Brand-Extension Price Premiums: The Effects of Perceived Fit and Extension Product Category Risk

Abstract

One of the assumed benefits of extending a strong brand into a new product category is the ability to capture a price premium relative to comparable products associated with lower equity brands. The authors argue that brand extension price premiums accrue in part due to the ability of a known brand to reduce the perceived risk customers experience in making purchase decisions. Accordingly, price premiums can be expected to vary depending on the risk associated with a purchase decision. The authors manipulated perceived fit between a brand and extension products and three dimensions of extension product category risk. They found that brand-extension price premiums are positively related to the perceived fit between the brand and the extension category. However, this relationship varies considerably depending on the levels of financial and social risk associated with the extension product category. Implications of these findings for theory, practice, and future research are discussed.