Before I even started studying businesses and billionaires, I had an unanswered question as a kid. How does a company stand out from all of its competitors that are selling almost the same thing?
That’s quite a weird question for a kid to have. But not so bizarre when I noticed the cut-throat street competition in China and all the lookalike restaurants and gas stations in America. In a highly competitive world, what can you do other than just compete by lower prices until one of you goes bankrupt?
My father, who used to run a tech business in China, said that he would see businesses cut their prices as low as they can go, even to the point of being unprofitable, in order to kill their competitors. How the heck do you counter that?
Fortunately, these are not new business tactics. Since the dawn of time, the art of business has been honed down to a masterful skill. The problem is that people are too lazy to study history … so they repeat it.
Today, I want to share with you one powerful tool you can use in your toolbox to be a business rockstar: branding.
To explain branding, I have to tell you a story from the billlionaire, Warren Buffett‘s life.
Mr. Buffett used to have an investment style that was based mainly on mathematics. He only bought companies that were going out of business and were willing to sell for less than what you can sell its assets for (assets are stuff like factory parts, trucks, etc.).
He called this “searching for cigar butts” because these businesses had one puff left in them, but the puff was free.
After decades of mistakes, he learned that this strategy sucked. These businesses were not as profitable as just buying a great business and holding it for a long time. Why?
- You can’t always sell the parts of the business right away.
- You have to deal with hordes of angry employees who hate you for shutting everything down.
- If the industry is dying, you’re fighting an upstream battle you won’t win. For example, he was in the textile business and no matter how exceptional his managers were, it was clear that competitors overseas could just do everything they did for a lot cheaper .
If you get into a great business, you have the opposite effect: the wind is pushing you where you want to go.
Therefore, his approach shifted to studying the fundamental traits of a great business. These businesses are rarely ever commodities. They’ve mastered the art of branding and have risen above their competitors.
What Is A Brand and What Is A Commodity? Which Are You?
“The difference between branding and sales is simple. Are you trying to convert or are you trying to create an experience? The latter always wins.” –Gary Vaynerchuk
What exactly is a brand? As hinted at, a brand is the reputation of your company, product, or personality in your market. The appeal of a brand is that it outsells competitors in the long term because you have built up so much goodwill.
There are many ways to build a brand, including appearing everywhere, out-caring competitors, over-delivering, and investing in customer experiences that go beyond the short-term one-time transaction.
A commodity is something that can be replaced purely by the ingredients alone. You wouldn’t pay any extra for one company’s product over another. An example would be someone who sold salt or napkins. You couldn’t care less which one is better.
These businesses are really hard to compete in because it’s hard to forge a competitive advantage that others can’t copy. You are competing on how much cheaper you can manufacture the napkins for or any additional features of the napkin like comfort, quality, and durability.
A commodity usually doesn’t have much brand presence built around it and focuses on the one-time transaction. There is usually no thought put into how a company can over-deliver beyond the initial transaction so that the experience is so good that they build a reputation and the customer tells others about it.
Why Branding Matters
The entrepreneur Neil Patel properly explains the power of a brand. When you think of a credit card, shoe, phone, computer, or car, a specific brand will probably pop into your head and you’ll probably go to them immediately (American Express, Nike, Apple, BMW, etc.). You don’t always Google for these terms and simply compare companies based on features like a commodity. Their reputation already has significant influence on your decision in their mind.
To answer that, I have to point to sodas and candy. There have been countless double blind scientific tests done comparing the most recognizable sodas in the world, like Pepsi and Coca-Cola, with store brand colas. Guess what? People rated the sodas the same when they couldn’t tell which it was. Yet when they knew what it was, they were willing to pay five to ten times more.
Warren Buffett makes a similar analogy with chocolate bars in the U.S. People will actually refuse to buy a store brand chocolate bar that’s cheaper and go to another store to get a Hershey’s bar if it’s not in stock. That’s really powerful.
So, to answer your question, proper branding can shoot your customer loyalty through the roof and allow you to charge a lot more for the same quality product.
Warren Buffett calls this concept economic goodwill. This is the monetary value of your company’s brand value that isn’t quantified in their balance sheets, a magical concept that took him many mistakes to learn. It’s like saying a person’s life is worth more than what you can sell his organs for. Similarly, Coca-Cola is worth a lot more than what you can sell its factories and resources for; they have a lot of intangible brand value that they’ve build up over decades that isn’t quantified in accounting.
