Saturday, January 3, 2015

Brands and Competitive Advantages

From The Little Book That Builds Wealth:
One of the most common mistakes investors make concerning brands is assuming that a well-known brand endows its owner with a competitive advantage. In fact, nothing could be further from the truth. A brand creates an economic moat only if it increases the consumer’s willingness to pay or increases customer captivity. After all, brands cost money to build and sustain, and if that investment doesn’t generate a return via some pricing power or repeat business, then it’s not creating a competitive advantage.

The next time you are looking at a company with a well-known consumer brand—or one that argues that its brand is valuable within a certain market niche—ask whether the company is able to charge a premium relative to similar competing products. If not, the brand may not be worth very much.

This reminded me of an excerpt from Competition Demystified that I have saved:
Some companies have access to market demand that their competitors cannot match. This access is not simply a matter of product differentiation or branding, since competitors may be equally able to differentiate or brand their products. These demand advantages arise because of customer captivity that is based on habit, on the costs of switching, or on the difficulties and expenses of searching for a substitute provider.