A shaving cream company, say Newbee, commenced its
premier product. Soon it started facing hardships in already overcrowded
market. Market leaders were MNC with deep pockets and distribution penetration,
backed by inducing advertisement on TV and print. MNCs have comfortably built
an impregnable brand in the mind of individual males. Newbee analyzed to its happiness
that MNCs have not made huge impact in saloons and therefore started focus only
there. Soon it had its distribution chain. Volume increased and variable cost
started decreasing. With cost leadership, Newbee found new lease of life and
invested in production enhancement. Soon it could reduce its cost further down,
enticing even the MNCs to get contract manufacturing from it. Newbee had the
scale, quality products, and knowledge of variable quality for its customers.
It was world’s largest producer of shaving cream. However, it still had one
problem. Its margins were low.
Now, with high revenue and disposable profits, it thought
of undertaking brand building and started advertising. It also increased the
prices of its product to offset marketing costs. Did it succeed?
Yes, it did and the balance lies in the balance in
pricing of its own product versus the competitor, even when both are resorting
to brand building. It is, in fact, advantageous to NewBee that they are able to
keep prices low, with same level of margins as competitor, due to lower costs.
Here in this illustrative story, Newbee has been able to wipe off its
competitor from manufacturing.
Branding is a costly preposition. Still, many start-ups
these days undertake brand building very early, as they get hot money very soon
in the cycle and investors are in great hurry to create that hype to increase
the valuation, enabling them to exit with huge positive returns. Ideal period
of this cycle of investment-hype-customer acquisition-growth-exit is 3 to 5
years. In this case, should a startup undertake paid branding? If yes, what stage
should it undertake it?
Consider the cases of amazon, makemytrip, flipkart,
yatra, via, redbus amongst many others, who built their product, refined it
well over time and then undertook paid branding. While housing.com, ola, quickr,
olx are some examples which jumped to market with huge marketing budgets from
an early stage. All the former have painstakingly built their product, distribution,
logistics and focused on self-sustainability to create revenue first. They
approached the investors for growth-stage funding and therefore pressure was
diluted for big bang marketing. While later companies got the seed /early stage
funding and had the compulsion to generate market valuations quickly.
It is no brainer that market valuation is more hype
than reality, now or in dot-com era. Profit is not the leading criterion like
in case of amazon or flipkart. It is potential to generate business in the
future that leads all the way. It reminds stories of the era, when most
companies going for IPO, would build a healthy order book, possibly from
friendly companies, and go bust soon after the subscription, swindling many
small time investors who would have no means to know what happened. When
branding is to target increased valuation and not sustenance, one must be wary.
Share your comments, criticism, counter-views to me
(Ashish Jain), at india.ashishjain@gmail.com.
