The Importance of Reciprocal Spillover Effects for the Valuation of Bestseller Brands

Category extensions occur when a firm holding the rights to a well-known brand uses or licences that brand for use in a different product category. They account for a large percentage of successful products across many industries; entertainment for example, where categorgy extensions can be seen in the adaptation of best-seller novels for the big screen.

Measuring the value of category extensions is of key importance when granting licences to other firms. However, the variance in prices charged for category extension rights demonstrates the difficulty managers have in determining their monetary value.

This study offers guidance to managers of entertainment products on how to value the category extension rights for an individual product, such as a book, while acknowledging the important roles of both the 'reciprocal spillover effect' (the influence of the extension product on its parent brand) and the 'forward spillover effect' (the influence of the parent brand on an extension product). The former adds complexity to the valuation of category extensions, because the rights owner may see an increase in sales of the parent brand in addition to the extension right fee.

This research combines existing research on the forward spillover effect for entertainment brands with a new contingency model of the reciprocal spillover effect. We look at the moderating effects of backward integration - the reaction of the parent brand company to the introduction of the extension - and of parent brand characteristics.

Data from all 446 literature adaptations produced for the big screen and theatrically released in North American cinemas between 1998 and 2006 was researched. This study offers empirical evidence of the relevance of reciprocal spillover effects for category extensions of entertainment brands. It develops a comprehensive framework of reciprocal spillover effects and tests it in the context of film adaptations of books. The results confirm the existence of reciprocal spillover effects - a parent brand is able to generate higher sales if an extension product is successful and/or receives marketing support. The results also show that various moderating forces exist.

The researchers combined their insights with previous academic findings to estimate the overall extension value of a bestseller brand, calculating the value of four hypothetical extensions in different scenarios as their test examples. The simulations illustrated that parent entertainment brands can earn more than they have generated from pre-extension release sales.

This model offers a tool for valuing alternatives in the context of financial negotiations over brand and category extension rights. In an industry such as entertainment, where decisions are predominantly taken on instinct, this model provides detailed guidelines for extension right evaluations for both sellers and buyers.

The full working paper can be downloaded from the link below. The final research paper was accepted for publication in Journal of the Academy of Marketing Science, July 2013.

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