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Perspectives

Private: Q&A on Ingredient Branding: A Source for New Revenue

By Ray George

Originally published in Advertising Express magazine

Who are the pioneers of ingredient branding? When did it start getting used?

Intel receives much of the credit for making “ingredient branding” known across the C-suite with the success of its Intel Inside campaign; whereas, several brands pioneered the concept before them. Consistently, the pioneers were high tech, high concept manufacturers who had little to no end-consumer relevance.

In the 1970s, Dolby was a pioneer of ingredient branding in consumer electronics. Its audio quality components became synonymous with “good sound.” The brand achieved this designation by becoming a key ingredient with top quality electronics brands at the time, Fischer and Harman-Kardon.

Shimano is well-known pioneer in bicycle manufacturing who made a name for themselves with premium bike parts in the 1980s. By offering gear shifting components and brake parts in the highest quality mountain bikes, Shimano built a high-performance image that consistently commands a premium price with bike manufacturers and consumers.

Another early success was Dupont’s Stainmaster brand, a carpet treatment protecting carpets from stains. It became a key point of differentiation for this manufacturer – shifting the frame of reference from merely style to quality and dependability.

A different view on ingredient branding could also apply to people delivering a service. Take Fidelity, its Fidelity Magellan Fund saw exponential growth – from $18M in 1977 to $14B in 1990 – under fund manager Peter Lynch. Peter became a legendary brand in the investing world helping to fuel US investment in mutual funds and differentiate Fidelity’s investment expertise, driving exceptional fund flows.

A more recent example is GE Plastic’s Lexan brand. While it is difficult to imagine more of a commodity than plastic, GE has begun to differentiate the functional benefits of high-end Lexan plastic, and subsequently how this adds to the quality of the end product.

What are the benefits of adopting ingredient branding?

Gaining end-customer relevance opens new revenue opportunities – the vast majority of ingredient brands have a primary target of the OEM (original equipment manufacturer), not the consumer. By expanding the frame of reference and audiences, it increases the opportunities available to these brands to reach new customer segments, channels and markets. These new audiences open up new revenue streams for the business and brand.

Premium pricing – by gaining influence in the end-consumer purchase decision, strong ingredient brands merit a higher price than competitors. This premium helps to differentiate ingredients from all competitors, ultimately helping to gain market share.

Shareholders value strong brands – there is a growing body of evidence that strong brands not only fuel superior business results, but also drive shareholder value. While the primary audiences for ingredient brands are manufacturers and end consumers, shareholders can also acknowledge the potential for by gaining brand equity.

Enhancing brand assets/minimizing brand liabilities – for many commoditized brands seeking differentiation, an ingredient can help build associations of innovation, quality or reliability. For others, gaining an ingredient can help minimize liabilities that are either perceptual (stodgy/conservative) or functional (quality/reliability).

Which product categories or sectors prefer this strategy and why?

The more complex the product and purchase decision, the more ingredient brands can help simplify the purchase process and differentiate from competition. We see this occur with everything from consumer electronics (Dolby) to computers (Intel).

The more commoditized the product category, the more likely an OEM is willing to gain a competitive advantage by promoting the benefits of a components. We see this occur with carpets (Stainmaster) to kitchen appliances (Lexan) to mutual funds (star fund managers, like Peter Lynch).

Why automobile component are yet to pick up this trend?

While some automobile manufacturers use ingredients, such as the “Onstar” system in certain luxury cars, most have avoided ingredient branding since they invest so heavily in the equity of their corporate and product brands. These brands, such as the Volkswagen Jetta, Ford Explorer and Toyota Camry, have historically controlled the customer purchase experience. Automobiles are not commodities, and while they are complex machines, you are buying the quality of the company/brand, not the differentiation of an ingredient.

Are there any studies indicating buyers purchasing preference mainly due to ingredient brand than the final product? Won’t the ingredient brand grow larger than the final product (brand)? To what extent it adds to the Brand Equity?

These questions strike at the heart of the issue facing ingredient branding. These brands are attempting to drive decisions that benefit the end manufacturer. Yet if it drives too much of the decision-making process, they disenfranchise the OEM – and run the risk of angering their customer. For example, Intel was so closely tied to the PC market and drove so much of the purchase process in the late 1990s (some would argue that people purchased a new computer only when an upgraded Intel chip was launched) that their fortunes also turned when PC sales plummeted in early 2000. In addition, Intel’s ability to branch into other products or services has been limited since its brand is so closely tied to microprocessors.

While the ubiquity of Intel has added little brand equity to OEM brands, the value proposition of ingredients to OEM’s is that they help the OEM brands gain equity with end-consumers. Therefore, ingredient brands should “team” with the OEM brands in both word and deed to achieve this goal. Teaming could include advertising incentives (like Intel), cobrand development partnerships and other activities that demonstrate a shared commitment to winning.

Are we confusing consumer in the long run by adopting ingredient branding? Imagine a situation if all the component makers start branding their ware, and the consumer has to buy a product, say a computer, then he has to search for computers having Intel microprocessors, SEAGATE Hard Disk, RAM of X and CD ROM of Y company, etc.?

Absolutely right – brands are meant to simplify an already complex buying process. If every component sought to gain influence in the end consumer purchase process, it would make this purchase process more complex.

Where we see ingredient brands thrive is in commodity categories (e.g. computers, rugs, soda, etc.) where OEMs are straining for differentiation. But as you will notice in the examples I have used, there is rarely more than one ingredient brand in any product.

Ingredient brands should only be pursued when they can help accomplish the benefits identified in question 2, and when there are no “competing” ingredients that already exist.