Investing in building a brand is only done by rational people when they can reasonably expect a return on that investment in the future.
Even with the benefit of hindsight, putting a value on a brand is an exercise in both judgement and maths. Most disregard the maths and invest because the marketing textbook says it is a good idea.
The outcome of having a brand with market power is increased cashflow. Luckily, cashflow is measurable absolutely in the past, and possible within boundaries of probability in the immediate future. The challenge is setting those boundaries of probability.
The purpose of investing in a brand building program is very simply to build incremental future cash flow. To that end, there are only three considerations.
Mental availability.
A brand provides ‘mental availability’ when a potential prospect is in the market. This is a different metric to the more common ‘awareness’ metric, as it implies that when a potential customer starts the process of considering alternatives to addressing a challenge they face, your brand is front and centre. Awareness lacks the second component. Coca Cola has huge awareness, but that does not do you much good when you come into the market for a new car.
Differentiation.
A brand articulates in a prospects mind why they should use you rather than a competitor to address their problem. Differentiation is only useful when it is wrapped around something competitors cannot or choose not to do. To continue the car analogy. For the last few years, a few new car buyers wanted to be seen as a sensible, ecologically aware and able to afford an expensive car that projects a specific image felt an electric car was the best option. Tesla was the only viable choice. That has rapidly changed as competitors finally caught up the technology, are producing objectively better cars at a cheaper price, at a time when the Tesla brand has been tarnished.
Greater value.
The third is the promise to deliver value to the customer greater than they would find elsewhere. Value is not the cost to the customer, although it is a key component of the equation.
Value = Utility – Cost.
As you increase utility, the impact of cost on the calculus of value lessens. Conversely, utility is a combination of quantitative and qualitative assessments every buyer will make, usually without great consideration. In the case of Tesla, the utility of owning one of their cars has been reduced substantially, so the value of the brand has been significantly reduced.
The key question in attaching a value to a brand is therefore the ‘Utility’ it delivers that is convertible into future cash flow.
In the literature, and established practises of those who value brands for a living, there are many ways to do the calculation.
Following are a few of the more obvious.
- Brand attributable cash flow. What percentage of gross margin can be attributed to the brand. Attribution is one of the ‘stickiest’ problems in marketing, so be very careful to separate reality from what you would like to believe. User research is the only way to be as sure as you can be.
- Royalty premium. Brand licencing is a well-worn track. What would you be prepared to pay to have that aspirational brand on your product?
- Price premium, and elasticity. What premium to the market average does your brand attract, and how ‘price elastic’ is that premium? Years ago when Meadow Lea was king of the margarine market, it held a dominating market share at premium prices. This meant that the benchmark shelf price was roughly the same as the alternative brands, usually just a cent or two more, but the promotional discounts demanded by retailers were less, we were able to attract significant added shelf space as there was ‘pantry stocking’ happening when of special, we won the preferred time slots for promotion, we did not need to promote quite so often, and the volume differences between standard sales at standard shelf price and on promotion sales were not as dramatic as competitors. It is not always just the headline price that counts.
- Weighted distribution. What percentage of distribution points that could stock your brand do so. This is mostly a measure for B2C, and it is too often forgotten.
- Customer repeat purchase. How often does a customer purchase your brand compared to others? Repeat purchase, particularly at non promotion prices is the holy grail of FMCG marketing. Price discounting in FMCG has just about destroyed all but the very best brands, so this measure needs to be able to filter out price as the motivation. For example, a house-brand at a standard discounted price to the market may seem to have a high repeat purchase rate, but price can be the determining driver for some consumers. Besides, an expectation of a low price is a lousy brand attribute, and does not contribute meaningfully to brand value.
- Net promoter score. This has become a widely used measure, and sadly, widely misused. Every time I pay an insurance premium, I get an emailed NPS survey asking about my experience. Clearly, the insurance company marketing people are deluded about the drivers of the payment of another insurance premium.
- Mental availability. This is the ‘kingmaker’ measure in many markets. I added it here as it is a measure that is calculatable with market research.
The word ‘Brand’ can mean many different things to a casual observer. To those who understand the word from a commercial perspective it is simply a device that is an indicator of the probability of future cash flow.
