Stay niche for better branding

Niche brand positioning can be more profitable than mainstream strategies by building consumer trust through consistent product portfolios

By Ellis Ng

Positioning a company’s brand can be a complicated process, especially in today’s world, where even luxury brands struggle to gain dominance. Take a look at LVMH, the owner of Louis Vuitton, and Kering, the owner of Gucci and Bottega Veneta. Both have grappled with shrinking consumer spending and reported a significant drop in China sales.

In these hard times, it’s natural for companies to rethink of positioning themselves closer to the mainstream in search of success. However, does giving in to popular taste will guarantee success? Recent research sheds light on how brands can effectively guide consumer decisions through strategic positioning.

“Positioning is one of the most important strategic decisions for brands, but as technology advances, market and consumer tastes are ever-changing,” says Tony Ke, Associate Professor in the Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School. “It is not uncommon for some brands to chase the trends by adding new products to their portfolio. This will create the discrepancy between the product portfolio and the brand positioning and thus leads to brand dilution.”

Brand positioning requires careful planning. Therefore, in a new paper titled A model of product portfolio design: Guiding consumer search through brand positioning, Professor Ke along with Shin Jiwoong of Yale University and Yu Jungju of Korea Advanced Institute of Science and Technology, came up with a theory to help brands connect with their customers more meaningfully. The study also identifies conditions under which brands should adopt a niche positioning strategy rather than a mainstream one.

“Traditional marketing theory does not really distinguish between brand positioning and product positioning, and when it does, it talks about brand positioning totally separate from product positioning,” Professor Ke says. “Our theory of product-based brand positioning recognises both the difference as well as the link between brand positioning and product positioning.”

Niche vs. mainstream

Brands have become shorthand for consumers, and their positioning provides critical information about the characteristics of a firm’s products, making it easier for consumers to look for what they want. Product positioning, on the other hand, focuses on the specific attributes and characteristics of an individual product within the brand’s portfolio.

“When we want to shop for a new jacket, we may visit our favourite brand first, even though we do not know what designs of the new season will be offered by this brand,” Professor Ke says. “This simple observation implies that brand is guiding consumer search for products.”

Professor Ke used this idea to propose a theory using a Hotelling line model to visualise how brands position themselves in a market. Named after economist Harold Hotelling, the model illustrates how businesses position themselves in a market to maximise consumer reach. The mainstream brands are positioned close to the centre of the Hotelling line to appeal to the mass consumers, while niche brands are positioned near an endpoint to appeal to a specific group of consumers.

“It is not uncommon for some brands to chase the trends by adding new products to their portfolio. This will create the discrepancy between the product portfolio and the brand positioning and thus leads to brand dilution.”

Professor Tony Ke

The researchers then analysed how different factors affected the firm’s optimal positioning strategy, considering variables like search cost, consumer preferences, and the firm’s ability to position its various products in the market. Search cost refers to expenses or efforts consumers must take when searching for products before making a purchase decision.

The niche brand positioning allows firms to stand out and better match the specific tastes of their consumers, especially when search costs are high. Mainstream positioning allows brands to attract a larger number of consumers, but they may dilute their unique identity by offering a wide range of products. However, if many consumers are interested in the brand, maintaining a mainstream position won’t be a problem.

“Many great brands start as niche brands, such as Arc’teryx and Patagonia. Even the name of these brands hints at their niche origin,” says Professor Ke. “Yet, they become very successful because of the clarity of their brand positioning.”

Why is it good to be niche?

According to the theory of product-based brand positioning that the researchers propose, consumers may not know the exact details of every product, but they understand the overall style or type of products the brand offers. Based on this information, consumers can decide whether to search for a specific brand by visiting the store.

Therefore, a brand’s position can convey crucial information that guides the consumer’s search decisions. Instead of having to search through multiple brands to find what they want, consumers can use their understanding of brand positions to narrow down where they look for. Niche positioning naturally provides more information that facilitates consumer search because it restricts the spread of the product portfolio and hence guarantees the consistency between the brand position and the designs of all products under the brand.

A good example of a successful niche brand is Lululemon, which is known for its activewear and lifestyle apparel. “Lululemon builds a very consistent product portfolio,” says Professor Ke. “Consumers know if they want a particular style, say a pair of violet yoga pants with a slim fit and high waist for warm weather, they can get it at Lululemon.”

The theory then implies that a consistent portfolio will save consumers’ search costs. Lululemon, with its limited designs and rich selections, is thus clear and informative with its branding, Professor Ke says. “The brand itself tells consumers lots of information about the products under the brand,” he adds. “If they go to a different brand, there is a chance they can get some selections of yoga pants, but they may not get the exact thing they want.”

And that has helped Lululemon, which is currently enjoying breakout popularity. It now has more than 100 stores in mainland China and saw a 34 per cent year-on-year revenue rise in the last quarter.

Brand positioning in the e-commerce era

Brand building takes time as consumers form their perception about a brand over interactions with its products. Search costs, to some extent, “lock” consumers to their favourite brand by limiting their consideration set. The rise of e-commerce is likely to disrupt branding in general, Professor Ke says, with some merchants focusing less on brand positioning and more on grabbing consumer attention.

“The rise of e-commerce has lowered consumers’ search costs, and our theory thus predicts that brand positioning would become less important, as consumers can now freely explore more products from different brands, consistent with the market trend of ‘brandless’,” he adds. “Indeed, instead of using brands to guide consumer search, e-commerce platforms have powerful recommendation algorithms that could steer consumers to products or brands.”

However, Professor Ke argues that branding itself remains a comprehensive concept. “Besides guiding consumer search, the brand is an important social device that allows patrons to signal their wealth, taste and social status, and this aspect will not be altered by the advancement of e-commerce,” he says.

As big Chinese brands seek breakout success, with BYD attempting to make inroads in the electric vehicle market, Chagee and Luckin Coffee in the beverages market, and Pop Mart in the toys market, they should be more patient. Instead of constantly rolling out new products to chase market trends, companies can focus on the consistency of their product portfolio. This is the organic way to build a brand that lasts and resonates with consumers. For companies with diverse product capabilities, instead of throwing everything under one brand, they can consider building a house of brands to segment the market, like what P&G and Unilever did, says Professor Ke.

“Chasing the market trend is risky because it leads to brand dilution,” he adds. “Staying focused on their product portfolio is important. You cannot put everything that you can make, or you can sell under one brand, which will make the brand lose its identity.”