A great business often has a brand or is in the process of building one. A commodity business usually is worth what you can sell its parts for because it hasn’t built a brand yet.
Now, there is a limit to how much you can charge before your customers get mad at the lack of quality. We’ll cover that in another section.
And great branding isn’t easy to build. Warren Buffett says a reputation can take twenty years to build and ten seconds to destroy. We’ll cover that later too.
When Has A Brand Gone Too Far and Exploited What They Have?
There are plenty of candidates for great brands, like Apple, Legos, Barbie, Hershey’s, Coca-Cola, See’s Candy, Beats by Dr. Dre, Gucci, Patron, or Northface. But which of these have gone too far? What happens when you exploit your brand and cross the line? What if you charge excessive amounts for the same quality products your customers can buy elsewhere for cheaper and they catch on to it?
Well, the brand reputation gets tarnished.
People are willing to pay 2x to 10x more for the product EVEN THOUGH most double-blind quality experiments for their products versus a competitor show that their competitor’s product is equal or BETTER quality.
I’ve fallen for this trap numerous times. I’ve caught myself about to buy a $200 Northface jacket because the logo was recognizable and it’d make me feel cool in school EVEN THOUGH the employees at the store urged me to get the $49 equivalent from a nameless brand. It was SO tough for me to not buy the Northface EVEN THOUGH the quality of the nameless brand was clearly a bit better.
Beats By Dre
I have seen this same phenomenon play out when I considered Beats by Dre headphones. This video explains it really well:
On top of this, I have seen TONS of mindless consumers who have spent unreasonable amounts of sums of money on the little they cash on the stupidest things because of this.
Yeezy’s: A Temporary Trend or Lasting Brand?
Here’s a video of Timothydelaghetto rationalizing to himself why he spent $2,000 on a pair of Yeezy shoes (Adidas shoes after the rapper Kanye West). This angered me a bit, considering I am a huge personal finance geek. He rationalized it as it’s only 20% of his weekly check, just like old times.
The Yeezy trend is slowly dying down. People are starting to see that it’s excessive and ridiculous. Though it also hasn’t died down completely. It just goes to show that people sometimes don’t care. They just want something that is a clear sign of excessive spending that can’t be faked in order to show off their status or get women.
As the Dr. Dre headphones video illustrates, branding costs money.
Usually, they are able to create this price premium because they’re spending a lot more on advertising and/or they have made it so that it’s such a cool and accepted thing that everyone who’s cool in school has it and there’s peer pressure to get it.
I remember having this feeling when people had the yellow Livestrong bracelets or when the iPod first started rolling out in schools. Everyone had it but me. I’m sure you’ve had similar feelings in school.
It works well but you have to be careful to not be tricked by branding and marketing experts who want to take heaps of your money and use it inefficiently.
I think the companies who do this best track every single dollar they spend on it as far as they can as use their money as efficiently as possible to get the biggest brand impact and sales for what they spend.
You can easily end up spending any extra money you make on extra advertising costs if you’re not careful.
One example of intelligently using your marketing budget so that it doesn’t eat up any extra profit margin you get is to strategically do your research on key social media influencers that will blow up your brand. And then, rather than spending tens of thousands of dollars on a billboard or TV ad, you just send them one of your products for free and a well-thought out letter. It will cost just the cost of the product and that’s one of the key ways that
It will cost just the cost of the product and that’s one of the key ways that the hoverboard fad start snowballing. They went key Instagram models and Viners and gave them the product.
Just as an important side note, it may be worthwhile to go into a business with a product that’s always wanted like a headphone versus something that’s more a fad that with fizzle out in a couple years like a hoverboard or a Spirit Hood Faux Hat.
Another great example is Dr. Dre’s Beats headphones. He was the first to get admired celebrities to start endorsing a set of headphones. With his connections, he was able to get a flood of super well known names to endorse his headphones and wear them in public: Snoop Dogg, Lebron James, Nicki Minaj, Skrillrex, Will.I.am, Tom Brady, and Serena Williams.
None of this new. In fact, many celebrities have been getting shipped tons of free products all the time just to get them to wear it in public.
