How Brand Empires Are Built
And how to tell the difference between brand recognition and Power
The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.
This is part five of the 7 types of business Power series. To read the earlier articles click here.
In 1985, Coca-Cola began what is often described as one of the era’s biggest marketing blunders when they decided to replace the classic Coke formula, for New Coke. Not only did the company fail to foresee the anger and frustration this would cause—but the lengths people would go to get their old Coke back. One man in particular—Gay Mullins—was hell bent on achieving this goal. Mullins, a retired Seattle investor, created buttons, t-shirts, and established a society called Old Cola Drinkers of America, that would accrue tens of thousands of followers with the sole purpose of forcing Coca-Cola to make the original formulation public. There was even a hotline for people to vent their rage. In a sweet twist of irony, Mullins conducted two separate blind tests and preferred the taste of New Coke—both times. In light of his obvious new preference of soft drink, what do you think Mullins did?
He still demanded his old Coke back.
So, what’s going on here? How can somebody want—demand, even—something they’ve been proven to not prefer? Well, how many times have you purchased something for more money, when you could have purchased an exact, or near perfect similar product?
My bet is quite a few.
How many times have you purchased something to “show it off?”
Probably more times than you’d like to admit.
The reason you spend more money on a product when you could buy an objectively similar one, is the same reason you buy branded medicine over a supermarket alternative when your child is sick. To quote Ronseal, “it does exactly what it says on the tin.” This isn’t some global capitalist mind hacking you from their ivory tower to squeeze every last penny from you—it’s brand Power. One of the most confused, but powerful forces in markets.
Helmer’s Definition of Brand Power
For those new to the series, Hamilton Helmer’s 7 Powers is widely considered the best business book on strategy. What’s particularly interesting about this Power though, is I guess it’s not only business nerds who will find this interesting. If you’re a publisher here on Substack, you too will understand the need for strong brand image. But strong brand image, and what Helmer calls Branding Power are two very different things. Every company has a brand image. But, can every company achieve brand Power? Let’s first look at how Helmer defines this Power:
Helmer describes the definition of brand Power as:
“The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.”
Simplified:
The ability to charge higher prices for something that is objectively identical to its counterpart based on the name of the company.
Simply being aware of a brand, and a brand being able to charge a 10 X premium for a comparable product is the difference that separates brand recognition, from brand Power. Businesses with brand Power are able to charge customers more for an objectively identical product due to one, or both of the following two reasons: 1) the relationship with the brand elicits positive feelings towards their offering, which is distinct from it’s objective value—something Helmer calls affective valence, and, 2) the customer has “peace of mind” knowing that the product will be as expected—something he calls uncertainty reduction.
We’ve all felt affective valence towards something we’ve purchased. Just ask Apple MacBook users, or god forbid, Tesla owners. Both have competition that offer alternatives, but people do pay more to say they own a MacBook or they own a Tesla. There’s an argument that MacBooks are better laptops—an argument I agree with—but others wouldn’t. The same goes for Tesla. Regardless of them being the ugly duckling in the electric car family. Whatever it is that a business sells, there must be a benefit for the end user. If it does not make you feel a certain way once you are the owner, it becomes very difficult for the business to establish Power through affective valence alone.
Uncertainty reduction is a different beast. It thrives on your anxiety. As before, if you have a sick child you go to no ends of the Earth when they’re sick to make them feel better, and if that means paying £6.70 for a 10 pack of Lemsip Max Cold & Flu sachets when you could buy an identical SuperMarket-Own Brand for £3, you do it. Admittedly I don’t have kids, but I do have a dog with a penchant for visits to the vets. Often out of hours. Last year my wife and I wanted to change pet insurers after a 100% price increase, from £67.50 to £135 a month for no other reason than Roo, turning 9! We signed up to another vet and felt content we’d ‘saved’ £55 as our new bill was £80. But Roo started being sick after we changed insurer. He then started haemorrhaging blood from his backside. We quickly rushed to him to the vets that Friday evening and were told he had AHDS (Acute Hemorrhagic Diarrhoea Syndrome)—a condition that not only made his stool look like the leftovers from a gunshot wound to the head—but a condition that can be fatal.
My wife and I were petrified, followed by shock when we were told we weren’t insured. There was a two week window when taking out the new insurance where we weren’t covered. The estimated bill was somewhere between £3,000 and £5,000 to keep him in for just the weekend and carry out tests. We obviously instructed them to do what they needed to do, and that we will find the money. Money that we didn’t have at the time coming of a big holiday to the states.
I’ll save the emotional state of my wife and I for another story, but my wife rang up our previous insurers and begged them to help. And help they did. The clause in our previous contract with them gave us a 30 day grace period after we cancelled to go back if we wanted. They covered every single penny from our bill, and aside from holding our breath anxiously every time Roo has a poo, he made a full recovery.
This year our pet insurance bill is £227 a month, and it’s worth every single penny having the peace of mind that if something happens again our insurers are there to help us. We trust the insurance company. Not something you often hear people say.
