How do we explain the tendency of a consumer to pay a premium for a certain brand in a given product category, even if competing products might be of similar, or even identical, quality? Indeed, in the 1930s and 1940s, and long before the polemics of Naomi Klein ("No Logo" here), this phenomenon so concerned the United States Justice Department that it questioned the entire rationale for trade mark protection as simply a symbolic means for exploiting gullible consumers and serving as a potential barrier to entry. Whatever one's macro-view of trade marks, the durability of the consumer tendency to prefer certain brands -- reason and logic perhaps notwithstanding -- cannot be denied, and it underpins the commercial justification for the entire enterprise of trade mark registration and protection.
While trade mark practitioners worship at the altar of brand preference ("may it continue ad infinitum") without much concern about the "why" and "how", scholars seek to explain the reasons for brand preference. One factor that has been suggested is the influence of the previous experiences of the consumer. A recently published study that attracted the attention of The Economist -- "The Evolution of Brand Preferences; Evidence from Consumer Migration", (NBER Working Paper No. 16267, August 2010) (c) Bart J. Broonenberg, Jean-Pierre H. Dube and Matthew Gentzkow) -- has empirically examined this issue. Those who enjoy reading quantitative-focused analyses of branding will find the article to be of particular interest. But even for those who don't, the article contains various insights that merit mention.
Permit me to bring the following quotations. The first describes the conceptual background to the study, while the second summarizes some of its most important findings.
As for the conceptual background, the authors write as follows:
"Theorists have long speculated that willingness to pay for brands today could depend on consumers’experiences in the past. Willingness to pay could be a function of past consumption, which could enter expected utility directly (Becker and Murphy 1988), through switching costs (Klemperer 1987), or through beliefs about quality (Schmalensee 1982). It could depend on past exposure to advertising (Schmalensee 1983, Doraszelski and Markovich 2007), or on past observations of the behavior of others, as in Ellison and Fudenberg (1995). At the extreme, brand preferences could be entirely determined by experiences in childhood (Berkman et al. 1997). Under these assumptions, consumers’ accumulated stock of “preference capital” could be a valuable asset for incumbent firms and a source of long-term economic rents. [footnote omitted.] In Bain’s (1956) view, “the advantage to established sellers accruing from buyer preferences for their products asopposed to potential entrant products is on average larger and more frequent in occurrence at large values than any other barrier to entry” (p. 216)."Analyzing the consumption patterns of U.S. consumers, and focusing on the behaviour of consumers that have moved from locale to another, the authors conclude as follows:
"We find strong evidence that past experiences are an important driver of current consumption. We first examine the way consumption patterns change when consumers move across state lines. Both crosssectional and panel evidence suggest that approximately 60 percent of the gap in purchases between the origin and destination state closes immediately when a consumer moves. So, for example, a consumer who moves from a state where the market share of the top brand among lifetime residents is X% to one where the market share is Y% jumps from consuming X% to consuming (.4X + .6Y)%. Since the stock of past experiences has remained constant across the move, while the supply-side environment has changed, we infer that approximately 40 percent of the geographic variation in market shares is attributable to persistent brand preferences, with the rest driven by contemporaneous supply-side variables. We next look at how consumption evolves over time following a move. The remaining 40 percent gap between recent migrants and lifetime residents closes steadily, but slowly. It takes more than 20 years for half of the gap to close,and even 50 years after moving the gap remains statistically significant. Finally, we show that our data also strongly reject the hypothesis that all that matters is where consumers lived in childhood: consumers who move after age 25 still eventually converge to the consumption patterns of their new state of residence".
1. The results suggest that a bit more humility about the ability of one's current environment to affect consumer behaviour is on order. This further argues in favour of developing metrics that can better pinpoint these past consumption experiences--but do I hear privacy advocates groaning?
2. As if we needed any reminder, our past experiences continue to effect current behaviour, often in a non-linear fashion. Unlike the world of Freudian childhood, however, even in a ever more mobile world, past preferences can eventually be neutralized. The brand holder may just have to work harder to overcome the consumer's past.
3. Not all brands are created alike. The focus of the study is on consumer packaged goods and the analysis reaches a very fine degree of granularity in that space (including 16 different categories of sauces and 12 different categories of pizza). What would a similar study look like for computer and electronics products or social media? Indeed, could there even be such a study for these areas? I may have adored Wang computers and the Word Perfect program 20 years ago but ... out of sight, out of mind.
4. Even if a strong brand may not be a barrier to entry, it does point to the value of early entry into a market. Ask Coke in connection with the Indian market. But that is for another blog post.