People sometimes buy and wear products more for the brand reputation than the quality of the product.
Too Much Hype And Not Enough Substance
Of course, don’t be fooled by people who hype up the power of branding too much. There is a threshold of too much “premium status” and not enough substance.
Just because you plow millions in to ads and get all these celebrities to talk about it doesn’t mean people will pay obnoxiously high prices for something. There is a point where it’s just not worth it.
Here’s a great example. Look at this video showcasing $100,000 bottles of water. It doesn’t take much thinking to realize that their business is probably not as thriving as Dasani or Smart water.
The best brands don’t build a majority of their brand value and goodwill off a pillar of sand. They don’t make their foundation based on ads or throwing money at something. It is built through creative, strategic, and efficient practices such as building a great reputation through effective, above average customer service.
The other danger of a high-end brand premium is knock-off’s. This has been going on for decades: fake Rolex’s, fake Beats by Dre, and fake soccer jersey’s have all been sold for years from places like China.
Beats by Dr. Dre lags behind considerably in audio quality from other similar competitor headphones like the Audio Technica when you do blind comparison tests. Usually, that means that it costs them a lot less to sell it and they can sell it for a lot more.
Unfortunately, what happens when you let the intrinsic quality of the product slip too low is that people can steal it, copy it, and re-sell it at a fraction of the price and illegally ride off the brand value you worked so hard to build in places like China or Piratebay, which hard to stop.
I recently watched an hour long documentary on Chinese knock-off’s. It really changed my perspective on capitalism and business. Business can be a great thing that provides value and helps people. But it can also be a horrible thing when there’s no laws, morality, or ethics behind them. Factory workers were chained to the factory and fed out of a dog bowl to manufacture fake knock-off products.
Why Business Owners Look Down on Commodity Businesses
From what I seen so far, it seems like a general scale for the best businesses to get into go like this:
Commodities < Medium and High-end Branded products < Low-end Branded products
This opinion is subject to change as I learn more about business.
High-end and medium-end Branded products allow you more wiggle room so you aren’t neck and neck with competitors and competing inch by inch with others on things as simple as price and cost to stand out.
These products are better since it’s easier to make more money and maintain your advantage, but lack in that they can be illegally copied and sold for cheaper because of your high profit margin.
Low-end branded products are things like Coca-Cola. A single product (a can of Coca-Cola) is so cheap that it is not highly valued like a pair of Beats headphones, a Gucci purse, or a Northface jacket. People aren’t going to do whatever they can to steal it, copy it, or manufacture it.
Coca-Cola is a great branded product because it can be sold on the global retail scale to millions and make a lot money, it’s illegal and very difficult to copy because it would require a whole manufacturing infrastructure, and it has great branded value when you run it through any double-blind taste test with a generic store brand.
People actually rate the store brand cola as tasting better oftentimes, yet most of us would almost always pay 5x more for a Coca-Cola bottle instead.
Just take these examples as inspiration for your strategy:
Consider what Steve Jobs of Apple said about Nike in a 1997 speech.
He said that Nike was one of the top brands in the world and they did it in an ingenious way through their marketing.
Rather than compete on a commodity level and talk about how their shoe features were much better than their competitor Reebok’s, they chose to honor the world’s greatest athletes and athletics as a whole.
They elevated themselves to a pre-eminent position and became the #1 brand instead of trying to compete on an equal footing with Reebok.
Steve marveled at how Nike managed to be elevated by their brand reputation so much that they could charge reasonably higher prices and make a lot more profit than others even though they were in the business of selling a commodity: shoes.
What blows my mind is that Nike still holds its dominance 20 years later from that speech. That’s a tough thing to do.
There are new entrants like Under Armour that have recently come in to keep them on their toes, but they’re still doing really well. Here’s a story to prove it:
Just a couple years ago, I went to Walt Disney World.
In the parking lots, they had tons of tourist buses that would ship people to the amusement parks.
I was really into business books at the time so I was going through an audiobook by the great investor Peter Lynch.
Lynch was a man who would walk through a mall and analyze every business there and pick everything apart. Which stores are getting the most traffic? Why is this candle store doing so well? Which products are selling well? Why is this store unique?
I tend to do this as well, but Peter encouraged me to do this more.
