If you work in finance or marketing, you have probably gotten tangled at some point in a debate about how much to spend on branding. A firm’s brand is likely its most valuable single asset. But for many managers this “value” is an abstract notion, often ignored when budget decisions are being made for branding efforts.
These managers might be surprised to learn that many studies have established the significant value of brands in monetary terms, for both B2C and B2B brands. Jim Gregory, founder and CEO of CoreBrand, tracks the brands of more than a thousand companies. He estimates that corporate brands account for an average of 11.6 percent of the market capitalization for companies in the aerospace industry, 4.5 percent in chemicals, 8.3 percent in computers, 10.3 percent in foods, 16.1 percent in home appliances, 10.7 percent in hotels and entertainment and 14.4 percent in motor vehicles. Estimated company brand equity values include $69.0 billion for General Electric, $53.3 billion for Microsoft, $42.1 billion for Toyota and $36.6 billion for Johnson & Johnson.
These are huge amounts of money. If you think about it, that brands are highly valuable assets makes perfect financial sense. Brands affect demand, which affects cash flow, which affects shareholder value. Unfortunately, this cause-and-effect relationship is not always understood, because it involves ideas from several disciplines — marketing, statistics, economics, accounting and finance. Because of this lack of understanding, managers often don’t invest sufficiently in branding efforts. In the end, the firm’s shareholders pay the price.
Let’s take a closer look at how brands affect shareholder value. The starting point is a marketing concept known as perceived value, or the maximum a customer will pay for your product or service — the ceiling on your price.
Perceived value is central to marketing and marketing strategy. I don’t define marketing in terms of the well-known four Ps — product, price, place and promotion — which these days is a confining and misleading characterization. I define marketing as “managing perceived value.” Everything that marketers do — targeting, positioning, advertising, pricing, selling, customer service and public relations — affects perceived value.
Perceived value can be measured in concrete, monetary terms. There are statistical techniques, collectively known as constrained choice models, that allow you to estimate the perceived value of any product or service. Companies such as DuPont, Gillette and Marriott employ these techniques to make marketing decisions.
From statistical analyses, we know that brands represent an appreciable part of perceived value. The percentage varies by product type — from less than 10 percent for semiconductors to close to 100 percent for fragrances, which explains why brand equity as a percentage of market capitalization varies by industry and company (and also why the marketing approaches of producers of semiconductors and fragrances are rather different).
Companies that sell products or services that have a high perceived value can charge a higher price or sell more units or both. A strong brand leads to higher revenue, which in turn typically leads to higher contribution, a significant component of cash flow. Shareholder value depends on the anticipated cash flows from a company. A company that can be expected to manage its brands well should be rewarded with higher stock prices.
All of these connections can be measured. However, according to studies by the Conference Board and the American Productivity and Quality Center, relatively few companies do such research. The consequence is often inattention to or underinvestment in branding efforts, both in product improvements and in communications with customers.
If the products or services under a brand’s umbrella are not improved, and if those improvements are not communicated to the customers, the brand may die. I call this process “hollowing out” a brand. It sometimes occurs when a senior manager wishes to improve short-term financial numbers by cutting investment in innovation and in customer communications.
The scary aspect of hollowing out a brand is that it can work in the short term. Brands benefit from inertia; customers will show loyalty to a strong brand even when it is being hollowed out. However, at some point those customers will realize that the brands they once knew no longer exist.
Brands are assets — extremely valuable assets — that need to be nurtured and developed like any other asset. Managers who recognize this will weigh an expenditure on branding with the same deliberation and long-term view that they apply to any investment decision. After all, the numbers are available to ensure that these brand investment decisions are sound.
Don Sexton is professor of marketing at Columbia Business School.