What is the Halo Effect?

The halo effect is a phenomenon whereby consumers perceive the products or services from a certain company to be better than they really are.

How Does the Halo Effect Work?

Let's say Company XYZ makes the 'Xphone.' The Xphone has many functions and a nice design. Priced higher than the competition, it quickly becomes a status symbol, especially among hipsters and others who are image-conscious.

This group of consumers celebrates the Xphone publicly and even camp out in front of Company XYZ stores to get the latest version, despite the fact that competing devices are less expensive and have the same features. The Xphone is the victim of the halo effect.

Why Does the Halo Effect Matter?

The halo effect can mean huge sales and steadier cash flow for companies. It creates brand equity. However, because it is often an emotional rather than logical affinity, the halo effect is very fickle and can disappear quickly as fads come and go.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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