What Are Brands Good For?

Brands are an indispensable part of modern business. This is true in large measure because of their remarkable efficiency in “aggregating” consumers — reaching large numbers of people with a promise to deliver a clearly stated benefit that sets it apart from competitors. “Volvo Is Safety” and “Tide Washes Whiter” are promises that attract consumers, reduce their perceived risk, and make it easier for them to make a purchase decision. Over time, as consumers come to associate a brand with a specific benefit, the brand acts like a stake in the ground, claiming territorial rights over its value proposition. This territorial ownership combined with the ability to influence a mass of consumers is the source of a brand’s market power.1

For many companies, brands are their most valuable assets. And their very success has led companies to burden them with increased responsibilities besides that of establishing differentiated value propositions. At a strategic level, brands are the prime platform for building relationships with the consumer; they also permit companies to charge price premiums over unbranded generics, reduce the risks of new product introduction (through brand and line extensions), and give companies power in dealings with distributors. Tactically, their roles are no less varied. Advertising and promotions of brands drive traffic and sales volume; marketing efforts and outcomes are measured and managed at the brand level; and brands are central to a firm’s responses to short-term competitive moves. In effect, brands have become the focal point of many a company’s marketing efforts and are seen as a source of market power, competitive leverage and higher returns.2

But the information revolution is undermining the logic of aggregation, the very source of brand power. In fact, it is becoming evident that in an information-rich environment, consumer disaggregation is vastly more efficient and profitable than aggregation. Under many guises and labels, such as CRM, direct marketing, one-to-one marketing and information-based marketing, companies are developing means of interacting with consumers at the segment or even individual level. Marketing is becoming more flexible, more adaptive to differences in consumer needs, and more responsive to the changing needs of consumers. Using customized publications, e-mail, direct mail, Web sites and call centers that are based on a common platform of consumer information, companies are demonstrating that they can effectively and efficiently drive consumer behavior through two-way communications.3 Common underlying databases ensure that each interaction is personalized, regardless of the channel through which it occurs. And each interaction with the consumer builds the consumer database further, making future interactions even richer.

The implications of the information revolution for the role of brands in business are far reaching. Many of the strategic and tactical tasks entrusted to brands can now be performed better, less expensively and more profitably at the level of consumer segments. (See “How Disaggregation Does It Better.”) And companies’ brand-centric structures are not suited to marketing initiatives that are based on reaching segments or individuals. So what are brands good for in an era of disaggregation? An answer can be found by examining three core areas of brand management: the consumer relationship, the channel relationship and the organization of brand management.

As with any radical change, disaggregation represents both opportunities and threats. The opportunities for sharpening the role of brands and redistributing some of their tasks to other tools are unprecedented. But as companies pursue such opportunities, they may end up reorganizing their marketing in a way that ultimately challenges the centrality of brands.

The Consumer Relationship

Besides capturing a differentiated positioning, the most valuable strategic function that brands perform is to build relationships with consumers. Relationships arise when a brand repeatedly and consistently fulfills its stated promise. But such connections are built through one-way mass communications of benefits and associations — neither the brand nor the communications are personalized, adaptive or responsive to individual consumer needs. Both are subject to the limitations of mass media, which by definition are driven by the logic of aggregation.

Relationships built within these constraints tend to be shallow. Even brand managers readily admit that consumers do not have a “relationship” with their brand of shampoo or plastic wrap. Disaggregation offers companies the possibility of establishing relationships in which each interaction between consumer and firm builds on a history of past interactions, the firm responds to the needs of the consumer from one interaction to the next, and the consumer pulls information from the company according to her needs. The consumer chooses when and through which channel to interact with the company, and the company ensures that the consumer’s history travels with her across channels. The iterative, two-way flow of communication becomes as much a defining feature of the relationship as the flow of products and money. This added dimension offers rich opportunities for building relationships that grow, rather than relationships built on mass advertising and repeated experiences with the product.

Indeed, once they have experienced the benefits of streamlined marketing, both firms and consumers tend to prefer the personalized approach to the blanket coverage of brands. Companies that employ disaggregate marketing are simply quicker to respond to consumer needs and better able to tailor their offerings and, therefore, to influence consumer buying patterns. Communication costs are dramatically reduced and hit rates increased through more efficient targeting, while finer segmentation allows more precise and profitable pricing.4 Furthermore, targeting consumers with marketing communications only with their permission, and only when they are likely to buy, increases not just the efficiency of the marketing effort but also consumer satisfaction.5 Consumers get the information they need without being assaulted by redundant advertising for products they will never buy.

