The Virgin brand name appears on compact disks, airplanes, online games, health and fitness clubs, and soft drinks. Why? Brand extensions facilitate new product introductions. Consumers are able to draw upon their experiences with the brand to imagine what the new product would be like.

For instance, if Virgin were to open a casino, people might imagine it to be loud, bright and exciting—much like the products that are already affiliated with the brand. Therefore, introducing a casino under the Virgin name should be less costly than convincing people of the attractiveness of a casino with a new brand name.

Research shows, consistent with this expectation, that brand extensions obtain greater introductory market share than do new brands. What's more—they do so with less marketing investment.

Ideally, a company can obtain both market share and a price premium for its brand extensions. How much more you would pay for Tide fabric softener over the $4.99 Gust fabric softener? A Sony laptop computer instead of a $500 model made by Bluetone? Or a Nike tennis racket in favor of a $99 Graysyn racquet? The additional amount that you will pay to get a brand extension by Tide, Sony, or Nike rather than buy an average (or in this case, fictitious) brand reflects the price premium the brand extension can obtain.

The question for the manager of an existing brand becomes one of identifying product categories in which healthy premiums may be obtained. One driver of price premiums is the quality of the brand. Consumers are unlikely to pay a premium for an extension produced by a substandard brand.

A second driver of price premiums lies in identifying product categories that "fit" with the existing brand. Despite its popularity, Nike is unlikely to induce consumers to pay a premium for Nike laundry detergent, as it doesn't fit with Nike in terms of manufacturing expertise or brand image.

Tide fabric softener, Sony laptops, and Nike tennis rackets are examples of respected brands that appear to fit the extension product categories. Yet, you were likely to differ in the percentage premium you were willing to pay to obtain these products. So what else accounts for consumers' willingness to pay for brand extensions?

Price premiums are also driven by the risk that is inherent to the product category. We conducted an experiment that developed new product concepts to assess the role of brand extension fit, and also to assess three types of risk in determining consumers' willingness to pay price premiums for extensions by favorably perceived brands.

For example, financial risk reflects the monetary commitment made in purchasing the product. Financial risk is captured in the purchase price and terms of payment. Higher prices and more "upfront money" increase financial risk.

Performance risk stems from possible harm to the user or the user's property (imagine a vacuum cleaner that may occasionally damage rugs).

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ABOUT THE AUTHOR

Devon teaches at the Richard T. Farmer School of Business, Miami University of Ohio.
Daniel is with the Kelley School of Business, Indiana.