“Influence in society is a capital which has to be economized if it is to last.”
- Leo Tolstoy

If you’ve been to B-School, there’s a fairly good chance that you’ve read HBR’s case study on Netflix. For those of you who 1) went but exercised their choice to not read 2) haven’t heard of the company, the HBR case study describes how Netflix’s innovative model for delivering DVDs through mail services helped them establish a competitive advantage that put a large chunk of their competition, the traditional brick-and-mortar video rentals, out of business. Now, just over a year down the line, Netflix has seen its competitive advantage erode as viewing video content over the internet becomes the popular channel for consumption of video. Netflix’s current situation makes for interesting reading. Reed Hastings, the CEO, recently uploaded a video on YouTube in which he apologized for the way Netflix communicated changes in pricing to its customers (you can watch the video at http://www.youtube.com/watch?v=c8Tn8n5CIPk&noredirect=1). If the CEO of a company is forced to actually post a video like that on Youtube, then something must really be wrong with the company’s communication strategy. However, what interested me a great deal more was Netflix’s decision to spin off their DVD-by-mail business under a new brand called Qwikster. I put on my marketing hat and wondered, “Why a new brand? Why not a sub-brand?” Those of you who had been following this bit of news would know that Netflix subsequently decided to reverse this decision. However, the aspect of marketing that deals with how the brand equity of existing brands are leveraged while creating new brands definitely seemed worth a mention on TheMarketers. Hence, this article.

Brand Architecture is the area of marketing that addresses how brand names, logos, symbols and other brand elements are assigned to new or existing products of a company. One definition of the term Brand Architecture is as follows: Brand architecture is the structure of brands within an organizational entity. It is the way in which the brands within a company’s portfolio are related to, and differentiated from, one another.

As the definition states, there is often a structure or hierarchy that is used to relate or differentiate different products in a portfolio from one another. Brand architecture is a very vast field and is a reasonably complicated one too. For the purpose of analysis and discussion, I have attempted in this article to present a simple overview of this topic.

There are essentially two dimensions to defining brand structures: the number of levels in the brand hierarchy and the relationship between brands in the different levels of the hierarchy. Let’s now look at each dimension separately.

There are multiple levels possible in the brand hierarchy that a company adopts. The various levels that are possible are: Corporate or Company brand, Family or Umbrella brand, Individual brand and finally, a Modifier. For example, the Tata brand is a corporate brand, Tata Motors a family brand, Tata Indica an individual brand and V2 a modifier for the Tata Indica brand. Most companies usually adopt a single brand strategy when they first start-up. This is usually the company name which eventually evolves into the Corporate or Company brand. For example, Amazon, IBM and Coca-Cola. As companies grow and enter multiple businesses or offer a wider range of product categories, they may choose to create individual brands for each product category that is part of their portfolio. Cadbury’s Dairy Milk brand is an example of an individual brand of chocolates sold by Cadbury. Further, companies may choose to club several product categories under a family or umbrella brand if there are considerable similarities in the product attributes or benefits of a specific range of products. This makes it easier to evoke a specific set of associations across a group of related products.  A family brand is usually a collection of multiple individual brands. Tata Indica and Tata Safari are individual brands under the Tata Motors stable.

It is entirely possible that a company uses only one name for all its products and therefore essentially employs a single-level brand hierarchy. For example, the General Electric company sells all its products under its corporate brand name, General Electric.

The second dimension has to do with how the brand identity of brands at different levels in the brand hierarchy is defined. There are three different approaches to doing this: creating sub-brands, endorsing brands and creating individual product brands.

Sub-brands
Let’s return to Tata. The Tata Group has lent its corporate brand name, TATA, to almost all family brands in the Tata organization. Why? Because of TATA’s brand equity. How was TATA’s brand equity built? Through associations that consumers as well as the general public have developed with the TATA brand name over the years. These associations are built around people’s perceptions and beliefs regarding different aspects of the TATA company as well as their existing products; aspects such as the quality and innovativeness of TATA products, the company’s customer orientation, its attitude towards the environment and society etc. The Tata Group has certainly been able to foster strong, favorable and unique brand associations and lending its brand name to its family brands would help build such associations for the family brands as well. That explains why most family brands include ‘Tata’ in their brand name. In the field of branding strategy, this is called Sub-branding. Sub-branding involves creating new brands with brand names that include the parent’s brand name as well. A sub-branding strategy can be adopted for individual brands as well as family brands.

Endorsing brands
In the case of Endorsing Brands, subordinate brands in the hierarchy are endorsed by the parent brand, which could be either the corporate brand or the family brand. A brand element of the parent brand could appear on the package, signage, or product appearance in some way but is not directly included as part of the brand name. For example, Polo by Ralph Lauren. Another example is Vivanta by Taj, which is one of the brands belonging to Taj Hotels and Resorts. A classic example is the Marriott’s branding strategy.  More prominence is given to the individual brand in the case of endorsing brands while still establishing an association with the parent brand so as to leverage its brand equity.

Individual Product Brands
Procter and Gamble is a classic example of a company that follows an Individual product brand strategy. P&G owns brands such as Gillette, Pantene and Ariel. None of the brands include a reference to the corporate brand. Another example of a company that adopts this branding strategy is GSK. This brand architecture is often referred to as the “House of Brands” strategy, as opposed to the “Branded House” strategy of the Sub-brand or Endorsing brand architecture.

Creating a sub-brand has several benefits. Achieving the desired level of awareness and strength, favorability, and uniqueness of brand associations usually takes time. Therefore, when launching a new brand, using a sub-branding strategy helps to create favorable brand associations even though the consumer may have never experienced the product. The power of Brand Equity!

Similarly, there are many reasons why a sub-branding strategy may not be chosen by a company for its subsidiaries. Sometimes, the corporate brand name simply isn’t relevant in target market. For example, most people would argue that the brand equity that the Sony brand name commands would offer very little leverage in building a new brand in the confectionary market. Another reason is that sometimes companies want to create a totally new brand image for a product offering; an image that is different from that of the parent company’s. That explains why Toyota, a company known for its fuel-efficient and economical cars, created a separate individual brand called Lexus for its luxury car segment. A third reason is that sub-brands, though they can leverage the brand equity of the parent brand, can also have a feedback effect on the parent brand. If the new sub-brand generates a negative response in the market due to say poor product quality, it could have negative repercussions on the parent brand’s equity too.

Now that we have the tools in place to analyze the Netflix move, let’s return to the Netflix story. Why did Netflix not choose to create two sub-brands (for eg: Netflix DVD and Netflix Streaming) instead of creating a new separate individual brand called Qwikster?

The DVD-by-mail industry is expected to shrink over the coming years, particularly due to the proliferation of high-speed internet that should help the streaming video industry to expand significantly. Clearly, by retaining the Netflix brand name for their streaming business and spinning off the DVD business under a new individual brand, they wanted to ensure that the Netflix brand image didn’t take a hit if its overall revenues were dragged down by the slowing down of its DVD-by-mail business.  At the same time, by creating a sub-brand for the DVD-by-mail business Netflix would have run the risk of its corporate brand image being negatively influenced through the feedback effect we discussed in the previous paragraph. That is probably why they decided to create a new brand which even if it failed would have in all likelihood had very little repercussions on the Netflix brand name.

Was it a good move? Well, unfortunately we will never know since they reversed their decision to create a new brand. It will certainly be interesting to see how they manage their brand equity now, especially now that people are aware of the potential damage the Netflix brand may have to endure because of their slowing DVD business.