How Brand Differentiation Shapes Corporate Culture and Profits

Journal of Marketing Research Scholarly Insights are produced in partnership with the AMA Doctoral Students SIG – a shared interest network for Marketing PhD students across the world.

Brands are differentiated along both vertical (being perceived as better) and horizontal (being perceived as different) dimensions. For example, Dior and Gucci are both vertically differentiated in terms of their universally valued quality of craftsmanship and heritage of excellence, and they are horizontally differentiated in terms of Dior’s timeless style and classic feminine beauty versus Gucci’s fashion-forward androgyny, for which preferences diverge as a matter of taste.

Researchers have primarily examined how these types of brand knowledge create value for firms through the lens of customer behavior in product markets. In contrast, a Journal of Marketing Research article develops and tests a novel framework that outlines the unique role brand knowledge plays in labor markets.

The study investigates the nuanced ways in which brand differentiation shapes employment dynamics within firms, revealing that vertical differentiation (perceived quality) typically leads to lower employee pay, and horizontal differentiation (brand uniqueness) correlates with higher pay. Companies that exhibit a high degree of horizontal differentiation tend to reward and appreciate workers who best represent the unique qualities of the brand. This creates a synergistic effect that raises employee productivity and retention rates and boosts firm profitability.

The study utilizes a robust multimethod approach, combining archival data and experimental studies, to examine the intersections of brand perception and labor economics. By detailing the employment effects across different types of brand differentiation, the researchers provide a groundbreaking perspective on how firms can strategically leverage brand equity not only for consumer marketing but also as a pivotal tool in human resource management.

Responses from the authors about their work shed further light on their motivations and the nuances of their findings. The initial inspiration for exploring this area came from observing MBA students and faculty behaviors influenced by brand prestige, which led the researchers to consider how brand strength could potentially allow firms to offer lower salaries without compromising talent attraction or retention. The authors also address the complexities of operationalizing and measuring constructs such as employee productivity and brand differentiation, sharing their strategies to overcome these challenges.

What Does This Mean for Managers?

In discussing practical implications, the authors suggest that while vertically differentiated brands might attract talent with the allure of brand prestige, relying solely on this can lead to a “false economy” in which the savings from lower wages are offset by diminished employee productivity and higher turnover rates. Conversely, firms characterized by horizontal differentiation could benefit from paying premium wages to employees who are a cultural fit, thereby enhancing employee satisfaction and retention, which in turn bolsters profitability.

This research not only broadens the conceptual understanding of brand equity’s role beyond traditional marketing but also invites corporate leaders to rethink how brand values are integrated into their staffing strategies. It’s clear that the strategic management of brand equity in the labor market can be an effective mechanism for enhancing organizational performance. The insights offered by this research are invaluable for brand managers aiming to effectively leverage brand differentiation to optimize both employee satisfaction and company profitability.

We had the pleasure of interviewing one of the authors, Christine Moorman, who encourages PhD students to maintain a strong sense of curiosity and openness to real-world phenomena, which are crucial for identifying relevant research questions.

Two major highlights after speaking with Dr. Christine Moorman:

Research highlight: Brand perceptions of being better or unique affect employee pay and behaviors in opposite ways, with important implications for firm profitability depending on manager choices.

Key takeaway for PhD students: The importance of persistence in acquiring suitable data and the understanding that data imperfection is a common issue that does not preclude meaningful research. Dr. Moorman emphasizes the necessity of compelling research questions that can make reviewers more amenable to overlooking data limitations.

Q: What observations/data points inspired you to investigate the relationship between brand differentiation and the labor market?

A: Tavassoli, Sorescu, and Chandy (2014) introduced the idea of employee-based brand equity and found that brands with strong reputations are more likely to pay their executives less. The idea that a strong brand could transfer to an employee who could benefit from it in terms of building reputation and résumé power was also something that we saw in our MBA students’ employment decisions and even among faculty who take jobs at prestigious universities for lower pay. Tavassoli et al. implied that this novel benefit of brands would benefit companies by increasing profits given that pay levels would be lower. We wondered whether this was true or if these “savings” might actually represent a so-called “false economy” and equate to a loss because lower-paid employees would work less hard and be more likely to leave. As Akerlof and Yellen (1986) note in their work, “…when people do not get what they deserve, they try to get even.” We also wondered if the lower pay finding would hold for more typical managers. Finally, we theorized that different effects for two core dimensions of brand differentiation—being perceived as “better” (vertical brand differentiation) or being perceived as “different” (horizontal brand differentiation). In particular, we expected that firms might compensate employees more when they provide a complementary fit in terms of matching their brand’s horizontal brand differentiation.

Q: Could you elaborate on the “why” aspect of choosing a mixed-methods approach involving archival data and experiments for your study? (What unique advantages did this approach offer?)

A: Experiments were necessary because our data, while extensive and very unique, had limitations. First, most of the variables we measured were endogenous (susceptible to unobserved factors), including brand, pay, and employee productivity and retention. Second, we did not have enough observations to include a fixed firm effect in the models, creating alternative explanations for our findings. Finally, even if our archival data were stronger, they did not contain variables about employee qualities that might influence how well they match with firms. This was important to our paper because we theorized that brands would pay more for employees who matched their horizontal differentiation (positive assortative matching).

