Sunday, July 26, 2015

Should a start-up undertake paid branding?

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, 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.

In the case of Newbee, it resorted to paid branding once it attained substantial competitive advantage, else the chances of return over investment reduces exponentially.

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