Pay and profits: the brand differentiation effect

Professor Nader Tavassoli on how brand differentiation affects employee pay and profits

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Brands that leverage their reputation for quality to pay employees less in return for résumé power risk eroding profits due to the negative effects of lower pay on employee productivity and retention. In contrast, brands that pay employees more in order to attract talent that embodies the uniqueness of their brand boost their profitability due to the positive impact on the same employee behaviors.

These are the findings of a new article in the Journal of Marketing Research co-authored by professors Nader Tavassoli at London Business School, Christine Moorman at Duke University, and Alina Sorescu at Texas A&M University.

Their research shows that vertical brand differentiation (being perceived as better) is associated with lower pay, whereas horizontal brand differentiation (being perceived as different) is associated with higher pay. These differential brand-pay relationships have important downstream effects on employee behavior and, consequently, on firms’ profits. Professor Tavassoli explains why.

“Brands are differentiated along two dimensions: vertically in terms of their quality and wide renown, as well as horizontally in terms of their uniqueness. For example, Dior and Gucci are both vertically differentiated in terms of their universally valued quality of craftsmanship and heritage of excellence. They are also both horizontally differentiated, with Dior renowned for its timeless style and classic feminine beauty and Gucci known for its fashion-forward androgyny, where consumer preference is a matter of taste.

“Just as consumers’ preferences for brands are driven by these two dimensions of brand differentiation, so too are employment decisions. What we find is that high-end brands that can attract employees easily through the cachet of their brand can offer lower wages – people want to work for them as doing so looks good on their résumé. However, firms that cash in on this will suffer lower productivity and higher turnover, which reduces profits.

“In contrast, brands which are seen as being more unique tend to seek employees who represent the uniqueness of their brand, and these more distinct, and sometimes scarcer, employees can thereby command higher pay. The good news is that this higher pay is more than made up in productivity and retention gains, thereby increasing profits overall.”

With the research showing that using brand cachet to pay lower wages represents a false economy, Professor Tavassoli believes that human resource (HR) managers should find other ways to leverage the quality of their brand, for example, to attract talent but not to lower the wage bill. Conversely, brands should invest in talent that matches their brand’s uniqueness, trusting that this will eventually pay off in terms of productivity and retention gains. More generally, brands should adjust their pay benchmarks to reflect their relative degree of vertical and horizontal differentiation in the market.

“Brand differentiation, which is typically under the purview of Marketing, has a profound effect on HR and associated financial outcomes. Despite this, The CMO Survey 2023® in both the UK and US found Marketing’s cross-functional cooperation in brand building with both HR and finance was lower than with functions such as IT, operation and sales. In fact, cooperation with those two functions was the lowest. Given our findings, there is a huge opportunity here for marketing managers to work more closely with their HR and finance counterparts to build and leverage the brand across the employee-brand matching process.”