In the book, Helmer uses the chirpier, but still anxious example of buying an engagement ring for a loved one:
“I bought Tiffany and I knew I was getting soaked. Didn’t matter—happy then and would do it again (in fact, I upgraded her wedding band to match channel diamonds years later). My priority was to buy the best without any doubt of quality/certification/etc. Size was not important. I wanted indisputable to match her. We’re not showy people and have never played up the fact the rings are from Tiffany’s. It was more appropriate to me to buy a reasonable size stone and know with quiet confidence that the thing is timeless—not a cheap knock-off or gaudy bauble.”
So how much more are people willing to pay for peace of mind?
In 2005, Good Morning America asked reputable gemologist Martin Fuller to appraise the Tiffany & Co. and Costco rings they had purchased. The Tiffany ring was bought for $16,600 and the Costco ring $6,600. What’s ironic is Fuller valued the Costco ring at $8,000—$2,000 higher than the retail price, and the Tiffany ring at $10,500. People are happy to pay nearly $10,000 extra to sleep easier at night? Fuller described why:
“You got exactly what they said you were getting. Anything that is brand-name and has developed a reputation that Tiffany has developed, they’ve earned it over the years for quality control. You can go there and you don’t have to think twice about your purchase. And you pay for that.”
That’s the benefit.
In case you haven’t yet figured it out, the barrier for this Power is time. It takes time to build a strong brand name, and positive reinforcing actions—something Helmer calls hysteresis—serve as the key obstacle. For a new-comer wanting to build their brand name, they are met with a lengthy and uncertain runway with no assurance that customers will feel any affective valence towards their offering. To make matters worse for them, no matter how good their offering is, it’s more than likely open to competitors copying them and eating away any small advantage they may have had.
Why Brand Recognition is Not Brand Power
What’s the difference then between brand recognition and brand Power —and more importantly how can you actually tell them apart?
Let’s look at one of America’s (former)
favourite beers.
Bud Light is one of the most well known beers in America and is advertised everywhere—including Super Bowls. Brands with strong recognition can afford such advertising through other Powers such as Scale Economies, but without making the goods distinguishable from others—customers cannot feel any affective valence towards it. In a 2023 blind test, Bud Light ranked 22nd out of 28 beers. This was on the back of ranking 6th out of 8 beers in 2022. It was impossible for drinkers to distinguish Bud Light from other light beers yet it was the most popular beer in the U.S. How? Marketing and consumer drinking habits. But, in 2023 a controversial marketing campaign, which somehow managed to alienate both political parties for different reasons, saw Bud Light’s US retail sales fall 17% for the year, cost them $1.4 billion dollars in lost revenue and resulted in them dropping down to third place, from first, in top-selling US beers. This fall from grace may have been triggered by the marketing campaign but it wasn’t because of it. The fact that Bud Light drinkers did not have an identifiable affective premium associated with the beer meant Switching Costs were near zero.
Again, brand recognition is not brand Power. The test: if you strip away the label—does the premium survive? If it does not, it’s likely consumer habit through better than average marketing.
Branding Challenges and Characteristics
Once Branding Power has been established it forever opens itself up to reputational scrutiny, copycats and changing consumer preferences, such as:
Brand dilution: perhaps the easiest mistake to make. Careful stewardship of a brand is needed to ensure its reputation remains consistent with its historical image. Releasing products that deviate from what is typically associated can create confusion and dilute the brands reputation resulting in negative feelings towards the brand. Toyota, aware of their brand image as a reliable, cost effective car manufacturer decided to create Lexus when wanting to enter the luxury car market. They understood the difference between “reliable” and “luxury” cars. A high-end fashion brand trying their hat at “affordable” fashion is almost certainly going to ruin its reputation.
Counterfeiting: people will always produce and buy counterfeit products. When a counterfeit product, such as a Louis Vuitton handbag, is produced and illegally sold to the masses it can damage the reputation of the brand. Tiffany would later go on to sue Costco in 2013 for ‘imitating’ to shoppers it sold Tiffany jewellery. They held no punches in their press release as they staunchly defended their brand: “Tiffany has never sold nor would it ever sell its fine jewellery through an off-price warehouse retailer like Costco.”
Changing consumer preferences: over time customer preferences may change in ways that could negatively impact the brands image. Nintendo had developed a reputation for family-friendly video games, but when the direction of the industry changed to more adult orientated games Nintendo did not—or rather—could not through fear of diluting their brand.
Geographic boundaries: the affective valence towards a brand may apply in one region but not another. Luxury brands have often struggled to infiltrate the Indian market because the Indians have their own luxury brands they prefer to Western alternatives.
Narrowness: brands with strong recognition may actually be benefitting from scale economies. Bud Light can pay for Super Bowl ads because of their size, whereas a smaller business can’t.
None-exclusivity: branding as a Power is non-exclusive. Multiple brands can, and do, have Power regardless of competition. Think of LVMH and Hermes. Both companies have Power in the same market. All brands with Power have returns superior to competitors who do not.
