Using distribution alliances, franchising, collaborative offering and co-branding for you customer relevance strategy

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Using distribution alliances, franchising, collaborative
offering and co-branding for your customer relevance
strategy
Alfred Griffioen

Introduction

There are two models often referred to that give
direction on how to get your customer value
proposition to stand out: Porter's model1 on product
differentiation, cost leadership and focus strategy, and
Treacy & Wiersema's model2 on product leadership,
operational excellence and customer intimacy. Both
models have served well in defining strategies in the
20th century, but competition has increased and
information about alternatives is widely available
nowadays. Therefore these models need some
adjustment.

Focusing on your customer, described by Treacy and Wiersema as customer
intimacy, is a strategy seen from the company. Of the three, it is actually the most
market-oriented type of strategy. However, with the growing diversity of companies
and brands, the perspective from the customer becomes more important: how
relevant is the company for its customers (Figure 1)?

The three strategies of The three directions of What happened in the
Michael Porter (1980) Treacy & Wiersema (1995) internet age? Current validity

Focus strategy:
targeting on a niche
Customer intimacy:
having a complete of f ering
f or specif ic customer groups

Figure 1. Development of differentiation on customer focus
There are many suppliers
with a broad of f ering.
Customers can choose
ü
Customer relevance:
being seen as relevant
by your customer group

One method to execute these strategies is by alliances, and for each strategy a
number of alliance forms can be proposed. Five basic forms of alliances contribute
to the customer relevance strategy: distribution agreements, franchising,
proposition alignment and referral, collaborative offering and co-branding (Figure
2). After a general introduction about customer relevance, each of these forms will
be elaborated in this article.

Strategy Purpose
of
the
alliance Basic
form
Using the other party's local
Distribution agreement
presence and service
Expanding one's own
Franchising
perceived presence
Customer
Increasing the chance of proposition alignment
obtaining leads and referral
relevance
Expanding one's own market
Collaborative offering
to larger projects
Utilizing the relevance of the
Co-branding
other party's brand

Figure 2. Five basic forms of alliances contributing to customer relevance

Alfred Griffioen - Using distribution alliances, franchising, collaborative offering 1
and co-branding for your customer relevance strategy

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Increasing relevance for your customer

The term 'customer relevance' pertains to the access a company has to offer its
products and services to its target group. After all, any target group, whether it
consists of consumers or people with purchasing responsibility within a company,
are exposed to so much information and so many opinions and offers, that they
have built up a highly effective filter in response. In addition, they exercise a great
variety of tactics to rid themselves of unwanted promoters, collectors and
salespersons.

Customers will pay attention to your product if your message is relevant to them at
that moment (see Figure 3). This means that the promise held out by your brand,
and its elaboration in products, service, marketing communication or distribution,
connects to their actual need.

Figure 3. When does an online ad get noticed?

Brands are the carriers of customer relevance. A brand need not necessarily be a
registered name with a logo. Even a trade name, a family name or even the name of
a region can be seen as a brand. Consumers group products and services under
such a brand name and attribute value to it. Customer relevance is therefore
measured per brand.

Relevance is also one of the four pillars under the Brand Asset Valuator of Young &
Rubicam3. Various researchers have –partly on basis of this model– studied how the
different components of brand value relate to a company's financial results. All
studies emphasise the predictive value of relevance and brand stature for financial
results.

These studies always measure relevance on a relative scale. This means that one
brand is compared to several other brands, and is found to be, say, more powerful
than 30% of those brands, and less powerful than 70% of the other brands. Research
by Frank Verbeeten and Pieter Vijn among 70 brands has shown that there is a
statistical relationship between brand power and that brand's profitability4. For
every 10% of brands that you leave trailing, your increases by around 0.2%.

A brand is relevant if the fulfilment of its promise connects to actual customer need.
This will happen if their actual need is answered by the promise that your brand
makes, and how this is fulfilled in products, services, distribution or your marketing


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communications (Figure 4). Customer relevance always starts with a clear brand
promise.

Portfolio Generic
management needs
Actual
Fulfillment of Customer
customer
your brand promise relevance needs
Distribution and Context /
communications Situation

Figure 4. Customer relevance increases to the extent that brand promise and actual customer
needs overlap

Every person has a number of generic needs: security, friendship, relaxation,
efficiency and success. Depending on the context or situation you are in, these
generic needs are translated into actual needs. Again depending on the situation,
one or more of these generic needs will be dominant, complemented by needs that
arise through a customer's expectations with respect to a certain situation. For
example, when spending the night in a hotel you do not expect anyone to enter
your room unasked (privacy), that drinks in the bar are charged to your account
(convenience), and that there is wake-up call service (efficiency). At higher-end
hotels you will expect a laundry or dry-cleaning service (give me comprehensive
solutions) and personal attention.

