The concept of brand equity, which began to gain acceptance over two and a half decades ago, dramatically changed marketing. Marketing executives moved into the executive suite, dealt with strategy as well as tactics, and shifted their goals to include building brand assets as well as stimulating sales.
These changes were based on the premise that brands were assets. There was and is pressure from CEOs, CFOs and others to demonstrate that, in fact, brands do have strategic asset value.
How can that challenge be addressed? There are several perspectives that can help.
Estimate Brand Value
Starts by estimating the value of the product-market business units driven by the brand. Business from Ford Focus sales in the United States, for example, would be evaluated by discounting its future expected earnings flow. The value of tangible assets (using either book or market value) is subtracted. The balance is due to intangible assets like manufacturing skills, people, R&D capability and brand.
A knowledgeable team then subjectively allocates these intangible assets to brand value by taking into account the business model and any information about the brand in terms of its relative awareness, associations and customer loyalty. The value of the brand is then aggregated over countries to determine a value for Ford Focus worldwide and then, finally, aggregated over the other Ford products to get an overall value of the Ford brand. This value can be cross-checked with the market cap of Ford stock and percentage of Ford company sales driven by the Ford brand.
Interbrand’s list of the Best Global Brands of 2013 implies that the percentage value of a business attributed to a brand varies from 10 to 25 percent for B2B or industrialized brands like GE, Accenture, Caterpillar, Hyundai and Chevrolet, to 40 to 50 percent for brands such as Google, Nike and Disney, to over 60 percent for brands like Jack Daniel’s, Coca-Cola and Burberry. Even 10 percent of the value of a business will usually represent an asset worth building and protecting. And when it’s higher, the need to protect the brand-building budget becomes more compelling.
Impact on Stock Return
On average, investments in brand equity increase stock return, which is the ultimate measure of a long-term return on assets. The evidence from a series of studies I conducted with Professor Robert Jacobson of the University of Washington supports this. We used time series data that included information on accounting-based return on investment (ROI) and models that sorted out the direction of causation.
The consistent finding was that the impact of increasing brand equity on stock return was nearly as great as that of an ROI change, about 70 percent as much. In contrast, advertising, also tested, had no impact on stock return except that which was captured by brand equity.
Use a Conceptual Model of Business Strategy
The challenge facing those who justify building brand asset investment is similar to that facing those who invest in any intangible such as people or information technology. These things add value that is difficult to quantify, and their rationale for investment must rest on a conceptual model of the business that affirms they are key success factors underlying the business strategy.
One conceptual basis for brand investment is based on a contrast with its strategic alternative, price competition. When competition is driven by price rather than brands, brands start resembling commodities, and firms begin to treat them as such. Profits erode. It does not take a strategic visionary to see that any slide toward commodity status should be resisted.
Consider the price premium paid for Morton’s Salt, for example. Few products are more of a commodity than salt, and management expert Tom Peters said it well: “In an increasingly crowded marketplace, fools will compete on price. Winners will find a way to create lasting value in the customer’s mind.”
Look at case studies of brands that have created enormous value. Consider the power of Apple’s personality and innovation reputation, BMW’s self-expressive benefits connected to the “ultimate driving machine,” and the ability of the Whole Foods Market brand to define an entire subcategory. Look also to the resilience of brands such as AT&T and Harley-Davidson in the face of product or service issues.
Also consider the damage caused by destructive brand behavior. Schlitz beer, once a strong number two brand to Budweiser, virtually disappeared when an effort to cut costs in production resulted in a product that passed taste tests by turning cloudy and lost carbonation after sitting on a shelf. After losing a billion dollars of brand equity, Schlitz returned to its old production method and ran blind taste tests during the Super Bowl to prove the quality was back. But by then, customers had lost confidence in the brand and the thought of getting “gusto” by drinking Schlitz became a joke.
Not everyone sees brands as assets. By securing solid evidence that brands have value you will provide a foundation for this fundamental premise that has guided marketing for over two decades.
The blog was originally postedd on David Aaker’s blog- Prophet