Q: What were some of the challenges you faced in operationalizing and measuring constructs, such as employee productivity and brand differentiation, and how did you overcome them?

A: Finding the right data for each measure was key. This meant acquiring new datasets that have not previously been used in our literature and combining employee, brand, and firm data over time. Finding instruments for our endogenous variables was also essential. Here, we looked for variables that were related to the focal endogenous variable but not related to the outcome it would predict. This process is actually a very creative exercise that involves borrowing from the literature as well as considering new variables.

For example, for our measures of brand differentiation, we use a peer-based instrument (at the industry level) and offer both supply- and demand-side explanations and empirical evidence for this choice. Supply-side pressures to conform to industry norms emerge from the interaction between firms and the ecosystem of non-customer stakeholders that exert pressure in the form of coercive, mimetic, and normative isomorphism. For example, mimetic isomorphism can occur because rivals are more likely to share personnel and practices within, rather than across, industries.

On the demand side, there are pressures for convergence that emerge from firms interacting with current or potential customers in an industry, including the development of product–category schemas to evaluate products and common demand shifts (e.g., toward sustainability) in an industry. In addition, we tested our explanations by showing that the industry indicator variables accounted for a significant amount of variance in brand differentiation, indicating that the variance in both vertical and horizontal brand differentiation is smaller within than across industries. We also compared the degree of vertical and horizontal brand differentiation within each industry and found these to significantly differ for 68 of the 80 industries in our sample. Of course, the best way to rule out endogeneity is to conduct an experiment, and we ran a series of studies with employees and HR managers to address specific issues that our empirical data could not answer or where endogeneity remained a concern.

Q: Considering the globalization of brands and labor markets, how do you think the effects of brand differentiation on pay and profits might vary (if at all) across cultural and economic contexts?

A: This is an interesting question. We expect that the findings will be broadly generalized, although the strength of these relationships may vary. For example, looking across cultures, we might expect the negative effects of vertical brand differentiation on pay to be stronger in cultures where résumé power is a stronger signal for future employment or for gaining social status, for example, in cultures that are more defined by a competence-based social hierarchy. The ability to pay less will also be weaker in tight labor markets that limit companies’ ability to offer lower wages, and we find labor availability to be a moderator of this relationship in our data.

Q: What practical advice would you give brand managers looking to leverage brand differentiation in the labor market to enhance both employee satisfaction and company profitability?

A: Henry Ford once said, “Paying good wages is not charity at all—it is the best kind of business” and that his decision to offer a large wage hike back in 1919 was “one of the finest cost-cutting moves we ever made.” We find that Ford’s logic still holds, but perceptions of a firm’s brand add a significant wrinkle to the story. Specifically, leaders hiring at vertically differentiated brands should think more broadly about their employees’ value proposition, considering the costs of employee turnover and lost productivity. These teams should use their brand power to attract talent but refrain from leveraging their high-quality perceptions to pay less so that employees will work harder on the job and stay longer, boosting productivity while reducing talent-sourcing costs to increase profits overall. Conversely, horizontally differentiated brands should be willing to pay for talent that matches their brand’s uniqueness, trusting that this will eventually pay off in terms of productivity and retention gains. These brands benefit from hiring true believers who possess an excellent cultural fit and who authentically bring unique brand differentiation to life.

Our findings should also put boards on notice, and we recommend that firms include brand differentiation in their compensation-benchmarking models. As noted, vertically differentiated brands should resist paying below industry and size benchmarks—key components in almost any benchmarking model—based on a high level of brand quality. However, they can justify a higher-than-average pay based on higher levels of brand uniqueness. Finally, not only does the full brand-pay-profit relationship tend to be out of sight for management but there are also structural impediments to getting it right. Specifically, The CMO Survey found that 67% of marketing leaders were primarily responsible for the firm’s brand but also that marketing’s cross-functional cooperation with HR and finance was significantly lower than that with IT, operation, and sales functions. In fact, marketing’s cooperation with HR and finance was the lowest overall. Our findings should encourage marketing and HR to work together more closely to profitably build and leverage the brand by attracting, rewarding, developing, and retaining the “right” talent.

Q: Do you foresee any long-term shifts in how brand differentiation affects the labor market, particularly with trends such as remote work and freelancing?

A. Yes. Marketing has made great strides in utilizing customer data and looking beyond short-term sales to make decisions based on customer lifetime value. Human resource management is following this analytical trend. This will allow managers to monitor productivity more closely and realize the long-term effects of pay. The gig economy, of course, already aligns freelancers’ pay more with their observable productivity, such as customer ratings, and does not suffer from the same kind of turnover dynamics found among more typical employees.

Q: Do you expect brand differentiation’s effects on employee compensation to vary significantly across industries? If so, how?

A: We do find industry differences. Most importantly, we find that higher pay based on horizontal differentiation is the strongest in service industries, where well-matched employees deliver the brand most visibly. We also think that it is more likely that we will see important firm differences. We contribute by conceptualizing the matching process between employees and brands and suggesting that it is shaped by various factors: the firm’s demand for labor (labor availability), its approach to creating a consideration set of candidates (labor identification), its ability to attract candidates (labor attraction), and its investment in match quality (labor development). We predict that firm strategies and investments in these activities will shift firm bargaining power and impact the brand–pay relationship.