Consider the impact that disaggregation is having on the packaged goods industry, which has traditionally been a bastion of brands and brand management. Kraft Foods Inc., for example, has a portfolio of hundreds of successful product brands, including Miracle Whip, Jell-O, DiGiorno, Tang, Oscar Mayer and Oreo. Over the past three years, the company has developed and launched the most elaborate disaggregate marketing initiative in the packaged goods industry.

Piloted in Canada and recently rolled out in the United States, the program’s flagship is its glossy quarterly magazine entitled (in the United States) food & family. This free magazine is the centerpiece of an effort to build consumer relationships that also involves call centers, e-mail, a Web site and even cooking schools. The publication arrives in consumers’ mailboxes quarterly, after people who want to receive it have registered with Kraft on the Web site, by phone, or by mailing in a business reply card. It delivers food-related articles, recipes, editorials, and of course advertising.

The magazine is personalized to the individual consumer. For example, someone who corresponded with the company by e-mail may receive a magazine in which the inside cover page points the reader, by name, to the relevant sections in the publication where answers to specific queries may be found. Judging by the numbers, consumers appreciate the personalized information they receive. The publication has rapidly become the third-largest circulation magazine in the United States, with over 11 million copies delivered — about as many as Time, Newsweek and People combined. The costs of the program are set against the benefits of reaching Kraft’s most loyal and profitable consumers in a targeted manner, providing opportunities to communicate directly with them outside of traditional media and retail channels. And some of the costs of publishing and distributing the magazine are defrayed by third-party advertisers such as Ford, Tupperware and even Campbell Soup, which are keen to tap into such targeted exposure for their brands.

The full impact of the program remains to be seen, but it highlights two central facts of disaggregation. First, the locus of the consumer relationship is likely to shift away from product brands toward a trusted and credible umbrella brand or even to the brand that is used as the platform for communications (such as food & family in the case of Kraft). Indeed, a model of such branding already exists in industries such as telecommunications and financial services, where disaggregate marketing has a longer history. (See “Disaggregate Marketing in Services.”) Second, as the consumer relationship shifts to the umbrella brand on the strategic level, tactical activities such as competitive reactions, product-trial coupons and selective promotions are implemented with targeted consumers or segments rather than at the brand level. Disaggregation begins to pay off through a combination of the economies of relationship building at the umbrella-brand level and the efficiency of tactics at the consumer-segment level. Individual product brands focus on communicating and delivering their specific benefits and value propositions.

In other words, for product brands disaggregation means a shedding of roles and a sharpening of focus. Product brands remain well suited to promising and delivering a specific usage benefit, but they are the wrong mechanism for building consumer relationships in the context of disaggregate marketing. They are also ill suited to performing several of the other functions with which they have been saddled. But this does not mean that brands become redundant. On the contrary, firms with large brand portfolios are well placed to take advantage of disaggregation. They are able to build the consumer relationship at a more fundamental level while using their vast portfolios of product brands to fulfill various consumer needs.6

Taken to its logical conclusion, in this model each brand becomes a tool in the toolbox of the marketer, whose job is to manage consumer relationships, not brands. The product brand is no longer a stand-alone focus of marketing. Brands and brand managers no longer compete with each other for scarce budgets that would eventually have been spent reaching the same consumer many times over for different brands. Instead, the new imperative is to manage consumers or consumer segments profitably. In sum, brands continue to play a vital role, but one that is much more streamlined than their current role. They evolve from carrying the entire burden of the consumer relationship and tactical activities to standing for and delivering a specific use-related benefit as part of a portfolio of brands. Brands become team players rather than individual stars.

The Channel Relationship

Perhaps the most dramatic change in the world of packaged goods over the past two decades has been the remarkable rise of the retailer. The source of retailers’ power today is not just their increasingly large size and concentration; it is in the way they now define their business. Retailers’ business is no longer about “collecting rent on shelf space” that they built (a location-based approach); it is a matter of adopting a relationship-based approach to marketing. Recent retailer efforts have been aimed at creating store-brand awareness and differentiation, promoting profitable private-label lines across a wide range of product categories, and building store loyalty.