The Conditions for Power
Not all goods sold create the conditions for Power, but two conditions are needed to establish it.
The first is magnitude. A promise to justify the price tag has to be made. Business to business products typically fail to create the positive association needed in creating Power, as the main goal is that of objective deliverables. However, consumer goods that can be attached to a sense of identity clear this condition (again LVMH and Hermes), because they offer the individual an opportunity to flaunt. To let people know that they could have bought an objectively similar handbag —but wanted the luxury of peoples eyeballs on them as they tried to figure out why anybody would spend so much on branded bag when they could have bought a cheaper one that does the same job.
Brand Power derived from uncertainty reduction offers the buyer comfort by knowing exactly what they’re getting from a trusted brand. The money saved from the purchase of a similar product from a less reputable brand isn’t worth the anxiety. Goods that have bad tail events—such as a cheap weight loss alternative—can have significant consequences when they go wrong. Only last night somebody told me a story of a woman they knew who had stated having periods again in her late 50’s after taking a knock-off GLP1.
The second condition is duration. If enough time hasn’t passed to build brand Power, the goods will fall victim to normal competitive arbitrage.
Affective Valence is Non-Transferable
When writing this article I had what I thought was an interesting question: can a company have branding Power for one of its products but no Power for others?
It turns out, yes. The affective valence a consumer feels for one product will not necessarily transfer to another good from the same brand.
An example is needed to illustrate this. Coca-Cola also owns bottled water brand Dasani—a brand pulled from the U.K in 2004 after an ill-fated attempt to enter the market. In the U.S, the cost ranges from about $0.40 to $0.50 per litre. The same price range as other bottled water brands. The brand likely benefits from the Scale Economies, marketing, and budget Coca-Cola has at its disposal, but customers do not feel any positive association or uncertainty reduction towards bottled water. I mean, how could they? I find it odd that people buy bottled still water when it flows from our taps, but I suppose that’s because here in Manchester the tap water is actually quite nice to drink.
Surplus Leader Margin (How to Calculate a Brands Power)
At the end of each chapter in 7 Powers, Helmer using some overly complicated Math to calculate the Power in question. Here’s it taken directly from the book:
SMargin = 1 – 1/B(t)
where
B(t) ≡ brand value as a multiple of the weaker firm’s price
t ≡ units of time since the initial investment in brand Industry economics define the function B(t) and determine the magnitude and sustainability of leverage. Time t represents the competitive position that S has relative to W in developing brand power.
To help operationalise this, I’ll provide two examples. One for uncertainty reduction, and one for affective valence.
Example A: Tylenol vs Equate acetaminophen (uncertainty reduction mechanism)
Same products, same dosage, same quantity.
Tylenol Extra Strength Caplets, 500mg, 100 count: $10
Equate Extra Strength Acetaminophen, 500mg, 100 count: $2.08
B(t) = 10 / 2.08 = 4.81
SMargin = 1 / 4.81 = 0.207
1 - 0.207 = 0.79
Example B: Coca-Cola vs. Great Value Cola (affective valence mechanism)
Coca-Cola, 2L bottle: $2.47
Great Value Cola, 2L bottle: $1.74
B(t) = 2.47 / 1.74 = 1.42
SMargin = 1 / 1.42 = 0.704
1 - 0.704 = 0.30
Tylenol is able to charge a higher price multiple of nearly four times because of the uncertainty reduction mechanism. Coca-Cola charges customers a third more compared to alternative colas, built on the back of a century of positive association with the famous soft drink.
Final Thoughts
Helmer shows us two avenues for benefits that help establish Branding Power: affective valence and uncertainty reduction. Both elicit strong feelings towards the brand. The barrier is hysteresis: brand Power can only be created on the back of a lengthy period of reinforcing actions. A competitor with more cash, can’t simply compress the timeline. Duration itself is the moat.
The type of good matters too, and acts as a screen before you should even consider the benefit and barrier. Does the offering have magnitude—the promise of eventually justifying a significant price premium? Has enough time passed for the magnitude to be achieved? A three year old brand—no matter how good its marketing and products are, can have many things—but not brand Power.
The biggest pitfall brands face is dilution. Chasing down-stream revenue at the expense of the affective valence that built the brand image in the first place. Imagine the disgust the proud Birkin bag owner would feel in the pit of their stomach if they saw Hermes offer an ‘affordable’ version of the bag they’d coughed up 25k to buy.
If you take nothing else away from this article, remember: brand recognition is often mistaken for brand Power, but there’s a rather simple calculation you can make to tell them apart.
Next week they’ll be a case study on Hermes and how they built one of the most iconic luxury brands of the last two centuries.
Until then, Karl.
If you’d love to hear more about Branding as a Power and the psychology people go through in justifying to themselves bloated price tags when other identical, or near identical alternatives are available hop into the 7 Powers thread i’ve just opened:
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