There are many different reasons why a company should invest in branding. The most overlooked and most important benefit is a brand’s ability to command a higher price.

You see this happening everywhere around you. Why do people pay a 10X premium for a pair of brand-name jeans when they’re really not that different from the value brand, and likely manufactured in a similar (or the same) facility? Is it because they are truly 10X better or cost 10X more to make? No, not really. It’s the brand, and more importantly, the customer’s perception of that brand, that commands the higher price. This article explains why some brands command the price they do.

Why Do Customers Pay More For a Brand Name?

Everybody knows customers will pay more to have that little label on their jeans, yet nobody really understands why. Most crack a cynical joke and shake their heads… then head to the mall and pick up the same pair. There’s a number of possible reasons why consumers will pay more for a brand:

Emotional Connection

Brands that command the highest price connect with customers at the deepest emotional level. They go beyond simply peddling products and offer customers something they crave viscerally. Often this craving stems from a deep emotional need such as feeling included, sexy, or important, or escaping into a world of fantasy.

Some brands that have mastered this include:

• Harley-Davidson: An image of power, respect, rebellion, and strength. Cruising on a Harley you’ll likely get some sense of feeling powerful, respected . . . and maybe even somewhat fearsome.
• Nike: Come on! Don’t tell me you don’t feel inspired and motivated by the brand that tells us to “Just do it!”: 
• Apple: Here is the brand that really cultivated the spirit of creativity and made it cool to be a computer geek.

Perception of Quality

A product that is branded may convey an image of quality. For example, one of the justifications people often make for purchasing expensive clothing is that it will last longer. But this isn’t always necessarily true. I’ve purchased some fairly expensive name-brand clothing to find them falling apart much faster than their value-priced counterparts.

Sometimes the perception comes from a true presence of quality.Other times, customers use quality as a way to justify their purchase and avoid buyer’s remorse. It’s profound that a brand can be so powerful that customers will defend it in their own mind against their better judgement.

For you as a business owner, customers paying more for your products and defending your brand on the basis of quality is a great thing. Especially if you do offer a high quality product or service.

Trust

A powerful brand creates a promise that customers can rely on, and the best brands always deliver on that promise in some way or another. For some of them, the promise is based around the experience they deliver. For others, it may be a promise of uniqueness, quality or value. For example:

• Harley Davidson: Power, Respect, Freedom
• Prada: Exclusivity, Envy, Social Status
• McDonalds: Speed, Convenience, Taste

When customers know that they will get what they need from a brand every single time, they are much less likely to object to paying a higher price. That reliability creates a feeling of safety and assurance that reduces the customer’s risk in purchasing the product.

De-Commoditization

Although sometimes difficult, companies operating in a commodity industry can use branding to break free of the price-driven market they serve. They may do this by specializing in serving a particular customer type or making vast improvements to a particular product or the experience surrounding it. The end result is they differentiate themselves enough that customers are willing to pay more to get access to it.

I know more than a few consumers that don’t blink twice about paying over double the price for their morning cup of java from Starbucks!

Branding Your Business For Profit

The price premium that an established brand commands is pure profit for minimum effort. Once the brand gains traction with customers, the return on investment starts moving towards infinity—where the investment is nothing for the profits made. Of course, it takes an initial investment to establish the brand to get to this point. But it can be done, even in small business.

Increasing Brand-Driven Margins vs. Cutting Costs

Cutting costs is a relatively easy way to increase profits, but the return is often relatively minimal.There’s only so many costs you can cut before it affects your ability to generate revenues. You may be able to curb the amount of office supplies your business uses in a year and save a few hundred dollars, but the return will be fairly minimal, and will sooner or later hit a glass ceiling. You do need a pen or two, after all.

Brand-driven price premiums, however, have a much higher ceiling in comparison. And the price premiums can be multiplied across all of your various products and services, and can apply to new products and services. Even a relatively minor increase of 5% in your pricing can turn into a staggering increase in margins at the end of the year.

Tune in Next Week for 5 Ways to Brand Your Business & Increase Margins

Join us next week for our follow-up blog post that illustrates 5 simple ways to increase your margins using branding.