For branded goods manufacturers, this retail awakening has been difficult. Because brands cannot afford to be delisted from any of the handful of major retailers that now control access to the consumer, the retail channel has become a major focus of manufacturers’ marketing and sales efforts, often to the detriment of brand building. In most developed markets around the world today, the proportion of brands’ marketing budgets spent on retailers’ listing fees, facing fees, trade promotions and cooperative advertising is twice as large as the proportion spent marketing the brands to the end consumer. But in increasing their trade spending, branded goods manufacturers also recognize that their actions are at odds with their own interests — they are feeding a potential rival for the consumer relationship.

Disaggregation is seen by some manufacturers as an opportunity to restore some balance to the imbalance of power between manufacturers and retailers. It provides manufacturers with a new medium to influence consumer decisions that is independent of the retailer. This new medium can help restore credibility to the manufacturers’ claims to know and understand the consumer better than retailers do and to reassert their role in the value chain. But manufacturers must act quickly for two reasons: First, because consumers prefer few relationships to many, a first-mover advantage will endure.7 And second, because retailers are not sitting idle in this game.

In fact, retailers argue that the economics of disaggregation favor them. Whereas a Kraft or Procter & Gamble spreads the cost of a marketing program over a few hundred brands, a retailer spreads those costs over more than 40,000 stock-keeping units and indeed can even pass some of the costs back to the manufacturers. Greater variety may also allow the retailer to achieve a finer level of segmentation, enabling them to capture the additional profits of disaggregation. Retailers also argue that in the eyes of the consumer, the retailer has greater credibility in assembling an assortment of products and brands that makes sense for the consumer and is not perceived to be driven by an interest in selling one brand over another.

Retailers’ understanding of brands has always been different from that of the manufacturer. Retailers used to view well-known brands such as Coca-Cola and Tide as magnets to attract consumers to the store. Those brands would be advertised on the front pages of retailers’ weekly flyers, often at very low prices, to pull in consumer traffic. But once retailers began to use disaggregate consumer data to drive traffic, brands were seen as a coarse and expensive mechanism for achieving traffic volume.

Perhaps the most innovative retailer programs for building consumer relationships are being pioneered by the United Kingdom’s largest and most profitable grocery chain, Tesco Plc. Using its loyalty card as the centerpiece, Tesco has built an information-driven marketing program. Data from shoppers who use the card provide a means of personalizing the consumers’ shopping experience and are used internally to make decisions on many issues, from the content of flyers to the size of parking lots for new stores. Like Kraft, Tesco has begun to view brands as ingredients in the process of building and delivering solutions for the consumer. But it is now the retailer that pulls together and delivers the solution, not the branded goods manufacturer. The risk for manufacturers is that the consumer’s relationship will be with the retailers’ umbrella brand.

Recognizing the importance and urgency of building disaggregate consumer relationships, in 2001 P&G launched its consumer information-based marketing initiative in the United Kingdom under the banner “Golden Households.” The initiative was intended to develop an understanding of those 20% or so of households that account for a sizeable chunk of the purchases of P&G products and hence of the company’s profitability. But the company also recognized that its consumer data covered only a small slice of overall consumer behavior and that Tesco’s data offered a much broader view. Marrying the two types of information would be very powerful. Indeed, P&G’s U.K. launch of its Physique hair-care brand was executed exclusively through Tesco channels, using Tesco publications, and targeted to consumers based on the combined data of the two firms.

Manufacturers are realizing their brands’ chances of survival will be better if they become an essential element of the retailer’s value proposition to particular consumer segments. In the channel relationship, too, the brand is perceived as no longer being the focal point of marketing.

The Brand Management Organization

In 1931, P&G pioneered an organizational innovation, the brand manager, as a means of focusing the firm’s resources on key market opportunities. The system allowed budgets and profits to be measured and marketing initiatives to be developed at the brand level without interference from other brands. Since brands were the platform on which consumer relationships were built in the emerging era of mass media, the move was prescient. Over seven decades, brand managers and brand management systems have become the foundation of marketing departments in many industries.

