Why Generic Products Are Cheaper Than Name Brands
4 Reasons Name-Brand Products Cost More Than Generic Ones
You're standing there in the store in front of a dizzifying array of options. The recognizable labels and brands are attractive because you've seen them before . . . but those unfamiliar options are so much cheaper! Should you buy that same-old familiar brand or is it smarter to choose one of those other labels?
What to do? Those well-known brands have done a great job of building longterm relationships with consumers and promoting widespread faith in their brand. But does that mean they're worth more money? Not necessarily. There is a long list of reasons why a name-brand product costs more than a generic one, reasons that have nothing to do with quality.
1. Because Brands Require Big Advertising and Marketing Budgets
A major reason why you don't recognize that generic brand is because you haven't seen it advertised. You just don't see ads for generic products. Name-brand products get "famous," let's say, by making themselves visible on television, billboards, in print, and on website side bars, and that costs a lot of money.
How much does it cost for a product to get famous?
- On a local station, for a 30-second commercial, advertisers might expect to pay at least $5 per 1,000 viewers.
- Nationally, 30-second ad might cost $120,000.
- A 30-second Super Bowl ad goes for at least $5.25 million.
How much do companies spend on marketing every year? According to Ben Hallman at Vital.com, big companies set aside at least 20% of their revenue for marketing, and "some even spent close to 50%!"
So the more well-known a name brand is, the more money its company likely spent for advertising and marketing, and the only way to offset that additional cost is to charge more for the product. In other words, with name-brand products you, the consumer, end up paying richly for those ads.
2. Because It Takes a Lot of Investment in Research and Development (R & D) to Invent Something New
Starting from scratch always takes more time, effort, and investment—the same goes for product development. In order to enter the market, a new product might go through years of testing and refinement. And if a product is potentially dangerous (like a new drug for example), it will require even more lengthy clinical trials and intense R & D to mitigate risk and control damage.
Plus, trying to bring a brand new product to market is financially risky, because no matter how much is spent, a company has no way to ensure success. There's never a guarantee that intense R & D will pay off in the end. Sometimes, a product goes through years of expensive development only to be scrapped, snubbed, or sidelined.
But if they start with an already-popular and successful product, a company can save all that investment and pass that savings on to the consumer.
It's much easier to just copy an already-successful product and sell it for less. After all, that recipe for success is printed right there on the big-brand label. These days, generic products are even often produced in the exact same facilities that made the name-brand version, and some companies even create generic versions of their own branded products in order to corner the market.
3. Because of Vertical Monopolies
A third reason why a generic products costs less is because there are fewer "fingers in the pie," so to speak. In microeconomics, vertical integration is when a company owns its own supply chain, distribution channel, or every facet of the product's manufacturing. That means that fewer separate parties need to see profits for the product to succeed . . . and that one company can profit at every level of production. In other words, vertical monopolies do well because they involve fewer outside companies or contributors that need to profit from it. So while there may be many mouths to feed with a name-brand pie, a generic pie means bigger slices for fewer mouths. This is how companies like Amazon centralize and concentrate their profits.
For example: You will find generic or house-brand aspirin right there on the shelf next to Bayer aspirin. In order for Bayer to succeed, at least four separate entities (the German brand-owning company itself, the manufacturer in New Jersey, the distributors, and the retailers) all need to see profits. But for most house brands, distribution is already in place, R & D and advertising are unnecessary, and so only the manufacturer and retailer need to profit.
But aren't monopolies illegal?
This type of vertical monopoly is perfectly legal because it doesn't prevent competition. After all, you find generic or house-brand aspirin on the shelf right next to name-brand versions.
4. Because of Competition
More competition means lower prices, and a name brand will always suffer most from competition. By competition, we mean both competition with other products on the shelf and between rival manufacturers. A brand-name drug is often produced by one manufacturer, but generics might be made by several manufacturers, which means more competition and lower costs.
The more competition, the lower the price:
- The FDA found that if a name-brand product has one generic competitor, the generic might be priced 39% lower, but
- with two competitors, the price might be 54% lower than the name brand
- with four competitors, the generic price is 79% lower than name brand
- and with six competitors or more, using both AMP and invoice prices, generic prices show reductions of more than 95%.
So...Why Are Generic Products Cheaper?
The short answer: Generic products are cheaper because they are made more cheaply. This doesn't mean that they are "cheaper" in the sense that they are lower-quality (although this is sometimes the case), but that they simply cost less to make and this savings is passed on to you.
How Much Cheaper Is a Generic Product?
Generic foods are about 30% cheaper than name brands, and generic medications can cost up to 95% less than the same brand-name version. According to the IMS Health Institute, generics saved the US healthcare system $1.67 trillion dollars from 2007 to 2016, According to one study, generic drugs saved the U.S. healthcare system $1.67 trillion from 2007 to 2016.
And Are Name-Brand Products Better Than Generic?
Oftentimes, you'll find that a generic product has the exact same ingredients as a name brand. Generally, generic brands will be "effectively" the same as the name-brand original, and the only significant difference is cost. But every once in awhile you will find a generic product that simply pales in comparison to the name-brand version (for example, it skimps on key ingredients, or uses significantly inferior materials).