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4 Things to Know About Brand Value

2011 July 13
by Greg
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There’s probably nothing that’s more likely to make ordinarily sober faced businesspeople wax poetic than the word “brand.”   Even finance guys have been known to break out in sonnet.

That’s because brands are conceptual.  They allow us to dream, to think of things other than logistics and pricing and firing people.  Reflecting on brands help us escape from the drudgery of work.

However, it’s important to remember that brands are quantifiable financial assets, just like buildings, machinery and oil wells.  Moreover, they are incredibly valuable assets, often accounting for more than half the value of a business, so we need to take them very seriously.  Here’s four things you should know about brand value and how to increase it.

1. A Brand is a Promise

Usually when people think about brands they think about logos and marketing slogans, but a brand is much more than that.  As I wrote in an earlier post, brand value is the value of promises made and kept.

When you drink a Coke, go to McDonalds or use an Apple product anywhere in the world, you have certain expectations.  You value these companies as a consumer to the extent in which you believe in and value those implicit promises.  Advertising might introduce promises to us or remind us of them later, but brands become valuable by delivering on them.

Moreover, brands extend far beyond consumers.  Firms makes promises to investors that they will make wise decisions and pay back loans.  They make promises to employees and suppliers that they will deal with them fairly; to communities that they will be good citizens and so on.

Steve jobs recently showed up a a city hall council meeting himself specifically to make these kinds of promises and, as companies from Nike to Microsoft have learned, when they break these covenants there is a real price to pay.   Promises broken, even implicit ones, diminish enterprise value, sometimes drastically.

2. Brands Have Tangible Value

There is a reason that companies spend billions of dollars every year to make promises and go to such great lengths to keep them:  Money.  Cold hard cash.  Moolah and lots of it!

Interbrand regularly tracks brand value using a complicated proprietary methodology. However, a much easier way to evaluate the how much a company’s reputation is worth is to look at the relationship of market capitalization to the book value of shareholders equity, which represents the liquidation value of the company’s assets.

I put together a list of companies below with competitors sharing the same color.

Even at a quick glance will tell you that a brand is an enormously valuable thing ($279 billion for Apple) and successful brands can make up to 80% of the total market value of the company.  Further, brands are long term propositions, with some of the most valuable brands over a century old.

You can also see that the value of a brand is independent of the industry it competes in. Apple’s brand is worth a lot, while RIM’s is worth very little.  A retail brand like Wal-Mart can be much more valuable than sexy media brands like the ones that Time Warner owns, but not as much as Viacom’s brands.

Company performance, not product category, is determinant.

3. Tracking Brands

Assessing brand value is only part of the story.  To use a sports analogy, it tells you the score, but not whether you should pass on third down (or, for my European friends, whether you should take that shot from midfield).

There is no shortage of metrics with which to track brands.  However, a good place to start is with awareness, sales and advocacy.

Awareness: Brand awareness is fairly easy to measure.  Although the link to brand performance is tenuous, most would agree that it’s a good first step.  Moreover, we understand awareness and how to increase it reasonably well.  When in doubt, you can always spend more money (as simplistic as that may sound, it does work).

Market Share: Like awareness, measuring market share is simple to evaluate, but has its problems.  There are a number of ways that we can increase market share withno improvement in brand health.

Discounting, “flooding the channel” and artificially segmenting the market to make yourself look better are all good examples of practices that can improve market share while diminishing brand equity.

Advocacy: What happens after a purchase is just as important (and some would argue more important) than what happens before.  The most popular measure, net promoter, is useful, but even its proprietors stress that it, in and of itself, doesn’t guarantee success.

Using all three metrics, we can evaluate conversions.  Here’s a simple hypothetical example postulating two brands with equal market share:

 

Less people are familiar with Brand A, but it coverts the awareness it does have into sales and advocacy very efficiently.  Simply raising awareness will lift sales.  Brand B, on the other hand, is better known, but doesn’t perform as well. They need to concentrate on lifting performance downstream.  More awareness is unlikely to help them.

It’s tempting to attribute the difference to product performance.  However, that is often not the case.  Research shows that brand promotion itself can affect how consumers experience products.  Some brands have a mystique, others target particular fertile segments, still others attract a cult following.

4. Emotions Build Brands

While brands are financial entities, they are built through emotions.  As I wrote in an earlier post, emotions are like a little yellow highlighter in our brains. They’re powerful because they bypass the rational center in our forebrains and go straight to embedding themselves in our brain’s synaptic pathways.

From an evolutionary perspective, emotions helped us remember what was important. When we saw a rustle in the bushes and our best friend got eaten by a lion, it was important to be able to remember the incident without repetition (a luxury man eating lions are unlikely to grant).

That’s why as much as we would like to think otherwise, decision making tends to be driven by emotions rather than rationality.  Great brands are built through emotional associations.

A Businesslike Approach to Brands

In the political realm, as Joseph Nye noted, soft power is the power to get what you want without coercion.  Brands play the same role in businesses.  They lower acquisition costs, increase consumer loyalty and employee retention and allow for greater access to capital.

Unfortunately, much like soft power, the value of brands is often neglected in corporate culture.  There’s a tendency to want to “leverage” and “extend” rather than to reinforce, protect and grow them.  Other times, they are simply seen as something for marketers to play around with while others do the “real work.”

That view dangerously ignores the enormous value that brands have.  Certainly, one would not take the same attitude towards a factory or a piece of expensive machinery; and a compay’s reputation and image in the marketplace are often far more determinant than capital assets of financial performance.

Brands, just like any other asset, need to be managed well to perform.

- Greg

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