Arnold Kling  

Reputation Systems and Brands

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Alex Tabarrok links to a story about the decline in the importance of brands, by James Surowiecki, who writes

The single biggest explanation for fragile brands is the swelling strength of the consumer. We've seen a pronounced jump in the amount of information available about goods and services. It's not just bellwethers like Consumers Union and J.D. Power, established authorities that unquestionably shape people's buying decisions, but also the crush of magazines, Web sites, and message boards scrutinizing products.

This reinforces my belief that we can reduce the significance of the "brand" of government licenses. Alternative reputation systems could provide a substitute, particularly in the case of health care providers. I believe that this would lower costs and speed innovation in the health care industry.

For Discussion. How strong is the evidence that reputation systems are eroding the power of brands?

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jamsl writes:

Some recent and notable branding failures include Dell, WalMart, Lexus, iPod, Amazon, Google, Harvard University, Nike and Progressive Insurance.

And every time I buy groceries, I'm amazed at how much more shelf space is devoted to generic packages of PEAS and CATCHUP and NOODLES and DETERGENT and TOOTHPASTE and SUGAR and TUNA. As predicted decades ago when the trend began, they now fill half the store.

jamesl writes:

More notable branding failures:

NPR, PBS and HBO. Virgin Atlantic, SouthWest and JetBlue. NBA, NFL, MLB, PGA and ESPN. Ikea. TGIFridays, Subway and Cracker Barrel. Fidelity, Vanguard and T. Rowe Price. UPS. FedEx. Bose, Nikon, Garmin, Leica and OnStar.

Finally, the two biggest failures from the "You can get better, but you can't pay more" category," Starbucks and Harley Davidson.

Matthew J. Sullivan writes:

This is something that I pointed out just the other night. I've noticed that there is a generational difference. Older people will often say things like, well that's a Maytag, in '77 I got burned by Maytag so I won't buy their garbage. My argument is that even in one company you often have totally different design teams even from one year to the next. Plus executives at the higher echelons seem to turn over at a faster pace than before. So the Coca-Cola corporation of today is more different that in 2000, when compared to a similar 4 year period from say the 60's. The disadvantage is that you are constantly having to do research in order to keep abreast of what's "best."

Brad Hutchings writes:

jamsl, I don't see how you can declare half of those brands you list as failures. Take the iPod... Premium price, premium features, market dominance. Go figure.

Today, brands are less a promise of basic functionality -- that is taken for granted. They are more a promise of style or simplicity or other distinguishing characteristic from commodity competitors. There is certainly a portion of the population that is very brand conscious, and good reasons for them to be so beyond being brainwashed. There is certainly a portion of the population that is anti-brand, and good reasons for them to be so. And there are many who are occasionally brand conscious, and good reasons for them to be so.

To Arnold's suggestion that the brand power of government licenses could be reduced. Again, go after the low hanging fruit. People are surprised to find out that ethnic hair braiders need cosmetology licenses. Work to end that silliness. People are surpiised to find out that they can still get a lousy haircut from a licensed barber. Work to end that silliness. Then we can go after the doctors and lawyers.

Bob writes:

Brad, jamesl is being sarcastic.

Lawrance George Lux writes:

Brand failure comes solely from Product failure. This is why the Drug industry will eventually implode. Generic labs have to meet health standards, and often produce at a tenth the wholesale cost of Brand products. Buying of Doctors and Hospitals will not last forever. It is the same throughout the business world, when two dozen Generic competitors produce; at least one competitor will provide at the quality level of the Brand name. Information spread assures this knowledge reaches the Consumer.

Code One Error: Such endeavor will never extend to human labor, because of the inconsistency of effort. There must be a Bonding process sufficient to cover malpractice. lgl

Brad Hutchings writes:

Oh man, my apologies jamesl and Bob and basically everyone. Egg on my face. jamesl... that was truly brilliant. I couldn't believe you could think that Harley Davidson wasn't a wildly successful brand. My dog is wearing a Harley jacket to keep warm, er look cool, er whatever. LOL.


Glen Raphael writes:

Brands are a form of reputation system, if it's the brand of an intermediary. I tend to assume that if I find a product in a store, it's probably pretty good. If the generic weren't any good, Safeway/Costco/whatever wouldn't stock it.

Just recently I bought a big-screen plasma TV of a brand I'd never heard of on the grounds that it was cheap, it looked good, Costco stocked it, and if I didn't like it I could return it within 30 days.

jamesl writes:

Lawrence George Lux:
Re: Drug Industry
Don't forget that new drugs are patented so there is no generic competition in their early years. Once off patent, the branded drug's price drops to compete with the generics. This 1998 CBO report has some very interesting data on this.
(this is the Google cache)

Interestingly, they found that total unit sales for a drug (branded plus generic) did not increase after the generic-induced price drop suggesting either an inelastic market or that sales shifted to newly developed drugs.

