When a company introduces new products that fit their customers it is called?

Line extension and brand extension address the marketing of commercial goods. The brand refers to the recognized product or company name such as Kraft, Pepsi or Apple. The way in which the company expands its inventory determines line extension vs. brand extension.

Product Line Extension

Line extension refers to the expansion of an existing product line. For instance, a soft drink manufacturer might introduce a "Diet" or "Cherry" variety to its cola line, while a toy manufacturer might introduce new characters or accessories in its line of action figures. In short, line extension adds variety to its existing product for the sake of reaching a more diverse customer base and enticing existing customers with new options.

Product Brand Extension

Brand extension refers to the expansion of the brand itself into new territories or markets. For instance, if a soft drink manufacturer unveils a line of juices or bottled water products under its company name, this would constitute an example of brand extension. The brand, or company, is an established name, and so the name alone can serve to drive customers to try new products completely unrelated to the older product lines.

Benefits of Extending a Brand

A line extension can reinvigorate a product line, bringing it back into the public awareness by drawing new customers and higher profits. A brand extension can increase profits by allowing manufacturers to tap into new markets and offer increased diversity in their inventory. Line extensions and brand extensions both allow companies to promote new products with reduced promotional costs because the new lines or brands benefit from being part of an established name.

As experts at Iowa State University notes, there are many other benefits to brand extensions, including:

• larger shelf space presence
• more potential customers
• increased marketing efficiency
• increased production efficiency
• reduced promotional costs

Risks of Extending a Brand

There are two risks you need to consider before extending a product line or band. First, any time a company introduces a new brand or line, the company name could become tarnished if the product proves to be an immense failure. Consumers might feel less inclined to support the company's new products in the future.

Secondly, extending into a new product or service that doesn't suit your current offerings could cause an otherwise great product to fail. Consider Volkswagen's failed attempt to extend it's popular, generally affordable, brand into the luxury car market with the VW Phaeton. Nobody bought it. As DriverTribe reminds us, this was primarily because the logo didn't fit the new brand. In this scenario, a better role model would be Lexus. Before launching Lexus, its parent company knew that connotations toward their current line of cars would not go well with the luxury car market, which is why so few people even know Lexus is owned by Toyota.

When an established consumer-packaged-goods (CPG) company introduces a new product, it faces a potentially make-or-break decision: how to brand it. Tying it to an existing brand (as was the case for Cherry Coke and Avon Hand Lotion) is tempting. Customers are more likely to try a new product with a familiar association, and companies have to expend fewer marketing resources to launch it. But the strategy has risks, too: Weak or failed brand extensions can harm the parent company. When the maker of Coors beer introduced a nonalcoholic beverage, Coors Rocky Mountain Spring Water, customers were confused, with some wondering about the alcohol content of the beverage. Sales of both water and beer suffered, and the new product was ultimately discontinued. A new study can help companies make the right branding decision—and shows that those who do will be rewarded with higher returns.

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When an established consumer packaged goods (CPG) company introduces a new product, it faces a potentially make-or-break decision: how to brand it. Tying it to an existing brand (as was the case for Cherry Coke and Del Monte Tomato Sauce) is tempting. Customers are more likely to try a new product with a familiar association, and companies have to expend fewer marketing resources to launch it. But the strategy has risks, too: Weak or failed brand extensions can harm the parent brand. When the maker of Coors beer introduced a nonalcoholic beverage, Coors Rocky Mountain Sparkling Water, customers were confused, with some wondering about its alcohol content. Sales of Coors water and Coors beer suffered, and the new product was ultimately discontinued.

A new study can help companies make the right branding decision—and shows that those who do will be rewarded with higher returns. “A strong existing brand is a strategic resource for managers wishing to introduce a new product,” says Boston College’s Larisa Kovalenko, one of the authors of the study. “But they must be careful not to kill the golden goose.”

The researchers examined nearly 20,000 products introduced by U.S. CPG firms from 2000 to 2012. They determined which of three branding strategies had been used: new brand (an entirely original name, as when Coca-Cola launched Dasani bottled water), direct extension (an existing brand name plus a descriptive word or phrase: Tide Washing Machine Cleaner), or sub-brand (an existing brand name plus a nondictionary or nonspecific word or phrase: Olay ProX, Arm & Hammer Complete Care). By analyzing the new products’ performance and their companies’ financial returns, the researchers identified five product and firm characteristics that guided the most successful branding choices.

Fit with the company’s other offerings.

When a new product doesn’t tie in naturally to an existing brand portfolio, customers may become confused or put off if that product uses a familiar brand name, as happened with Coors Rocky Mountain Sparkling Water and another short-lived beverage, Frito-Lay Lemonade. In cases of an obvious mismatch, managers would be better off creating wholly new brands. That’s why the Coca-Cola Company introduced its noncarbonated sports beverage as Powerade.

Innovativeness of the new product.

Innovation is inherently risky, and so companies bringing out a truly novel product generally should use a new brand to avoid imperiling their existing one should things not pan out. Unilever introduced Persil Power—a detergent with a special cleaning formula—in Britain in the 1990s, positioning it as a sub-brand of its popular Persil detergent. However, customers using hot water in their machines discovered that their clothes were falling apart after being washed with the new detergent—something Unilever hadn’t foreseen because it had done most of its testing at cooler water temperatures. The firm recalled the product and abandoned it, but not before damaging the reputation of its flagship detergent.

Conversely, when an innovative product has an entirely new name and enjoys commercial success, it becomes an asset that can be leveraged with appropriate brand extensions down the road.

The breadth of the existing portfolio.