The other aspect is the brand promise and how this is fulfilled. If you want to have a
meal, that need will differ depending on whether you're alone or with your family. A
company's response to this may lie in the right portfolio management of the
products and services it offers. It also makes a difference whether you're in town or
in an amusement park, and a company's solution here lies in its distribution
management. And finally, in this particular case, you do not have this need for a
meal at each and every moment. Thus, being relevant means that companies must
present you with their offer at the right time. Marketing communications and
personal sales are important means to achieve this.

Businesses that deliberately invest in relevance also try to flesh out that brand
promise: by formulating the promise, communicating the promise, and especially
also by living out this promise in different ways. BMW uses the slogan “BMW makes
driving great”. The company tries to sustain that promise by putting only truly well-
designed products in the market. For example, when all car brands had already
launched an SUV, BMW also had one in the pipeline, but it wasn't thought good
enough. It wasn't until BMW had thoroughly developed the X5 that they rolled it out
into the showrooms.

According to a Booz Allan & Hamilton article entitled ‘How to brand Sand’5, you can
differentiate your offering through the product or through the service that you
provide as a company. These company service ‘promises’ could be:

• supply reliability,
• applications knowledge
• assuming responsibility, e.g. for part of their supply chain process.


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Christopher Lovelock, in his book ‘Services Marketing’6, gives 8 ways to differentiate
on service aspects:

• Providing information (e.g. about the products, how to apply them)
• Advising customers (tailored to their specific needs)
• Making exceptions (handling special requests, complaints, restitution)
• Delivery (speed, timeframes)
• Fulfilment (planning, flexibility, change orders)
• Invoicing (EDI, clarity of the invoice)
• Payment and payment conditions (local bank account, payment term)
• Hospitality (is the client welcome, how is he treated)

Both with commodity products and unique products you can apply one of these
differentiators to become a relevant supplier for your customers. This can lead to
differentiating brand promises such as: “We deliver on time”, “Clear contracts”, “The
best advice”.

Alliances can help achieve relevance for customers more quickly. The value of
alliances can best be quantified by considering the costs your own company would
have to make to accomplish a comparable boost in relevance. This is elaborated
further for the five basic forms of alliances that aim to enhance customer relevance.

Distribution alliances

These forms of collaboration each seek to increase the number of sales points for
your product or service. This can be in the form of your own shop, an Internet
channel, or by being included (as brand) in the assortment of a larger store. Your
distribution channels ensure that the customer encounters your products or services
more quickly and can purchase them more easily.

Generally speaking, a distribution channel fulfils the following functions:

• Information: to gather and spread market research and intelligence
• Promotion: to develop and spread announcements about special offers
• Contact: to communicate with potential buyers
• Matching: to adjust the offer to a quantity that meets the needs of the buyer,
including assembly and packaging
• Negotiation: to reach agreement about the price and other conditions
concerning the offer
• Physical distribution: transport and storage
• Financing: applying capital to maintain stocks and incur costs before
payments are received
• Risk taking: to maintain stocks of products and invest in processes without
guaranteed sales.

If distribution takes the form of a distributor placing a number of the supplier's
products on his shelf and adjusting his purchase depending on the sales, this does
not meet the criteria of a partnership. There is hardly any risk sharing, and certainly
no joint operational management. This changes as soon as the supplier and
distributor decide to work together in marketing, sales and delivery. As a result, the
distributor will take a greater interest in the supplier's product or service. It may be


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that the distributor, in return for taking a greater interest, will demand the exclusive
distribution rights for his region or customer group.

The value of a partnership for a supplier can be quantified by considering the effort
the supplier would have to make in order to set up an alternative means of
distribution that achieves the same effect. Relevant aspects to consider here are:

• elaborating a shop concept;
• leasing or buying and then furnishing commercial space;
• leasing or buying and then furnishing sales offices;
• hiring, training and managing sales personnel;
• conducting local marketing campaigns and developing sales promotion
activities;
• tending to the financing and possibly the storage of goods.

