The more a company invests in its brand, the more difficult it is to get paid more for higher quality, according to a study.
KNOWLEDGE @ BI: Corporate Brand Investments
It is not always easy for high-quality suppliers to be preferred ahead of competitors with lower quality, while also achieving prices that correspond with their higher quality level.
This particularly applies when suppliers compete for contracts in markets with products and services that are seemingly the same.
The challenge facing suppliers is particularly great when customers cannot fully assess the quality of the services before entering into contracts. This means that customers risk selecting unqualified suppliers. They could also risk selecting suppliers that do not deliver services with the agreed quality.
In such a situation, high-quality suppliers must use tools that inform and require them to be honest regarding their level of quality. Examples of such tools are investments to strengthen the company’s brand, higher prices or guarantees.
Investing in the company’s brand is in line with the dominant brand strategies in markets where companies negotiate with other companies (so-called B2B markets). They do this because customers generally prefer well-known brands. At the same time, the brand literature claims that investments in the company’s brand could make it possible for suppliers to achieve a higher than normal market price for their services.
Brand investments do not pay off
We have conducted a study proving the opposite. The suppliers’ ability to achieve a price that exceeds market price for their services declines in correlation with how much they invest in their brand.
The study also shows that suppliers who support their quality profile by issuing guarantees for improving errors and deficiencies beyond the obligations in a standard contract, to a greater extent achieve prices exceeding the normal market price.
Rewarding honesty
These results seem to contradict common sense. However, they are logical if we apply information economy as a basis.
A common denominator for brand investments, guarantees and a higher price is that they reward the honest companies and punish the dishonest companies financially. A breach of quality commitments will therefore result in losing customers, and thus brand investments. A high price provides even higher income. However, this is lost if the supplier does not deliver the agreed, high quality.
When the company risks losing its brand investments if it does not deliver the agreed quality, a quality and price-conscious customer does not need to pay suppliers with high investments in their brand more than the market price for being honest.
Guarantees create additional value
Guarantees exceeding the standard contract terms and conditions entail that customers can have errors corrected at no additional cost for a certain period. Only high-quality suppliers can offer such guarantees. Low-quality suppliers would lose money if they implemented such a scheme.
The guarantee requires the supplier to fulfil its quality promises. However, guarantees in the form of future, free corrections also result in additional value which customers are willing to pay more for.
Trust those who invest in the brand
The findings from our study do not mean that companies should avoid investing in their brand. When both the price and quality are important, as in many markets where companies trade with other companies, customers know they can trust businesses with high investments in their brand name to deliver quality at competitive prices.
Brand investments entail costs independent of sales. Since they also reduce the possibility of achieving good prices, brand investments are an effective barrier against competition.
Brand investments could therefore be less suitable for new companies or companies with limited financial resources. For such companies, the use of guarantees could be a more suitable instrument. Guarantees help build a credible quality reputation, they require no disbursement in advance, and increase the possibility of achieving a higher than normal market price.
The study is based on a survey among managers in 235 suppliers of electrical installation and plumbing services. In the analyses, we split the sample into two groups depending on how easy it was for the customer to assess the quality before the contract was signed.
The first group delivered services which were difficult to assess before the contract was entered into (experience services). The second group delivered services where the customers could assess the quality before entering into the contract (access services).
Reference:
Harald Biong and Ragnhild Silkoset: “The Ineffectiveness of Corporate Brand Investments in Creating Price Premiums”. This article has been accepted for publication in the Journal of Marketing Theory and Practice.