Everyone knows what a brand is, and few consumers do not have a few favorite brands for which they will pay a premium price or exert extraordinary effort to obtain. Consumers routinely talk about “loving” a brand or feeling incomplete without a specific brand. Such comments reflect more than just familiarity or loyalty; they suggest a deep emotional attachment. Despite such common experiences, the process of creating a strong brand remains mysterious and the value of a strong brand for a business is poorly understood by many managers. One reason for this state of affairs resides in contemporary accounting practices.
Accounting standards in the United States prescribe that brands only appear on the balance sheet as the result of a purchase transaction. As a result, most brands, such as Coca-Cola or Procter and Gamble’s Crest do not appear anywhere on the balance sheet. Brands that do appear on the balance sheet as the result of a purchase transaction can never increase in value on the balance sheet; their value can only change through a reduction in value or write-down. This is how accounting treats brands even if revenue and margins, and future discounted cash flows increase dramatically. Thus, the value of a brand created by a firm is not reflected on the balance sheet, and a brand that is acquired and placed on the balance sheet can only go down in value. Given this state of affairs, it is perhaps not surprising that brands and branding are poorly understood, even by experienced managers. This could be just a case of out-of-sight, out-of-mind, except the costs of brand building and maintenance are always highly visible and easy targets for cuts. It also does not help that much of the return on investment in brands occurs in the future, rather than immediately (though there are also immediate measurable outcomes as well).
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Of course, many savvy investors do understand the value of brands. The consulting firm, Brand Finance, has tracked the financial value of thousands of brands over time. In one historical analysis Brand Finance found that companies with the strongest brands generated twice the average return of all S&P 500 firms. Similarly, the marketing research firm, Kantar, tracks the value of the top 100 brands through their BrandZ™ methodology and has consistently found that stronger brands out-perform the S&P 500. The Marketing Accountability Standards Board has directly addressed the financial value of brands and has developed best practices for both reporting the financial return on brands and for brand management.
MASB observes that there are five factors that contribute to the measurable financial value of a brand: volume, margin, mix, cost, and optionality. These are not just indicators of value; the represent tools for the management of a brand’s financial performance.
Brand preference can translate into greater sales volume and more revenue as consumer preferences are translated into more purchases and greater market share. However, strong preference also often means that a brand can command a price premium, require less price promotion to incentivize purchase, and can be more resistant to competitors’ price discounts. Such pricing effects also increase revenue. The relationship between volume and price also gives the firm the flexibility to trade off higher volumes for greater margins and generate higher sales volume and market share by reducing margins. Such flexibility can be an especially useful management tool in highly competitive markets and in cases of economic downturns.
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Mix is also a useful management tool and refers to the ability to serve customers with different tastes and different preferred price points. A portfolio of brands provides the means to migrate consumers from one product to another within the portfolio. Thus, younger, price-sensitive consumers may be moved to higher quality and higher margin products as they become more affluent. Similarly, a lower-priced product provides a place for consumers to trade down to in the face of economic downturns or just a change in preference for a lower-priced, more functional product.
While branding is often associated with higher costs, e.g., more advertising, more expensive product or service, and greater distribution support, among others, effective branding can influence a variety of costs, including may non-marketing expenditures. A strong brand may provide a platform for R&D efforts and product improvements that are less expensive than creation of a new-to-the-world product. Reminder advertising and distribution support is less expensive than advertising and obtaining distribution for a new-to-the-world product. Strong brands can have a positive effect on lenders and investors, which can reduce the firm’s cost of capital. Pride in a brand can even translate into more effective and efficient employee recruitment and retention and reduce the associated costs of recruiting.
Finally, a brand can create options for the firm to exploit. Such “optionality” refers to opportunities to leverage the brand for new opportunities through brand or line extensions. Such options can be especially important drivers of revenue growth in some businesses. For example, Disney routinely leverages its film properties through merchandising deals, new rides at its amusement parks, and tie-ins with its hotel and cruise offerings. Similarly, Apple has created a highly integrated eco-system that ties hardware, software, content (such as music), and even retailing together. Such options, even when not yet realized, have real value but are often overlooked in discussions of brand management.
Given such power to influence the financial health of the firm, it is surprising that most discussions of brand management primarily revolve around marketing communication. Communication is important, of course, but branding is more than slick advertising. It is a way to do business, and a very profitable way to do business if done well. Marketers who focus on the creation and maintenance of brands would enhance their contributions and credibility by communicating to CEO’s and CFO’s how branding contributes to financial performance, increases financial leverage, and provides tools for financial management.
Contributed to Branding Strategy Insider by Dr. David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Growth and Brand Education
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