Working with one's own distribution is particularly an option if the sales activities
require little shop or office space, the work can easily be scheduled, and extensive
travel is unnecessary. In virtually all other cases, working with distribution partners
or franchisees will be a cheaper option, even if these partners only spend part of
their time on the product portfolio.

From the distributor's point of view, the value of an (exclusive) partnership with a
supplier is that it enlarges his portfolio, it offers better marketing and sales
support, and it enables him to set up a good purchasing process. This does come at
a price, obviously.

In many cases, a distribution agreement contains a reward in the form of margin
that the distributor can achieve on reselling the product. In the simplest scenario
the distributor works with a fixed purchasing and fixed sales price, but there are
several variants.

In most cases, the distributor is free to determine the sales price. In Europe and the
US this is often even a statutory requirement in order to prevent cartel formation;
local exceptions are books, cars or medicine. This allows the distributor to
determine a premium price depending on his marketing, sales efforts or
distribution, or to offer discounts under certain conditions. This is the optimum
mechanism from the perspective of value enhancement.

In the sale of products, the difference between purchase and sales price will define
the distributor's profit. Where it concerns services, or products with a service
component, there may be a direct contract relationship between the supplier and
the buyer, for instance when selling insurances or supplying photocopier equipment
on the basis of a certain price per print. In such cases, the distributor's reward is
paid retroactively by the supplier.

There are different methods to determine that reward:

• A fixed sum per type of product
• A fixed percentage of the turnover
• A percentage of the difference between the sales price and a purchasing
price to be determined by the supplier
• Or a combination of the methods above.


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To the extent that the reward is more related to the sales price, operations will lean
more towards the margin than the turnover. This can tempt a distributor to neglect
less lucrative sales opportunities. For a supplier this may mean a decline in his
market share or production capacity utilisation. That is why a reward as a
percentage of the turnover can be effective. However, if this takes the form of a
fixed commission per product, a minimum sales price will need to be set.

In other cases, the supplier will pursue some sort of policy in determining the
purchasing price. This could be by offering volume discounts per order, by
introducing purchasing discounts depending on the annual volume, or by
introducing a bonus scheme that accumulates benefits with each individual sale. In
a network of comparable distributors, another option is to introduce a competitive
element: the best selling distributor is entitled to a sum of money or some prize like
a holiday trip.

In a number of industries such as IT, the large and lengthy sales processes make it
customary to offer additional discounts on the purchasing price to the distributor
that first discovers and registers a sales opportunity in the supplier's administrative
system. This allows supplier and distributor to respond more effectively to an
opportunity, for instance by approaching the buyer even before he issues a Request
for Proposal. This discount, which is for that one distributor exclusively, enables
him to reduce his price even further and so to increase his chance of winning the
order, or to better maintain his own margin. With Oracle, for example, this discount
is 5% but only applies if the order is confirmed within six months after registration.

A number of preconditions need to be observed for these types of price structures
to work properly:

• The price structure must be established beforehand and be entirely
transparent.
• Differences between distributors may occur, but they need to be
objectifiable: it is fine for a certain distributor to obtain an additional
discount for a large volume or on account of a specific agreement, but then
this should, in principle, be attainable for other distributors.
• Any channel conflicts must be tended to: it should not be possible to obtain a
greater discount via a longer or different channel, on the basis of certain
agreements, then when making the purchase as directly as possible from the
supplier. The supplier should carefully define the application of any
exceptional arrangements.

In general, a distributor will be inclined to sell those products or services that yield
the largest reward proportionate to his sales efforts. This makes increasing the
reward an important method, but there are also a large number of non-financial
methods that can incentivise the distributor. The easier it becomes to sell a product,
the more such methods will be applied, even though it means a somewhat lower
financial reward.

Important is first of all the attractiveness of the product or service. This is certainly
also a matter of packaging, the documentation and the guarantees. Packaging that
is easy to stack or to ship, a clear manual that reduces the number of customers
calling the distributor for help, and an effective complaints processing procedure
and guarantee policy, preferably arranged without the distributor's involvement, can
help limit the required sales effort.


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Second, a supplier can assist in the marketing. By advertising the product it can
generate a pull-effect, stimulating customer demand. Additionally, the supplier can
help in terms of product-push: for instance by providing in-store displays, the
design of the packaging, or by offering samples or trial versions.

