The Power of a Brand

Anyone can create a brand, an image or a reputation. People sometimes go out of their way to create a perception of themselves that suits their objective. A company’s CEO, for example, can develop a reputation that is arm’s and entrepreneurial. Like individuals, businesses also need to create a brand that resonates with its consumers. But in a much larger scale.

Thousands of companies around the world spend millions of dollars every year building and maintaining a brand image that, in reality, does not affect the quality of their product. This can include forking out tens of millions of dollars to get a celebrity to endorse the product or putting their brand logo across huge billboards in prime locations around the world.

So why do companies spend so much on branding?

Legendary investor Warren Buffett is a strong believer that good businesses should have a deep “economic moat” that can protect its business against competitors.

This can mean a variety of things, like having a great product that is hard to replicate, obtaining patents or simply having a strong reputation amongst its consumers.

Here are two advantages that reputable brands can have over its competitors.

Pricing power

A reputable brand can create a reputation around its products or services that are reliable and of high quality. Consumers, who have developed an appetite for the brand, will not be easily swayed by competitors and will keep coming back despite price increments.

Hence, companies that have built up a brand that people trust and recognise will be able to command greater pricing power. Take, for example, a restaurant that you regularly visit. If they were to increase prices suddenly, would you still return? Companies that have a developed brand following would not be afraid that customers will turn their back and would be able to increase prices when they please.

Immunity against the competition

Business environments are dynamic and constantly evolving. Competitors can emerge and try to muscle their way into any industry. Because of that, businesses need to create a way to keep customers returning and ensure that competitors remain at arm’s length away.

Brand loyalty has proven that it can be just the antidote that companies need to shrug of competitors. Especially in industries where product differentiation is minimal, companies rely significantly on customer loyalty and brand perception.

The Foolish bottom line

Customer loyalty is important in keeping businesses ahead of the competition. It also gives them the ability to command higher prices for its products. The most efficient way of creating customer loyalty is maintaining an image that resonates with customers through brand recognition and a reputation for great products.

As investors, we should not underestimate the power of branding. Looking out for companies with a deep, economic moat and a powerful brand can be very rewarding.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.