Brand equity and vertical product line extent

This paper addresses the question of how the vertical structure of a produc t line relates to brand equity. Does the presence of "premium" or high-qual ity products in a product line enhance brand equity? Conversely, does the p resence of "economy" or low-quality products in a product line diminish bra nd equity? Economists and marketing researchers refer to variation in quali ty levels of products within a category as "vertical" differentiation, wher eas variation in the function or "category" of the products is referred to as "horizontal" differentiation. Much of the existing research on the relat ionship between product line structure and brand equity has focused on the horizontal structure of the product line and has been primarily concerned w ith brand extensions-what happens when the product line of a brand is exten ded horizontally into new categories? Researchers have been concerned prima rily with how the extension fares, but the effect of the extension on the c ore products is also important. There is an analogous question of what happ ens when the product line of a brand is extended vertically, either "up mar ket" or "down market." This question of vertical extensions is part of the more general issue of how the vertical structure of a product Line relates to brand equity. The specific research questions addressed in this paper are: (1) do "premiu m" or high-quality products enhance the brand equity associated with the ot her products in the line? (2) Conversely, do "economy" or low-quality produ cts diminish the brand equity associated with the other products in the lin e? These research questions are relevant to three managerial issues in prod uct-line strategy. First, what are the costs and benefits of including "dow n market" products within a brand? Second, what are the implications of inc luding high-end models within a brand? Third, when should high-end and low- end products be offered under an existing brand umbrella and when should th ese products be offered under separate brands? We address these research questions empirically through an analysis of the models and brands within the U.S. mountain bicycle industry. We use price p remium above that which can be explained by the physical characteristics of the bicycle as a metric for brand equity. We then test several hypotheses related to the relationship between extension of the product line upward an d downward and the price premium commanded by the brand. We further support this analysis with a simple laboratory experiment. The analysis reveals th at price premium, in the lower quality segments of the market, is significa ntly positively correlated with the quality of the lowest-quality model in the brand's product line; and, that for the upper quality segments of the m arket, price premium is also significantly positively correlated with the q uality of the highest-quality model in the brand's product Line. The result s of the analysis are supported by the outcome of an experiment in which 63 percent of the subjects preferred a product offered by a high-end brand to the equivalent product offered by a low-end competitor. These results impl y that managers wishing only to maximize the equity of their brands would o ffer only high-quality products and avoid offering low-quality products. Ho wever, this result must be moderated by the overall objective of maximizing profits. Maximizing profits is likely to involve a tradeoff between preser ving high brand equity (and therefore high margins) and pursuing the volume typically located in the lower end of the market. One of the most signific ant implications of this research is that product line managers need to be mindful not just of the incremental cannibalization or stimulation of sales of products that are immediate neighbors of an extension to the product li ne, but also the effect of such an extension on the brand equity in other, possibly quite different, parts of the product line.