Investing in training materials can be useful, particularly where more complex
products are involved. The supplier usually assumes that the distributor has all the
knowledge and skills required to sell the product; yet often enough the distributor
even lacks commercial skills, let alone technical skills. Or perhaps the entrepreneur
is sufficiently capable, but is assisted by employees that are just starting out. Good
training materials, perhaps even videos to demonstrate how to sell a certain
product, can significantly boost sales figures.

Non-financial factors are particularly relevant for distribution across a number of
different links: here, the margin between the supplier's sales price and the sales
prices for the end user is stretched across the various links. Although the supplier
can set the price for the supply to the first distributor/wholesaler, he has no control
over the price and discount structure applied further down the chain.

In such cases, non-financial methods such as providing promotion materials, in-
store displays, training materials or arranging proper complaints procedures are
much more effective than lowering the sales price. Projects in which the supplier's
representatives talk to distributors far down the line, just one or two steps removed
from the end user, can also prove more cost-effective than a discount campaign.
Finally, the wholesaler can be rewarded for offering information and training to
retailers.

For example, Coca-Cola supplies its raw materials to bottling companies, but
supports the sales through mass marketing campaigns targeting consumers and by
providing an infinite number of signs, banners and vending coolers to retailers all
across the world. It is not without reason that Coca-Cola's brand value is immense,
and their product is available virtually everywhere. This even forced Unilever to team
up with soft drinks giant Pepsico for its Lipton tea brand. The clear distinction
between tea/ice tea and other soft drinks means that the partners do not interfere
with each other, even though they share the same target group and distribution
channels. These channels can now be utilised jointly, which generates a
considerable cost benefit on account of the huge volume.

There are also challenges for the distributor. Especially with custom-built products
or with services, the contact between the supplier and customer cannot be avoided.
After making the deal with a specific customer, the distribution partner has to
sustain his added value, which in most cases is based on relatively easy to copy
knowledge. This can be done in several ways:

• By sustaining a broader relationship with the customer than for this solution
only. The added value of the distribution partner then lies in his product
portfolio and his further arrangements with this customer.
• By continuously bringing new one-off customers into the alliance.
• With a contractual arrangement, stating that all business of the supplier with
the distributor’s customer base has to be done through the distributor.


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Franchising

In case of franchising, the relationship becomes closer yet. Here, the distributor
enters into an exclusive bond with the supplier, no longer working under his own
brand name but only under that of the supplier. It is no longer or hardly possible for
the distributor to sell products or services of another supplier, and the
distributor/franchisee is bound to strict rules with respect to shop interior and
marketing communication. He only needs to concentrate on local marketing and
sales.

For both exclusive distribution and franchising, the parties share in the risk that
sales may disappoint and thus not justify each other's efforts and investments. In
case of a distribution agreement the distributor holds the reins, and the supplier
will want to steer along through generic marketing. In case of franchising it is
generally the supplier that holds the reins, and the franchisee will want to steer
along with respect to his own sales area.

Franchising is an important growth strategy for many organisations, particularly in
retail. Franchising can also be applied in the business-to-business market to
expedite the sale of products or technology. In return for the brand name, the
service concept and often the purchase of products, franchisees pay a fixed sum or
a percentage of the turnover. This often concerns long-lasting contracts in which the
franchisor and franchisee clearly depend on each other.

For a franchisor it is often important to grow rapidly through the number of
franchisees, as this yields cost benefits in three respects:

• He is better able to spread his investments in the concept.
• Marketing communication generally becomes more effective since there are
more sales outlets.
• Scale size enables him to negotiate better purchasing conditions.

Additionally, it is a way of establishing a brand name that requires few extra own
investments.

Nevertheless, the value of the franchise format is somewhat doubtful. Many
franchise formulas collapse relatively soon because the concept is not embraced by
consumers, or even because it proves impossible to find sufficient franchisees.

To determine how attractive a franchising formula is for the franchisees, three cost
components are important:

• the size of initial investments to set up a shop or sales office;
• the size of the monthly payment in return for using the formula;
• the margin obtainable through sales, based on purchasing costs and freedom
to set prices.

Pioneering franchisors will need to keep the franchisee's initial investments low and
possibly refrain from asking a one-off compensation. This reduces the starting-up
risks for the franchisee. This risk will also seem less if the franchisor agrees to
share in the investment; this will have a positive impact on the formula's growth
rate.