And finally, walk into your local drug emporium and check the price of brand name Bayer Aspirin and its generic equivalent on the next shelf.

john top writes:

Brands appear to be weakest where the homogenization of the product is greatest. As a product becomes more like a commodity, the power of brands is less and less. An example that comes to mind is laundry soap. Early on, I bet it did matter what kind of soap you used for the laundry. Now all soaps are more or less the same.

Bernard Yomtov writes:

I don't think reputation systems erode brands, I think information does.

I can go to the drugstore and compare the ingredients of a name brand product with those of the much cheaper generic or store-brand product. If they are the same, as they often are, I buy the cheaper one. But without the labelling I would go for the brand name, on reputation grounds.

Lawrance George Lux writes:

I did not forget about the Patents, and area on which I have written often. The Drug industry will still implode. There is lack of quality improvement in new Drug Patents over previous issues--consider Prilosac v. Provasaid.

Your comment about shelf price is valid, but I was referring mainly about Wholesale price to Retailers, who make their Profits on Price markups on Generics. lgl

jamesl writes:

Lawrance George Lux
Re: Drug Company Implosion
The generic term for your point is "Failure to Innovate."

Jim Glass writes:

"NPR, PBS and HBO. Virgin Atlantic, SouthWest and JetBlue. NBA, NFL, MLB, PGA and ESPN. Ikea. TGIFridays, Subway and Cracker Barrel. Fidelity, Vanguard and T. Rowe Price. UPS. FedEx. Bose, Nikon, Garmin, Leica and OnStar."

Exactly. I don't see evidence at all in that article to support any claim of the "decline of brands". The opposite, if anything. The article even says that Roger Ebert is making money by turning himself into a brand, for crying out loud.

Stories about particular troubled brands should not be taken too seriously. That's just competition, brands fail constantly. The Edsel was a pretty famous failed brand. It didn't mean the end of branding.

Such a claim needs real data to support it, and as someone once said, data is not the plural of anecdote.

Bob writes:

Marketing is not my field but it seems the most one can say is that branding has changed with the rest of the world so brands develop differently today and offer different value to consumers. To build on jamesl's point about generics, even generics are branded. Private label brands appear to be an attempt to monetize the retailer's own brand, probably as a quality signal.

For this to happen in medicine, it seems like we'd have to see massive consolidation into Kaiser-type organizations (or maybe looser Ace Hardware-type groups). eBay-style feedback as an alternative would work for planned care, so maybe the large "branded" healthcare providers (McHospitals) would specialize in providing different emergency/surgery/etc. price/quality packages while reputation systems allow local provider groups to compete on basic care.

engine writes:

two comments

1. on Private labels vs. Brands in supermarkets: retailers (like Target, Stop & Shop) introduce more of their own private labels, on which they enjoy a higher profit margin than branded products. Review of Industrial organization has an issue this year specifically for the topic of private labels.

2. prices of patented drug do not necessarily decrease after the patent expire. common wisdom is actually the opposite. when generic drugs are available, price-sensitve customers are gone, so sellers of brand-name drugs can target only those price-insensitive consumers and raise price accordingly.

Lawrance George Lux writes:

I was referring to more than 'Failure to innovate'. I am talking about the Cost efficiency of Drug research. Is the added 2% Drug efficiency in promoting health over its nearest competitor worth a $7 pill, instead of a $2 pill? lgl

Fazal Majid writes:

I think the decline of brands is real, maybe not for top-tier brands but certainly for the others. This could be due to saturation, but another explanation is that marketers fetishize brands and nurture the self-serving cargo-cult belief that the brand itself is the success factor, not the product quality it used to promise. Money is diverted from R&D or manufacturing improvements to advertising, which contributes nothing to product quality and builds up a hollow brand image, that does not long resist contact with reality.

jamesl writes:

lgl: Viagra and Tagamet were innovative drugs that commanded a premium. Repackaging and re-patenting a drug as once-a-day is not innovative and shouldn't command a premium. Unfortunately, discovering innovative drugs is extremely difficult and expensive.

Fazal: Its "Brand and Deliver". The attributes that define the brand must be valuable to the customer and the brand owner must continually support, deliver and reinforce those attributes. If FedEx quit delivering packages on time, or if they quit reminding us of how good they are, the brand would lose its value.

Engine: Private Label Brands are Brands, not generics. The Great Atlantic and Pacific Tea Company (A&P) sold Ann Page branded products (next to Campbell soup and DelMonte tomatoes) for decades before any shopper had heard the term "generic." There are probably degrees of "genericicity."

And finally ... The point of the article was that simpler and faster information flow is making brands less valuable and possibly obsolete. However, today's best brands use the same information systems (mostly internet enabled) to stay closer to customers and reinforce the brand's message and value. FedEx doesn't just advertise that they deliver your package on time, the allow you to track it from your door to the truck to the terminal to the plane to Memphis back to a plane to a truck to your customer. Progressive Insurance supplies competitors' prices. Lexus has third party competitive comparisons. The president and COO of Sun has a blog.

Its a great time to be a marketer. And its a great time to be a customer.

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