A brand extension basically is a spin-off product with the same brand as the parent product. These new products are usually closely-related to the original. A good example of a brand extension is Reese's® Peanut Butter. A company that was already known for their peanut butter based candy began marketing a line of standard, non-candy, peanut butter. Companies use brand extensions to put the brand's name in more locations, increasing the number of times a consumer will see it during a shopping trip.
In order for a brand extension to be successful, the original brand generally needs instant name recognition and a good reputation. It also helps if the spin-off product has a similar focus to the the parent product, so consumers will associate the parent brand's good reputation with the new product. In the cases of Reese's®, the company makes a wide range of peanut butter candy that available worldwide. As a brand name it is nearly synonymous with its product. As a result, the company was able to make other products, such as peanut butter, baking chips, and peanut butter cookies. All of these products are similar to the original peanut butter candy, but different enough to have other competitors and locations in a grocery store.
A brand extension can be risky for the parent company. They often need to invest in research and equipment to make the new product, then spend money to market it. One failed extension can lead to millions of lost dollars and potentially damage a company's reputation. In order to see if the their customer base is ready to try new products, many companies opt for a product extension as a first step. These are products that occupy the same location as the original product and appeal to the same customers. For example, Mountain Dew™ makes a brand soda, then offers more than ten varieties of Mountain Dew™ based drinks. Each of these sodas are appealing to the same market as a whole, but each has a slightly different niche audience.
Product extensions are often seen as a first step toward a brand extension. A company expands its reach in small increments through new products in its own sphere of influence. As it gains market share within its original area, it can use the steady income and increased consumer base of its flagship product to move into other areas and create brand extensions.