An extension-based business model: Virgin

Most brands conjure up an image of a product or service: shoes for Nike, yoghurt for Danone, ballpoint pens for Bic, a holiday village for Club Med, and so on. This is not surprising: before they became brands, they started out as a simple product or service, driven by marketing and sales.

Virgin is an exception: who associates that brand with only one product or service? Indeed, Virgin now comprises 200 companies and 25,000 people working for the brand worldwide. It has a turnover in excess of s7 billion, and has become one of the world’s top 50 brands. Even in countries in which it does not operate, it is still a famous brand.

It all started in 1969, when Richard Branson decided to launch a direct record-selling operation, enabling many groups without distribution by the ‘majors’ to gain access to the general public. The brand’s DNA is already apparent in this founding act: Branson seeks out opportunities in markets choked by ‘false’ competition.

He asks himself how he can operate differently from the leaders – who have usually frozen the market to their advantage. The Virgin name was chosen because it was friendly and modern, and could be applied to sectors other than just music. This last consideration alone presaged the business model that would follow.

Virgin’s originality lies in the fact that it is held together by one entirely intangible ‘glue’, its brand. This is why the brand architecture is umbrella branding. Every year, Virgin launches itself into new businesses and pulls out of others. In under 20 years, Richard Branson has extended the brand to the following sectors (and subsequently pulled out of some of them):

  • First business: mail order (1969).
  • Records: Virgin Records (label created in 1973 and sold to EMI in 1992).
  • Radio:Virgin Radio.
  • Video games: Virgin Games (1983).
  • Distribution: Virgin Vision (1983), Virgin Megastores (1988) and Virgin Bride (1996) for brides-to-e.
  • Cosmetics: Virgin Vie.
  • Drinks: Virgin Cola, Virgin Vodka (1994).
  • Computers: PCs manufactured by ICL Fujitsu (1996), Internet terminals manufactured by Internet Appliance Network (2000).
  • Air transport: Virgin Atlantic Airways (1984), Virgin Cargo (1984), Virgin Express (1996).
  • Rail transport: Virgin Railways (1997).
  • Tourism: Virgin Holidays (1895), tour operator, Virgin Sun.
  • Hotels and pensions: Virgin Hotels, Virgin Pensions (for senior citizens).
  • Financial services: Virgin Direct Financial Services (by telephone, 1995), Virgin Bank.
  • Internet: Virgin Net (1996).
  • Utilities: Virgin Power House (2000): water, gas and electricity.

In a sense, Virgin is like the Japanese keiretsus, horizontally structured conglomerates consisting of independent companies that share one name and one set of values. How can a brand spread itself in so many directions without specific competencies and with minimal investment? Of course, the more widely the brand spreads itself into apparently dissimilar extensions, the greater the need for an intangible link (see Figure below) – and this link consists of the Virgin brand’s values. Its extensions actually form a family of independent companies that share the values of the Virgin brand.

The Virgin extension model

To finance his expansion, Branson usually seeks support from appropriate partners in order to minimise his own investment, even if this means not being the majority shareholder. The partner thus provides the sector know-how, the money, and its own energy as an entrepreneur. For example, Virgin Megastores in the UK are 75 per cent owned by the W H Smith group. Similarly, Virgin Vodka was manufactured and distributed by William Grant in a 50/50 partnership with Branson.

Virgin allows start-ups to begin with a world brand as their ‘birth gift’, significantly reducing their necessary advertising expenditure
– particularly as Branson is well aware of the financial benefits of repeated public relations exercises such as his balloon trip around the world, or riding down Fifth Avenue in a Patton tank to celebrate the launch of Virgin Cola.

Branson also resells his businesses, but only after having added what makes them valuable in the eyes of the public – his brand. For example, the French Megastores were sold to Lagardère, and Virgin Atlantic Airways went to Singapore Airlines. Of course, the Virgin brand remains the property of Virgin Enterprises, a company of which he is the sole owner.

Virgin’s extensions are remarkable in that they are truly based on a strategic analysis of the sector. But in addition, like any healthy extension, they deliver far more than just a name to customers: they represent true innovation which remains consistent with the brand’s values.

As its name so prophetically suggests, Virgin aims to take a brand new, ‘virgin’ approach to markets and operate in a different way from the ‘majors’. Virgin has a rebellious, extraverted personality. Its ambition is to ‘unblock’ markets and liberate consumers from meaningless choices between dominant market leaders. Its commercial proposition is innovation, quality and fun.

The result is a product range totally different from those of its competitors, targeting a younger audience and better value for money, all under the aegis of an aspirational brand.

After all, in order to succeed, innovation is required at every stage, even if it means being copied: Virgin Atlantic Airways was the first company to offer a Volvo-chauffeured collection service for its business class clients from their offices, and a bathroom at the arrival airport. On board, Virgin innovated with the first personal video screens, followed by relaxing massages and the like.

Another example is Virgin Cola, which innovated by offering an excellent taste, produced by the Canadian firm Cotts (bought out by Virgin in 1998), at a price nominally 10–15 per cent lower than that of Coke, with widespread distribution.

However, the system has its limits: extensions do not always work (a fact that applies to Virgin just as it does to any other firm, of course). The further you get from the British zone of influence, the weaker and less emotive the Virgin brand becomes. This makes the high visibility associated with the Megastores’ music and entertainment brand a prime tool for generating recognition and empathy among young people from all countries.

Paradoxically, Virgin’s failures do not seem to have damaged its business model. In situations where many brands would have packed up and gone home, Virgin simply continues to expand elsewhere. After all, should we criticize David if he loses to the Goliaths every now and then? At least he tried. But can this brand and business model last forever? Not if the extensions fail too frequently. An analysis of the failures readily shows when an extension has been inappropriate:

  • When it adds nothing other than just competition. This was what happened with Virgin Clothing, abandoned in 2000. London already buzzes with creators, rebels and anti-conformists. In a fragmented market with extremely wide price variations, what could Virgin add?
  • The same is true of Virgin Cola. In Europe, Pepsi already plays the role of the fly in Coca-Cola’s ointment. Furthermore, the multiples’ purchasing centres chose not to stock the brand, thus starving it of access to the public. A question mark also hangs over Virgin Express: despite the fact that Virgin Atlantic Airways and its battle against British Airways assumed emblematic status, the act of starting yet another low-cost airline to compete with Ryanair failed to connect with the brand’s mission. There are no dominant leaders in this sector, and customers do not feel trapped.
  • When the scale of investment required pushes the fulfilment of the promise back into the long-term future. This is what has happened to Virgin Rail. In the UK, the brand’s entry into commuter railways has not made any real difference to commuters’ daily life: it has not been able to deliver a better experience. True, the dilapidated state of the rolling stock and infrastructure, handed over to the firm ‘as is’ under privatisation, ensured there could be no miracle: a network cannot be changed that quickly. Similarly, profitability issues concerning the MGM cinemas taken over by Virgin in 1995 prevented any real price reductions – one of the terms of the brand contract.

Without Richard Branson himself, could the Virgin group succeed? Given its founder’s aura, and his ability to attract the attention of the media and to concentrate energy and investors around him, it must be concluded that Virgin is Branson himself. This is the brand’s strength, but also its weakness. As with luxury brands, we should remember that a brand only truly begins with the loss of its founder.

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