the name which Vijay Vishwanath and Jonathan Mark give to brands in the premium category with low market share. They average 15 to 20% on sales - twice as much as the 'low-road brand', which has a high share but sells on value. That is plainly unattractive for manufacturer and retailer alike, although it's better than the 'dead-end'.

Brands in this fix have low shares, marginal returns and (as the name implies) probably no future. Never believe their owners when they say 'The brand isn't making money today, but it will tomorrow'. The real interest, though, is what determines these categories. The answer is clear: innovation. That's why customers will pay premium prices for small-share hitchhikers.

Just as important are the wonders that innovation works for brand-leaders. The HBS study calls these 'high-road brands'. Their return on sales exceeds 20%, and these are plainly the products to push and cherish. Gillette's retaliation against cheap disposable razors, for instance, eventually took the form of the $200 million Sensor shaving system. It earned a 25% price premium over the most expensive brand on the market.

The lesson is powerful. Don't just look at the brand's present sales strength. Look at the innovative effort which the manufacturer makes. The more numerous and better the variants, and the more often the brand is freshened by new launches, the more likely it is to command the price premium which everybody wants - and the profits.