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Research has shown that the size of the monthly payment does not seem to
influence the growth rate. However, this payment should be such that it combines
with the profit margin of the turnover to produce a profitable franchise. As the
formula ages, the pressure will increase to reduce the monthly payment: franchisees
become more experienced and less dependent on the formula, for example because
they know their customers and their needs better, and mutual competition
increases7.

In many cases, the franchisee will need to finance the launch of his or her company.
The furnishing of a location, hiring and training personnel, a sub-optimal staffing at
first and building and maintaining stocks all cost money. These financing costs also
need to be incorporated in the business case.

Where it concerns an established franchise formula, the costs for a franchisor
usually concern the consultations and part of the shop furnishing. The major
investments have been made before, and the most important risks have been taken.
At bottom, he is the party that stands to gain most from the negotiations.

Proposition alignment

Portfolio management is an important means of increasing your relevance for a
target group. By including more special, complementary or even lower priced
products or services in your offer, you are substantiating your brand promise.
However, this need not necessarily be the offer of one single company; if two or
more suppliers decide to align propositions, or to refer to each other, or to
collaborate in the offering, they can achieve greater relevance for their market.

Yet to remain relevant, it is important that the portfolio displays some measure of
synergy. Thus, it wouldn't make sense for McDonald's to start selling vegetables,
but it would if they started offering veggie burgers. Also for a company like Office
Depot, portfolio management constitutes the core of their marketing policy.

By choosing for one or a few alternatives at most, rather than selecting all products,
the customer is offered a pre-selection. This saves the customer from making
complicated choices, and regardless of the precise purchase, the quality is
satisfactory. Combined with the availability of the products and the certainty of not
needing to go somewhere else afterwards, this makes Office Depot a relevant party
for many entrepreneurs.

Entering into a partnership may be an attractive alternative to developing and
producing or purchasing and reselling a product or service in-house.

Where two companies align their propositions and refer to each other, this will
generally not see much in the way of cost settlement. In most cases both parties
bear their own costs for the alignment and possible product or service
modifications. Aside from that, the expenses of joint marketing campaigns may be
shared; see also the paragraph about co-branding.

In the services sector it is still common to work with a lead fee. Simply contributing
a potential client or arranging an assignment can be reason for the contracting
party to remunerate the contributor. For a single lead this may be a few percent, but
for an entire sales trajectory percentages of 10 to 30% are customary.


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Also referring Internet users through links or banners on another website, known as
affiliate marketing, can be regarded as partnering; the more so if payment is offered
for each completed sales transaction, rather than for each ‘click’ as Google does
with Adwords.

Collaborative offering

If two businesses decide to align their portfolios and to refer to each other, this may
represent added assurance for the customer: he may assume that the supplied
products or services are compatible, or that he will, at the very least, be informed of
any necessary adjustments. This assurance is of value to the customer, and may
thus justify a higher price.

An alternative would be to calculate how much it would cost the company to
purchase the goods or services directly and to resell them. In case of goods one
should also consider the costs for storage and physical distribution, and in case of
services the costs of matters such as quality inspections and idle time/unused hours
of personnel.

If two businesses decide to collaborate in their offering, this yields even more value
for the customer. Provided all is specified properly, it offers the customer a
contractual guarantee that the two firms' products or services are compatible, and
that he is saved from having to coordinate the delivery. He is furthermore
purchasing from a larger entity, which offers greater delivery assurance. This may
prompt the collaborating firms to increase the prices, or it can enable them to bid
on orders that would otherwise be beyond reach.

Here again, the alternative is to calculate what a company would have to do in order
to offer the entire product, if at all feasible. In purchasing and reselling part of the
offer, the company must either run greater risks, or must pay a higher price to
cover those risks. Moreover, such a construction often lays claim to working capital,
since suppliers generally wish to be paid for their part before the customer pays for
the whole.

In collaborative offering, two or more companies will often want to supply their own
part of the solution requested by the customer, but it also requires overall
coordination and, in many instances, the customer will want to deal with just one
contact point. The latter wish is in order to prevent ending up with a defective
solution, should the separate supplies fail to integrate seamlessly.

In formulating a collaborative offering, there are a number of pricing aspects to
consider.

The first question is what margin the businesses apply in their pricing of their own
contribution to the solution. Not all suppliers are willing to fully disclose their cost
price calculations, and the extent to which overhead, capacity utilisation and
possible inefficiencies are incorporated varies among companies. Prices can
sometimes be compared to those of previous assignments, or with reference to
competitors in the market. But often it will just be a matter of trust that partners do
not add an extra margin.


