The electronics industry is the pioneer when it comes to ingredient branding. There have been many great and iconic cases of this practice, and there is a lot to learn from them. This article analyses two such cases in the first part of this two-part series.
The computer industry really brought ingredient branding to the forefront. Assembling desktop computers using branded components was a viable way to save money for the end user. An assembler could take a Seagate hard disk, Intel processor, Samsung monitor, Logitech mouse and, like magic, you had a computer as good as an HP or Compaq desktop.
The slow shift to the laptop is what eliminated the ability to ‘assemble’. However, by then, the industry was operating with well-known ingredient brands for the processor, hard disk, monitor and mouse. Although the assembling industry was not threatening the computer brands, the result of this ingredient branding was that there was not much difference between an HP, a Compaq or an IBM product.
What is an ingredient brand?
When a component maker builds a brand, it is called an ‘ingredient brand’. An ingredient brand is not built with the component maker’s customer as the target audience; rather, it is built with the end user in mind. When the end user knows you well, it creates a ‘pull’ for your brand.
Many component makers feel that if their customers know them, and these customers are also well-known in the industry for providing quality products, they have built a brand. But I beg to differ. The end user, too, needs to know them and their products. And these component makers need to have created some ‘pull’ for their products in order to truly call themselves brands.
Till the first company in the component category takes the step to build a brand, the category remains largely commoditised. And the players remain largely unknown to the end user. Because of that, no one player can command a price premium in every sale they make. Players often build relationships with their customers by providing good quality at the best possible price and look at increasing sales based on that, rather than on the strength of their brand.
Benefits of ingredient branding
For the finished product/OEM:
Finished products comprise components. Let’s assume one of those components is branded. The maker of the finished product leverages the ingredient brand to sell. It hopes to give the impression that ‘this is a high quality finished product, because the ingredients used are also of high quality’. This adds credibility to the finished product and allows the makers to charge a premium.
For the ingredient brand:
The single biggest advantage of investing in brand building is the ability to charge a premium. Once the ingredient brand has built a name for itself, the end user desires finished products that contain this brand. This allows the ingredient or component maker to charge a premium, which the finished product maker passes on to the end user.
Another critical benefit for the ingredient brand is ‘not being substituted’. Once the finished product starts relying on the ingredient’s brand equity to make a sale, it also reduces the ability of the finished product maker to substitute the ingredient with another component. Some might argue that this is even more important than charging a premium, because it ensures business continuity.
Be the first mover
But one critical factor for a component to become an ingredient brand is that it needs to be the first mover. The first player tends to become the market leader and remains so, provided of course, the company doesn’t make a hash of its marketing efforts.
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