‘Rolex has strong brand equity in the luxury watch market. Research shows that people who buy their watches also buy expensive jewellery.’ Critically discuss the advantages and disadvantages to Rolex of entering the luxury jewellery market.
Students should make use of relevant marketing concepts and frameworks to structure their answer.
Better answers would start by explaining the notion of ‘brand equity’ and its relevance to Rolex in the watch market. Brands with high levels of brand equity enjoy customers’ trust. The further that trust can be stretched, potentially the more profitable this can be for the company. However, there are limits to which customers will accept such ‘brand extensions’. Brand extensions work on the principle of ‘stimulus generalisation’. Customers make the same response to slightly different stimuli. Success depends on relevance of the new product to the marketplace image of the brand name. The greater the similarity between the primary product and the brand extension, the greater the transfer of positive evaluations to the new product. The question requires candidates to assess this issue in the context of Rolex entering the luxury jewellery market.
The brand strategies model shows the different strategies that a firm can pursue in order to grow the business in terms of how it manages the brand and/or the product categories in which it competes. These two variables are the focus of analysis in this model.
Good answers were expected to explain which of the four options within the brand strategies model was the most relevant one to describe the situation being described here. Whether or not something is a new product category or an existing product category depends on whether customers consider the new product to be a substitute good. So if luxury jewellery is considered by customers to be a substitute for expensive watches this will be an existing category (line extension); if they are not considered a substitute this move will be considered a brand extension.
For a line extension the firm is using an existing brand name and launching a product within an existing product category.
Good answers were expected to show a critical understanding of this topic. For example, there are a number of different criteria that can be used to judge the costs and benefits of the move Rolex is expecting to make, for example, ‘riskiness’ in the case of a brand extension where an existing brand name is used in order to sell a product in a new product category. The risks that apply here are that the marketer may not necessarily understand buyer behaviour, or they may not know the issues involved in effectively using the elements of the marketing mix for this
type of good.
However, brand extensions have the benefit that the marketer is able to make use of their brand equity, which may help with sales. A possible weakness with this approach is that if the venture fails it could damage the brand equity.
Of course, the potential for sales and profits may be limited for other reasons, such as the fact that the new offering may be so similar to the firm’s existing products that any sales of the new product are at the expense of lost sales of existing products, also referred to as ‘cannibalisation’. Better answers dealt in some measure with this critical discussion.
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