But now entrenched brand-management organizations are proving to be an impediment to the adoption of consumer-level disaggregation initiatives. Packaged consumer goods companies, where brand management systems have been the most pervasive, have been late adopters of disaggregation technology and remain reluctant to accept the organizational consequences of consumer information for brands and brand management. Each brand speaks to the consumer, usually outside of a usage context (mainly through television advertising) and without the context of other brands from the same company, leading to duplication of effort and other inefficiencies.

Even at Kraft, the information-based marketing program is treated as an add-on to existing channels for reaching the consumer. The program is funded from budget allocations from brand managers whose brands are featured in the disaggregate marketing campaigns. The brand manager can choose to put money in this program or to continue using only traditional media. This approach defines disaggregate marketing as just another media choice, not a different way of doing business. Brand managers continue to be concerned with the marketing and sales of their brand rather than the profitability of the entire portfolio of brands. The focus of marketing efforts remains the brands, not the consumers.

Brand management systems have much to commend them, but they were designed for an era of mass marketing and are not well suited to making good use of the tidal wave of valuable consumer information that is now available. For example, few companies today measure their performance at the consumer or consumer-segment level. In the automobile industry, any company can readily determine from its management accounting systems the profitability of any of its brands or sub-brands, because the systems are designed to track, measure and manage brands. Yet the same company would have difficulty pulling together information to determine whether a specific customer is profitable, whether the customer and her family are loyal purchasers, and whether the general segment to which that customer belongs is financially attractive.

Because so many organizational systems are built around brands, a switch to a consumer-centric organization cannot happen overnight. To understand the nature of the changes required, managers must recognize the need for three elements in any new structure. The first element is a relationship-building entity and mechanism. That might be a corporate brand or the brand of the communication medium, such as the food & family brand that Kraft launched. The purpose of this brand is to be the face to the customer, building a relationship based on trust and responsiveness. The second element is targeted communications that can exert a tactical influence on consumer behavior. Such communications require data analysis, continuous segmentation, testing of messages on subsamples of the consumer base, and development and implementation of targeted campaigns. Naturally, all targeted communications need to be consistent with the nature of the relationship that is established at the strategic level. As a basic example, an implicit understanding with the consumer is that communications should never be unsolicited; they should always be based on an individual’s permission. The final element of a consumer-centric organization is obtaining expertise in new-product and brand development so that the portfolio of product brands can be continually rejuvenated.

But firms must also recognize that changes to the organization chart alone are not enough to address the opportunities presented by disaggregation. Changes are required in the measures they use to gauge success (focus on customer-level profitability, for example, not brand-level profitability), the incentives and rewards used to motivate people (bonuses should be tied to segment profitability, not market share), the way they deploy resources to the market (consumer-pull versus trade-push expenditures), and the manner in which teams coordinate to tackle market opportunities. (See “Disaggregation’s Impact on Brand Management” for an overview of necessary changes.)

The Value Proposition of Brands

The success of brands over the past century is in no small measure attributable to their unique ability to aggregate consumers into viable markets economically and efficiently. Their ability to communicate an identical message to large numbers of consumers makes brands the ideal and natural ally of mass production. Whereas assembly lines shrank the cost of building products, brands reduced the cost of building markets. And while brands were initially confined to packaged consumer goods, they are now ubiquitous even in services and business-to-business settings. Despite major upheavals in the world of marketing, including retailer concentration, media fragmentation, niche marketing and the advent of the Internet, brands have endured and continued to flourish.

Yet a question mark now hangs over their future purpose and role. Major advances in the information environment have made it technically feasible and economically viable to supplant brands by managing the consumer relationship directly. Disaggregation is proving to be an efficient and profitable marketing approach. While most firms initially approach disaggregate marketing initiatives as matters of technology implementation (in the form of a CRM system, for example), they quickly realize that disaggregation is not just an add-on to their brand-focused organizations. It is a different way of doing business that challenges brands and brand-based organizational structures.

What, then, are brands good for in this new environment? As they were initially and have been for decades, brands are an excellent means of developing and communicating a differentiated value proposition in the market. Armed with a basket of such value propositions, a manufacturer’s umbrella brand might even rightfully aspire to the ultimate prize — a relationship with the customer. It is on this task that companies should focus their attentions in this new era of disaggregated marketing.