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The second aspect concerns the legal form chosen for the offering. Does one
partner act as chief contracting party, with a purchasing relationship towards the
other partner or partners? This means a bigger risk for this partner; a risk that can
be reduced by:

• arranging that the partners are only paid after the client has paid and no
further claims can be expected (back-to-back construction);
• requesting a bank guarantee that can be claimed in the event of delivery
problems;
• requesting guarantees from a holding company or shareholder to prevent the
partner from going bankrupt as a result of setbacks during the project or of
liabilities afterwards.

Any reduction of this risk should be reflected in a smaller compensation premium
for the chief contracting party. However, percentages of 10 to 30% are not unusual.

Alternatively, the offer can be made as a legal partnership in which both partners
have an equal position. If this implies limited liability for the partners/shareholders,
this means restricted claim options for the client, who thus will have to consent to
that.

Equal collaborations without limited liability for the participating parties can have
the consequence that liabilities arise for both parties, instead of for just one. One
reason to opt for this may relate to fiscal facilities. In multinationals, the national
organisations may choose this option because share transactions, where liabilities
can be limited, require the head office's permission.

Finally, the actual alignment of interfaces and tasks should be considered. The most
important compatibilities can often be identified, such as hardware requirements for
a software system, or the maximum weight of a component for an aircraft. But who
is responsible for making sure two software systems can be operated on a single
hardware system simultaneously, or for the weight distribution of an aircraft and
the implications for its construction? One party shall have to act as system
integrator or quality safeguard. This, too, justifies a price premium. However, each
contract provision that assigns part of the risk elsewhere requires a corresponding
reduction of this premium.

Parties engaging in collaborative offering will need to confer closely concerning the
total sum of risk premiums and margins. The simple fact of collaborating must not
cause the partnership to price itself out of the market. On the other hand, having a
deficit on the joint budget is as good as a guarantee that tensions will arise in the
companies' relationship.

Co-branding

Co-branding involves utilising the value of two different brands. Co-branding closely
resembles two other forms of alliances. If it concerns the combined promotion of
two different products, each belonging to a different supplier, in a single offer or in
one marketing campaign, then this is referred to as joint promotion. This is actually
not a form of co-branding but of collaborative offering.


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On the other hand, it may be that two companies collaborate to develop an entirely
new product, such as moisturised shaving by Philips and Nivea. Another interesting
example is the collaboration between Biodermal and Davitamon to develop tablets
that care for the skin from the inside. This is an example of joint R&D as described
further on in this book. This need not necessarily result in co-branding; it might be
handier to market the product under the brand name with which the product is
most closely associated. If the other brand's contribution is only partly visible, this
could create some confusion.

Between these two extremes we find the two most common forms of co-branding8:

• Symbolic co-branded products: the product of one of the brands is
augmented with just the exterior features of the other brand, such as a cereal
that is linked to Disneyworld, or the Ferrari laptop by Acer.
• Ingredient-branded products, in which an ingredient, component or
technology of one brand is added to the other brand, with explicit reference;
for instance Dr. Pepper soft drink with NutraSweet or Liga Yobreak children’s
biscuits with Danone Yoghurt.

A number of aspects are important in co-branding. First of all, the brands should fit
together in terms of their values and appeal. The collaboration between Swatch and
MSN, which lets you receive messages from friends on your wristwatch, is a
successful match because both brands engage a young target group. The earlier
example of the 'fast' Ferrari teaming up with somewhat ‘nerdy’ Acer is not as good.
Since a brand's product portfolio supports the brand experience to a significant
extent, the portfolios should also fit together intuitively. Thus, a McDonald's sales
outlet inside a clothing store is not a good idea.

A new product that is the result of two brands collaborating should primarily mesh
with the values of those brands, rather than with their other products. It wouldn't be
such a surprise if Hummer were to start making sturdy kids' strollers, even though
the firm mainly builds cars. Engaging in a collaboration may help improve the
plausibility of 'brand-alien' aspects in the customer's perception.

Philips entered into collaboration with, among others, Swarowski for the
manufacture of a luxury, crystal-studded USB stick. Their goal was not so much to
sell large numbers, but rather to adjust their respective positioning. The partnership
enabled Philips to enhance the status of its products, while Swarowski's association
with a high-tech company allowed it to upgrade its somewhat old-fashioned image.

