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John Wanamaker, an early 20th century marketing guru once famously quipped that half of all advertising is wasted but nobody knows which half.
I would indeed be the last person to equate all branding with advertising but the quote does resonate with a question that many CFOs have been asking for years on end: Do brands deliver business results? In fact, one finance head in the middle of a particularly acrimonious debate on marketing budgets threw up an interesting googly 'what would really happen if I decided not to advertise this year'. There was a telling silence for almost half a minute. Of course the immediate pushbacks were risking trade support, losing share of voice to competition and suspicions of imminent closure.
But I can't recall a single person in that room actually making a case for retaining customer engagement. How can we afford to ignore the cause and effect relationship between branding expenses and performance metrics? And why don't we measure this relationship? Talk to companies and this is usually brushed off, citing the tenuous links between brand expenditure and sales performance. By that token do we really know which part of the capital employed in any business really delivered the ROCE?
Back in 2009, a friend, who chairs one of the top five communications groups today, asked if we could design a brand award in memory of his famous father who founded the firm. (I have lost count of the number of brand awards this country gives out. Are they really taken seriously?) We agreed, provided the award recognised brands that could demonstrate a performance contribution. And so was born the Hiperband(TM), or the High Performance Brand award. The underlying logic was that the business under the chosen brand should have been able to sustain growth over the category, as well as drive a return in excess of the cost of capital. In tandem, this would provide fundamental evidence of the role of the brand in generating economic earnings. We linked brand metrics to performance measures, thereby making brands accountable for shareholder returns.
Let us take a couple of examples to test this logic.
BMW is able to generate demand at a higher rate than the competition. This is because it enjoys a higher level of purchase consideration, existing customers would like to upgrade to another BMW and most Beamer customers will strongly recommend the brand to other prospective car buyers. It is fairly clear that the business will enjoy a much higher level of enquiry than the category as a whole, placing it over tail wind. Given this strong equity, it will generate higher levels of conversion, higher average price recoveries and low credit periods too.
The upshot of all this is threefold: strong momentum, healthy margins and steady cash flows. It takes no financial genius to link these to enviable levels of economic profit and shareholder value. Could you say the same for many of their competitors? The difference is primarily in the ability of the BMW brand asset to influence real business metrics.
This could be applied to an Apple, an Uber (in a little while) as well as a Disney. All of these businesses tend to have higher predictability as well as cash streams. Both derived from the intrinsic strength of the brand assets. Back home in India HUL even today has a negative working capital utilisation. This is because the company provides almost zero credit to the trade while enjoying decent levels of credit from their suppliers. Both are the direct result of high brand equity.
None of this is possible of course without a fundamental recognition of brands as business assets. The world's best companies including B2B giants like GE assign CXO level responsibility to their brand assets. It is only then that brands get the financial recognition, performance accountability and the governance that puts them in the same class as any other capital item.
@rjt_equitor
(The author is the president and chief knowledge officer of EQUITOR Value Advisory Pvt Ltd, erstwhile Indian partner for Interbrand. An invited faculty to INSEAD in Paris, he has also lectured at leading institutions in India)
