Halo Effect

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.