I looked around at the 200 people there waiting for a ride. It was clear that most weren’t American. They came from all over the world to experience the world that Walt had created.
But there was a couple things in common with all of them.
Almost all of them had at least one product from a well-known brand. iPhones, iPods, Adidas shoes, Nike satchels, and so on.
But the one product that united a great majority of this group was Nike.
Out of all the brands, the one that was most common was Nike. Whether it was a hat, a shoe, a t-shirt or a backpack, I saw the logo across all these different ethnic groups.
That was very interesting to me.
To discover how a single person with an idea, like Walt Disney or Phil Knight, grew this into such a globally recognized brand that’s impacted billions over less than 100 years really excites me.
What excites me is finding out things like the fact that Phil released a book this year that tells his incredibly interesting story. And then reading that story.
But those are stories to tell you about for another day.
The point is that brand marketing is incredibly important.
Almost every kid knows about them. Yet they’re in the business of selling commodities: toy bricks.
Well, they technically are. But they choose not to be. Instead, Legos have chosen to be in the business of selling possibilities, dreams, creativity, and stories.
When I played with Legos as a kid, I didn’t think “blocks”.
I saw the stories and characters that came with it.
You don’t buy a bag of blocks. You buy an assembly kit to a Batmobile lego-set. You buy the chance to assemble Sauron’s Mount Doom Tower. Or you buy the chance to build a 27th century futuristic helicopter.
The Lego Movie was the best example of this brilliance. The whole movie was actually really good, even for an adult.
- There was child and hidden adult humor.
- It incorporated a ton of recognizable characters like Superman in lego-form.
- The main character was an average everyday man Lego man to symbolize that anyone could do great things.
- The story was in an immersive lego world that was 3-D and then occasionally flipped to the real live-action world.
- It was beautifully animated.
- It had a charming voice cast, which included Morgran Freeman and Will Ferrell.
Rather than being a simple kid’s movie that would have gotten a small box-office reception, it got:
- A ridiculously high 96% rating on Rotten Tomatoes with a Certified Fresh badge.
- A trailer that got over 30 million views on YouTube and positive reception from adult and children alike.
On top of all that, the film itself acted as a marketing piece that promoted kids to buy more Legos.
And they’re going to do it again with the LEGO Batman Movie. The trailer’s gotten millions of views and if you just look at the comments, you’ll see children, teens, and adult LEGO nerds geeking out.
Just look at the trailer and you’ll see the effort they went into to make this animation incredibly immersive and filled with dark humor and jokes entertaining enough for adults and children.
The truth is that at its core, Legos are a commodity. And there are competitors.
You might have heard of them. They’re the Lego-block knock-off’s that you can buy cheaper. Some of these competitors are pretty clunky and the pieces don’t fit together as well.
But it’s cheaper, right? You can get it at a lower price!
I bet you had a immediate reaction to that statement. I’m willing to best that you will probably go with Legos for your child even if it’s more expensive.
Because they’ve elevated themselves from the competition.
While their competitors are still trying to position themselves as the “cheaper brick alternative”, Lego has been playing a different game the whole time.
A really important point to add. In fact, this is one of the most important points.
Lego and Nike provide great value to back up the extra price you have to pay. Ultimately, they do make a huge profit from doing this, but it’s important to keep up the extra value you deliver.
For example, Lego sets come with instructions and picture diagrams on how to build intricate Batmobiles from the pieces they give you.
Someone has to be paid to come up with these ideas and then come up with how to build the most awesome Batmobile possible. Then, they have to visually capture that and print out the directions in an easy to follow fashion.
I always respected how they mapped out the steps. They could map out how to add every brick step-by-step, but the booklet would be super thick and no one would read it. Even as a 11 year old kid, I was able to follow along. They intelligently
Even as a 11 year old kid, I was able to follow along. They intelligently skipped a few steps and give implications on all the pieces they added in a manner that was easy to follow and concise.
That takes extra time and effort.
Victorias Secret transcended the image of a company selling a commodity of women’s clothing by creating the concept of “Angels” and having an annual Fashion show. The event attracts the world’s top celebrities and hires the top performers. The Victoria’s Secret Angel is seen as the pinnacle of success as a supermodel. Models aspire, dream, and cry about becoming an “Angel” one day (if you don’t believe me, watch the model profiles during the show).