Consumers often see one of the two brands as more important than the other. This
is termed brand dominance. This is generally due to the fact that one brand triggers
more associations in the consumer's perception, for example thanks to brand
familiarity, the promotion upon introduction, the function of the product, or the
distribution. Considering tablets with beneficial properties for the skin: should we
associate these with skin creams (such as Biodermal) or with vitamin pills (such as
Davitamon)? It may therefore prove useful to make one of the brands dominant, and
to give the other brand a supporting role.

Co-branding actually means relying on the value of the added brand. The
independent value of this can be calculated reasonably well using methods such as
the Brand Asset Valuator (see above). Usually, the added brand is used to highlight


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certain aspects of the product. Accordingly, the added value should only be seen in
relation to this aspect.

Suppose, for instance, that the Disney brand on a DVD cartoon makes it possible to
ask a 50% higher price in comparison to other cartoon movies, then it might add
only 10% to a box of cornflakes. The reason is that the 'entertainment' aspect for
which Disney is famed plays a subordinate role with respect to cornflakes, where
other aspects dominate such as nutritional value, flavour and convenience.

In addition one must ask what the position of the added brand is in comparison to
the main brand. For Macbooks by Apple, for instance, having an 'Intel processor
inside’ may not carry as much weight as for a weaker computer brand such as
Toshiba.

Arranging a satisfactory financial settlement here requires determining the value of
the added brand. Does the added brand justify a higher sales price, or does it
mainly promote the distribution of the product, yielding benefits on the production
side? Benefits can also be obtained by jointly conducting marketing campaigns.
These considerations create the following settlement mechanism options:

First, the parties can arrange compensation per sold item. This seems particularly
appropriate if the added brand is stronger than the product brand, thus acting as an
'endorser'. The brand value of the stronger brand translates into a higher sales price
or greater sales volume, which is accurately reflected in a certain compensation per
sold item. This compensation will then be part of the expected price premium.

Possible variations are:
• If there is any doubt about the combination, the compensation may only
become effective once a certain volume is reached, in other words after the
introduction proves successful; this reduces the risk of the product launch for
the producing brand.
• The compensation may gradually decrease or end once a certain volume is
reached, on the assumption that if the product proves a hit, the value of the
added brand becomes unnecessary.

Second, the parties can arrange a fixed sum as compensation. This is more
appropriate if the aim is to strengthen the producing brand, rather than to boost
sales figures. The collaboration between Philips and Swarovski to produce
ornament-like memory sticks is a case in point: the goal for Philips was not to sell
large numbers, but to add some glamour to its brand reputation. The collaboration
may also be restricted to a small number of highly exclusive products, for instance a
Ferrari car with Louis Vutton upholstery.

Third, parties can arrange a settlement for their marketing efforts. If the producing
brand advertises the product, the added brand enjoys the benefit of a greater name
recognition. In that case the costs of the campaign can be shared.

A combination of arrangements may mean that the added brand ends up making a
net contribution. This could be justified if its brand value is inferior to that of the
producing brand, in combination with the right to supply its own product as an
ingredient at a favourable price. This may well have been the case in the
collaboration between Dr. Pepper cola with NutraSweet sweetener.


Alliance experts

Conclusion

It is good to consider that there may be more ways to structure each of the forms of
alliances, described in this article. In principle, the possibilities are countless.
However, one might do well to strive for a simple structure that can be explained
easily to all involved in the alliance. A simple structure will limit the effort necessary
to draw up a contract as well and make the management of an alliance easier.

For more articles of Alfred Griffioen search on Slideshare or go to www.allianceexperts.com

References

1
Michael E. Porter, Competitive Strategies, 1980
2
Michael Treacy, Fred Wiersema, Discipline of market leaders, 1995
3
Young & Rubicam Group, Brand Asset Valuator, 2003
4
Frank H.M. Verbeeten, Pieter Vijn, Do strong brands pay off?, Nijenrode Research Group working paper, 2006
5
Sam I. Hill, Jack McGrath, and Sandeep Dayal, How to brand Sand, Strategy+Business, 1 April 1998
6
Christopher Lovelock, Services Marketing, Prentice Hall, 7th edition, 2010
7
Scott Shane, Venkatesh Shankar, Ashwin Aravindakshan, The effects of new franchisor partnering strategies on
franchise system size, 2006
8
Lisanne Bouten, Co-branding, A brand partnership and a new product, Universiteit Delft, 2010


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