How brands build competitive advantage beyond scale

   by Nigel Hollis

I recently came across an article on Bain’s website which highlights the fact that a company does not need to be the biggest in their category to make the most money. In addition to the usual business advantages the article details attracting the best customers as one way that these companies get better returns. So how do you do that?

The Bain article by James Allen is titled, ‘Some Companies Aren’t the Biggest Players in an Industry. So How Do They Make the Most Money?’ The article reports an analysis of the total profit generated in 45 product and service categories over three years and what share of the profit pool the participating companies captured. The analysis found that among the economic profit leaders 40 percent were not the scale leaders.

It is received wisdom in business that bigger is better. And there are definite returns to scale: cost dilution, market influence with suppliers, distributors and retailers and accumulated expertise are listed in the Bain article. But there are also deficits to scale that undermine those advantages: lack of agility, internal siloes and poor communication. Not everything is stacked in a big companies favor and the successful ones work hard to overcome the deficits and leverage the returns.

But what of those smaller profit leaders? In addition to superior business expertise Allen’s article identifies attracting the best customers. He notes,

“Every market has a group of customers that is more lucrative than others. The companies that attract them command the highest margins. These customer groups are stickier, not as price- sensitive and cost less to serve.”

Music to my ears, if only because it accords with the data I see from all our brand equity and brand guidance work. In every category there are people who value brands in general and those that do not. Within those groups there are people who will likely value a specific brand’s offer more than others. We find that brands which are seen to be meaningful and different can command a 14 percent price premium over the average for the category, which can have huge profit impact.

Allen goes on to say,

“Aggressive challengers can also hijack the industry profit pool by winning over the best customers or by introducing something new that creates additional demand among this lucrative group.”

When I looked at the corporate world and integrated brand equity data with financial performance data for over 100 local companies (as opposed to the Global BrandZ Ranking) I found that the ones which were more likely to be perceived as meaningful and different returned far better profits than the norm. Now, that could be because they have a better offer and more satisfied customers, or it could be that they do a better job of attracting more valuable and stickier customers. Either way, they made more money.

There is often an artificial disconnect made between business practice and customer attitudes when ultimately everything a company does builds its brand. And building a profitable brand is not just about scale, it is about identifying valuable customers and how best to attract them. What do you think? Please share your thoughts.