For a brand-driven business wanting to increase the value and/or revenue its brand generates, brand extension may be something to consider. This article discusses two traditional approaches to brand extension from a trademark owner's perspective.
A brand can be defined as the symbolic embodiment of all the information connected with a product or service (the name, logo and other visual elements such as images, fonts, color schemes or symbols) and encompasses the set of expectations associated with a product or service. Brand extension involves offering products or services not previously associated with a well-established brand so that they benefit from the brand's reputation and goodwill.
A common approach to brand extension consists of offering new products or services related to those already associated with a brand, e.g., extending a brand for pants and shirts to tailored suits or tailoring services, or extending a brand for restaurant services to ready-made food and catering services. Generally, with this type of brand extension the brand owner:
- has existing knowledge of the relevant market (i.e., needs, players, risks, etc.);
- makes a relatively minimal investment (leveraging existing operations and capabilities);
- can easily integrate new products/services into existing business lines; and
- has a consistent and coherent brand strategy/message.
Another approach to brand extension consists of offering new products or services totally unrelated to those already associated with a brand, e.g., extending a brand for heavy machinery to footwear, or extending a brand for cinema to wine. Generally, with this type of brand extension the brand owner:
- has little or no operational knowledge of the relevant market;
- must make potentially major investments (such as developing new operations and capabilities, and engaging additional resources);
- is faced with the challenge of integrating new products or services into existing business lines; and
- is faced with the challenge of maintaining cohesion with, or enhancing, the existing brand strategy/message, and minimizing adverse effects on brand goodwill.
Other approaches to brand extension include variations of the above two approaches and new distribution mechanisms, for example, through an on-line service.
As such, assuming a business wishes to extend its brand, a key business decision is which approach to brand extension is most suited to the company's business operations and strategy. This also includes whether the company itself will be extending the brand or whether someone else will assume that task, which usually entails licensing the brand.
The different approaches to brand extension present advantages and disadvantages. Some advantages and disadvantages of a business extending its own brand are as follows:
- The brand owner has direct control over the quality of products or services offered.
- The brand owner can ensure consistency of the brand strategy/message.
- The brand owner must potentially spend a significant amount of time and make significant investments in extending the brand.
- The brand owner assumes all risks (but also all rewards if successful).
On the other hand, some of the advantages and disadvantages of licensing one's brand to someone who has expertise in the relevant market for the desired product or service to which the brand will be extended are as follows:
- Royalties must be paid by the licensee to the brand owner, the rate and amount of which can vary depending on many factors, including: strength of the brand, obligations/risks assumed by either party and the success or recognition of the brand, etc.
- The licensee would have pre-existing knowledge of the market and the risks associated with new products or services.
- It is more time and cost effective for the brand owner.
- Some of the risks may be transferred to the licensee.
No matter how the brand owner chooses to proceed with the extension of its brand, certain risks must always be kept in mind, including notably:
- The risk of infringing 3rd party rights. Reasonable searches should be conducted before extending a brand so as to determine if the brand is available to be used and registered in association with the contemplated new products or services.
- The risk of non-compliance with laws and regulations specific to new products or services, including regulatory approvals. One should have reasonable knowledge of any applicable laws and regulations, especially in foreign jurisdictions.
- The risk of incomplete or lack of protection of the brand and ensuing difficulties of having the ability to license and enforce. This can be avoided by ensuring that registrations offer satisfactory coverage of the contemplated new products or services in advance.
- The risk of failing to enforce the brand. This may result in loss of the brand's distinctiveness and value and can ultimately lead to loss of rights in the brand. The brand should be reasonably enforced against all infringing third parties.
- The risk of the brand being damaged by inconsistent branding or quality. The sale of products or services incoherent with the brand strategy/message or of products or services of lesser or questionable quality or origin can have negative repercussions on the brand's overall reputation and value. Coherent brand message and quality of all the products or services, old and new, need to be managed.
Licensing out a brand may present additional risks, including:
- Lesser control over the quality of the products or services licensed out by the brand owner can result in the loss of brand distinctiveness, reputation and value and can ultimately lead to loss of rights in the brand. To guard against this, the brand owner should:
- exercise reasonable control, either directly or through someone else, by way of brand use guidelines/style guides, product sample/advertisement approvals, inspection procedures, reporting obligations, etc.; and
- advise the public of its ownership of the brand and its use under licence by way of a notice on the products or with the services.
- The risk of having chosen an unsatisfactory licensee, especially in lesser developed jurisdictions.
Although brand extension is not without risks, with the proper approach, counselling and strategy, brand extension can be an effective way to increase revenues and grow brand value.
The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.
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