Americans Overpay $44 Billion for Brand Name Products

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Procter & Gamble Co. (NYSE: PG), Colgate-Palmolive Co. (NYSE: CL) and the like live off the consumer appetite for branded products. It turns out that this appetite costs these consumers $44 billion a year, compared to the price difference if each of these consumers bought a generic brand.

According to research from the National Bureau of Economic Research, some of the preference for branded products is due to advertising. The authors of the study believe that, in part, “misinformation” may contribute to the impression that branded products are better than generics.

The study’s report begins with a simple example. A 100-tablet container of Bayer aspirin costs $6.29 at CVS.com. The retailer’s own brand costs $1.99. Each has the same “dosage, direction, and active ingredient.” Obviously, the price difference has not destroyed Bayer sales.

Another critical conclusion of the study is that members of households with higher incomes are more likely to buy store products than the equivalents from major branded companies. Education plays a part as well. Doctors are more discerning about the difference in price for over-the-counter drugs than the average American is.

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If the conclusions of the research were taken to their logical end, all Americans would be aware of the difference between generics and products from major corporations, and presumably these corporations would be badly, and perhaps irreparably, damaged.

However, the lesson from the research is, in part, that branded companies have built up such tremendous brand equity that consumers do buy their products. And this brand equity has often been created by decades of marketing. Take, for example, some of the world’s most valuable brands based on research from Interbrand. The Gillette brand has a value of $25.1 billion. Virtually every product sold under this brand name has a generic equivalent. The same could be said of Coca-Cola Co. (NYSE: KO). There are generic sodas that probably have the same ingredients, but the brand value of Coca-Cola is $79.2 billion, making it the third most valuable brand in the world, according to Interbrand research.

The good news for branded companies is that consumers are not aware of the National Bureau of Economic Research information about brands, or if they are, they don’t care about it.

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