What is the 'Halo Effect'

The halo effect is a term used in marketing to explain the bias shown by customers toward certain products because of a favorable experience with other products made by the same manufacturer or maker. The halo effect is a concept driven by brand equity. The opposite of the halo effect is cannibalization.

BREAKING DOWN 'Halo Effect'

A classic example of the halo effect is the relationship between Mac notebooks and iPods. When the iPod was released, there was speculation in the marketplace that the sales of Apple's Mac laptops would increase because of the success of the iPod. This phenomenon is referred to as the halo effect.

The Halo Effect: An Acceptable Loss

The halo effect is often used to justify business segments that are a drag on earnings. If the business segment provides a lift in customer traffic, it may translate into additional sales for other segments or business units available to the customer. Managers are okay with taking a loss on business segment profitability as long as it increases customer transactions in other parts of the store. For example, many convenience stores and gas stations sell cigarettes even though cigarettes are known to have a low margin. The gas station owner makes no profit from the cigarette sale, but it gives customers a reason to select his gas station over another. Another example is a free service offered by company, such as a grocery store that offers a free carry-out service for senior citizens or a retail shop that offers free shipping on sales over $50. These products and services are not free for the company, but they are offered to the customer as incentive to purchase a product over the competitor. The halo effect of free delivery translates into the purchase of additional items.

Effectiveness and Usage

The halo effect is effective for companies with high brand equity and in industries that rely heavily on brand equity to grow demand. It is also effective for companies in competitive monopolies where there are many companies offering the same service with marginal differences. Companies also use the halo effect to establish themselves in a particular industry. If one product can become a leader in a given industry, the brand equity from that product may spread, like a halo, to other products. This reasoning allows companies to accept a certain level of loss with the understanding the loss is really an investment in brand equity with a payoff across all future products and services sold by the company. In this way, the halo effect has the potential to not only increase customer traffic but also pricing, which are the two main levers of revenue growth.

RELATED TERMS
  1. Brand Equity

    The value premium that a company realizes from a product with ...
  2. Brand Management

    A function of marketing that uses techniques to increase the ...
  3. Brand Loyalty

    When consumers become committed to your brand and make repeat ...
  4. Brand Identity

    Brand identity is the way a business wants consumers to perceive ...
  5. Brand

    A distinguishing symbol, mark, logo, name, word, sentence or ...
  6. Competitive Pricing

    Setting the price of a product or service based on what the competition ...
Related Articles
  1. Investing

    Nassim Taleb Believes Market Crash on Horizon

    Nassim Taleb, who coined the phrase Black Swan, is bearish right now. Here's why.
  2. Small Business

    Understanding Marketing

    Marketing includes all of the activities of a company associated with buying and selling a product or service.
  3. Investing

    What Is The Impact Of Research On Stock Prices?

    The answer to this question is directly related to the importance of information in the marketplace.
  4. Small Business

    Explaining Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent.
  5. Small Business

    What's Involved in Customer Service?

    Customer service is the part of a business tasked with enhancing customer satisfaction.
  6. Small Business

    The Power Of Branding

    It's the ultimate economic moat, and we look at the approaches and effects of good and bad branding.
  7. Small Business

    How Companies Create A Brand

    We take a hands-on approach to creating a brand, and see what it can mean as an investor.
  8. Managing Wealth

    How To Profit During High Inflation

    Some companies are better than others at pivoting their strategies to overcome inflation or other cost-increasing concerns. The best companies can push cost increases out to the market quickly ...
  9. Small Business

    In Small Business, Success Is Spelled With 5 "C"s

    Incorporating these steps will help your business thrive in a competitive market.
  10. Small Business

    Understanding Competitive Pricing

    Competitive pricing is the practice of setting prices for products or services based on what the competition charges.
RELATED FAQS
  1. What impact does brand equity have on profit margins?

    Learn how both positive and negative brand equity affects profit margins by influencing profit per customer, sales volume ... Read Answer >>
  2. What are some of the benefits of positive brand equity?

    Learn how having positive brand equity enables companies to make a higher margin on sales and spend less money on marketing ... Read Answer >>
  3. What are some of the ways that a company can improve its brand equity?

    Learn why brand equity is so valuable in business. These strategies for gaining high exposure and a great reputation will ... Read Answer >>
  4. What's the difference between the income effect and the price effect?

    Learn what the price effect is and how it is related to consumer spending. Learn what two components make up the price effect ... Read Answer >>
  5. Should a small business test the substitution effect on its products before launch?

    Explore the substitution effect and find out how small businesses may evaluate how this principle impacts their own products. ... Read Answer >>
  6. How does a customer base dictate goodwill?

    Find out how a customer base dictates the value of the goodwill by providing a ready market for its products and spreading ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center