When a company owns many active brands, odds are it can find a good fit for a new product and so should favor a direct-extension brand name. “If you are Procter & Gamble, you will find it much easier to tie a new product to an existing brand than a company with only a few options to choose from,” Kovalenko says.

The risk of brand dilution.

Some companies introduce so many products under one brand that the brand loses its magic. Consider how the luxury brand Pierre Cardin overextended itself. After successfully moving beyond fashion into perfumes and cosmetics, it started losing margins, revenue, and brand equity when it extended into numerous unrelated categories, introducing, for example, Pierre Cardin baseball caps and cigarettes. The researchers also point to Virgin Group, which has been criticized for unclear brand positioning and a lack of focus owing to its several dozen sub-brands in categories including record labels, cruise lines, retail banks, telecommunications, and airlines.

Amount of advertising funds.

Firms lacking the resources to provide strong advertising support should avoid the capital-intensive task of building a brand with an entirely new name. Well-resourced firms can be bolder, as they stand a better chance of getting a new-to-the-world brand name off the ground.

Analyzing the brands in their study, the researchers calculated that companies that followed the guidance of the five principles when branding a new product saw, on average, a 0.18% increase in stock market value in the five days around the product launch—which for large firms translates to as much as $26 million in shareholder value. Firms whose new products deviated from the guidance saw no increase around launch. Tracking Tobin’s q—a measure of long-term performance that compares the market value of a firm to the replacement value of its assets—the researchers found that firms that followed the guidance did better in that regard as well. “While the branding of an individual new product could be seen as a minor corporate action, our research demonstrates that…these decisions significantly impact the stock market value of firms,” the researchers write.

David Placek founded the brand-development firm Lexicon in 1982. In the 40 years since, he has helped companies come up with dozens of category-defining names, including Dasani, Pentium, Swiffer, and BlackBerry. Placek recently spoke with HBR about what companies should consider when naming a new product. Edited excerpts of the conversation follow.

How do you approach branding with large companies?

You have to consider “branding architecture,” or the way that multiple brands in a portfolio interact. When you have a new product, should it be positioned as an extension of an existing brand or as an entirely new one? The research by Larisa Kovalenko and her colleagues looks at various factors that should influence the decision, such as how innovative the product is and how well it might fit under an existing brand, but I think there are others, too.

Such as?

One of the most important is managerial resources and commitment to the project. The research talks about the size of a firm’s ad budget, and advertising is certainly needed to build awareness for a new brand. But the talent and resources on the internal marketing team are equally important. Do I trust my people to introduce a new brand? Can we afford to hire the best advertising and design firms to support us?

How does the competitive landscape influence your approach?

You need to consider whether you’re dealing with a dominant incumbent. When we worked with Microsoft on naming its cloud offerings, the seemingly low-risk solution was Microsoft Cloud Services. But the firm was taking on Amazon Web Services, popularly known as AWS. If Microsoft Cloud Services became known as MCS, where would the differentiation be? So we came up with Azure, and it took off. AWS had a much harder time painting Azure as an imitator than it would have had portraying MCS as one.

What about customers? What factors do you consider there?

The decision is often influenced by psychological and behavioral factors, which are important but can be very hard to quantify. Think about the stroke of genius behind Hello toothpaste. The category leaders, Crest and Colgate, presented their products in clinical, scientific terms. Craig Dubitsky, the founder of Hello, recognized that consumers would react well to a friendly line of oral care. If you want to demonstrate friendliness, what’s the first thing you say to a customer? “Hello!”

Your firm is known for innovative names like Azure and Dasani. Do you ever recommend more-prosaic ones?

Of course! We look first at whether a product is one-dimensional: Does it do only one thing really well? In that case, it can be best just to say so. The research cites Tide Washing Machine Cleaner, which is a good example. That’s a way better name than something abstract, like Tide Alpha.

There are exceptions, though. Sometimes a product does its one thing so much better than anything else on the market that you have to differentiate it. I remember when scientists from Procter & Gamble demonstrated a new spray for me. They used it on a really stinky trash can, and the smell disappeared. I knew immediately that this was something truly special. In such cases, you have to look for opportunities to stimulate people’s imaginations. So we came up with the name Febreze, which has become a major source of brand equity for P&G. I’m glad they didn’t call it P&G Deodorizer or Smell-Away or some such.

None of this is an exact science, Kovalenko cautions. For instance, managers must use their judgment to determine whether a product is a good fit with their firm’s existing brands and what constitutes a “sufficient” advertising budget. And branding decisions involve balancing sometimes competing factors. When PepsiCo developed a protein-rich energy drink, in 2006, the product was in theory a nice fit for several existing brands (such as Gatorade), suggesting that a brand extension or a sub-brand would be a good choice. But managers went with a new name, Fuelosophy, presumably because they felt the product was innovative and could be supported by their formidable advertising war chest. The beverage ultimately failed to take off, demonstrating one reason to give a highly novel product a name unrelated to core brands.

The study’s findings obviously don’t apply to firms that use a single brand, such as Sony and Patagonia. They’re also not relevant to private-label brands, which have unique dynamics. And the researchers discovered that market leaders appear to have more leeway to make suboptimal branding decisions without imperiling the parent brand. But that leaves 90% of the world’s CPG companies—and for them, the research promises to bring structure and rigor to a highly consequential choice.

About the research: “What Brand Do I Use for My New Product? The Impact of New Product Branding Decisions on Firm Value,” by Larisa Kovalenko, Alina Sorescu, and Mark B. Houston (Journal of the Academy of Marketing Science, 2022).

A version of this article appeared in the January–February 2023 issue of Harvard Business Review.

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