Delight Your Customer. Deliver On How You Brand Yourself. Don’t Slip or Your Reputation Is Done For.
The point is that you don’t want to be the brand that’s all about hype and not about extra value.
I’m sure you know of a few clothing and apparel companies like this. You buy this purse or t-shirt for 10 times what you can get elsewhere. And then you find out the quality, material, and design is virtually the same.
That’s under-delivering. Avoid this.
Beats by Dre has been called out numerous times for doing this. Anyone who understands a thing about audio quality knows that you’re paying multiples of the same price audio quality you can get from Sony headphones. They’ve started to underperform in hardware despite the incredibly high brand reputation they’ve gained from getting tons of celebrities to be seen wearing the headphones.
They’ve started to underperform in hardware despite the incredibly high brand reputation they’ve gained from getting tons of celebrities to be seen wearing the headphones.
So far, they’ve been raking in a lot more money by doing this, but it’s been unraveling as tech-nerds with millions of subscribers on Youtube, like MKBHD, call them out.
Ideally, they could still maintain their dominance if they spent more time figuring out how Sony is able to get such high audio quality for such little cost and duplicating some of that while maintaining its celebrity-brand status. Always seek to delight customers.
The Secret to Branding
Harley Davidson doesn’t just sell bikes – they sell freedom.
Lululemon doesn’t sell yoga mats – they sell yoga itself.
Disney doesn’t sell movies -they sell imagination.
Lego doesn’t sell bricks – they sell stories.
Nike doesn’t sell shoes – they honor athletes.
You get the idea? By elevating yourself from your competitors, you no longer become a commodity.
There’s A Difference Between Branding and Burning Your Money
There are plenty of “brand consultants” on LinkedIn with no real achievements to their name who are more than willing to take all your money, burn it on online ads that don’t get you any sales, chalk it up to branding, and give you a lot of fluff advice. These people speak to the dangers of misunderstanding branding.
Real branding should be tied on some level to a measurable return on investment on the short term or mid term level.
Don’t Do This When You’ve Built Your Brand: The Danger Of Complacency
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” -Warren Buffett
One great example of branding gone wrong are premium clothing companies, like Hugo Boss. For the clothing industry, a brand reputation can take decades to build by delivering great quality clothing for a good price.
But once a clothing brand gets established, they can get lazy or greedy at the cost of their brand. They jack up prices and lower the quality to reduce costs and make more money. They start relying too much on the brand they built out over the decades.
At first, customers will keep buying because they recognize the prestige and quality of the brand. But over a long time, they start getting found out, especially if they really start lowering the quality and jacking up prices.
And once a brand’s reputation is damaged, it’s really hard to re-win customers’ trust.
How To Leverage Branding For Service Businesses
We’ve talked about branding for large companies. But what about small service businesses or one-man shows? Well, it turns out you can use branding for services too.
Think about it. Most services (yoga teacher, piano teacher, videographer, etc.) are commodities. The customer can’t tell the difference between one CrossFit or Brazilian Jiu Jitsu teacher and another in your area.
Because of this, they just look at which is cheaper and which are decent quality. You’re competing on price.
But by elevating yourself and positioning yourself above the rest, you become different and can charge a lot more. Russell Brunson, a successful founder of a SaaS, gave a great example. A photographer can position himself as a photographer who charges a lot more because he delivers an incredible experience, not just photos.
Rather than just paying for photos, you get an entertaining experience, free gifts for your children, and you pick everyone up in a limo.
Branding can be an incredible way of getting your business and product to stand out. It’s a great way to create and maintain a competitive advantage. It’s a much easier way of making more money than being in the commodity business.
Branding can be applied to you as an individual, not just businesses.
People naturally do this, but how can you make a conscious effort to stand out and be different from the hordes of average people out there auditioning or interviewing for a job?
Branding can be taken to the extreme and you can lose a lot of money by inefficiently spending too much on advertising for the extra gain you think you will get in profit margin. Make sure to track every dollar you spend and be strategic with how intelligently you go about spending your marketing dollars.
Finally, it seems like low-tier branded consumer products like Hershey’s or Coca-Cola are some of the best businesses to get into. Of course, this is considering that your goal is to make the most money and stay profitable for many years. Businesses may have different goals.
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