Type 2 Consulting’s conviction about the economic significance of branding is based on extensive research into the relationship between brand equity and business value, and into the nature of intangible value more broadly.
Our research has shown that business value can be expressed as a function of two main variables:
- The quality of your business model
- The quality of your relationships
Our goal is to understand why, in any given industry, the valuation of two equally profitable companies may be significantly different. Finance theory says that these differences must be due to the growth and risk profile of the two firms. Our research demonstrates that brand equity acts as a powerful proxy for differences in growth and risk.
This result seems intuitively reasonable – companies with strong customer and employee relationships (high brand equity) have greater permission to bring new products and services to market (growth), and enjoy more stable earnings (lower risk). However, the most important insight from our research is that brand equity is only a powerful driver of business value for companies with a strong underlying business model.
We looked at a sample of 140 companies over a 10 year period to see how their valuation multiples as they move from below-average profitability and brand strength to above-average performance on either or both dimensions.
What we found was that, in the absence of a strong business model, improvements in brand equity result in relatively small changes in the overall value of a business (the valuation multiple is typically only 20% higher – they move from the 1.0 quadrant to the 1.2 quadrant).
The most powerful influence on the value of a business is, of course, its profitability. For the companies in our sample, moving from below average to above average profitability resultsed in a near doubling of business value (they move from the 1.0 to the 1.9 quadrant).
What is less often appreciated is the scale of the value uplift that brand equity is able to provide for companies with strong underlying business models (those already in the 1.9 quadrant). For such companies, moving from below-average to above-average brand equity results in a 50% increase in business value (they move from the 1.9 to the 2.9 quadrant).
Type 2 Consulting specializes in working with companies with strong business models but below average brand equity (those in the 1.9 quadrant) to help them develop the brand strategies to take advantage of this 50% potential uplift in value.