Competitive Advantage  133
Sometimes the perception of quality lasts significantly longer than any ac-
tual difference in quality. This has been the case with Honda and Toyota, rela-
tive to many automakers (at least until Toyota had to make product recalls in 
2009). While American and Japanese cars have been comparable in terms of 
quantifiable quality measures, such as the J.D. Power survey, Japanese compa-
nies have enjoyed a price premium for their products. Even when American 
and Japanese sticker prices on comparable vehicles were the same, American 
manufacturers were often forced to sell at a $2,000 to $3,000 discount, whereas 
Japanese cars sold for nearer the asking price.
Brand  Price premiums based on brand are sometimes hard to distinguish 
from price premiums based on quality, and the two are highly correlated (as 
in the example of BMW). While the quality of a product may matter more 
than its established branding, sometimes the brand itself is what matters 
more—especially when the brand has lasted a very long time, as in the cases 
of Heineken, Coca-Cola, Perrier, and Mercedes-Benz.
Packaged food, beverages, and durable consumer goods are good examples 
of sectors where brands earn price premiums for some but not all products. 
In some categories, such as bottled water and breakfast cereals, customers 
are loyal to brands like Perrier and Cheerios despite the availability of high-
quality branded and private-label alternatives. In other categories, including 
meat, branding has not been successful. Because of their strong brands, bev-
erage and cereal companies can earn returns on capital of around 30 percent, 
while meat processors earn returns of around 15 percent.
Customer Lock-In  When replacing one company’s product or service with 
another’s is relatively costly (relative to the price of the product) for custom-
ers, the incumbent company can charge a price premium—if not for the ini-
tial sale, then at least for additional units or for subsequent generations and 
iterations of the original product. Gillette’s shaving products offer a classic 
example: the manufacturer realizes its margin not on the starter pack but on 
replacement razor blades. In consumer electronics, wireless-audio product 
manufacturers such as Sonos also create a form of lock-in: once customers 
have one or more loudspeakers installed, they are not likely to switch to other 
brands when replacing or adding units, as these would lack compatibility 
with their existing Sonos units.
High switching costs, relative to the price of the product or service, create 
the strongest customer lock-in. Medical devices, such as artificial joints, can 
lock in the doctors who purchase them, because doctors need time to train 
and become proficient in the procedures for using and/or implanting those 
devices. Once doctors are up to speed on a device, they won’t switch to a 
competing product unless there is a compelling reason to invest the necessary 
effort. Similarly, bankers and traders who have invested considerable time in