Natalie Mizik of the Kenan-Flagler Business School at UNC is putting together a conference next April that takes a multi-disciplinary approach to branding.  Hallelujah!  This is exactly the kind of broad thinking that marketing needs.

Her conference will include academics and practitioners that deal with brands from the accounting, business, legal, marketing and business perspectives.  I am very optimistic about the prospects for some innovative thinking coming out of an event that brings together so many different viewpoints on branding.  I expect that the event will be something of a “reality check” for marketers to understand how their discipline is viewed from outside – and will encourage them to develop more effective ways to communicate the strategic contribution of brands.  The current obsession with ROI and brand valuation does not seem to be addressing the root cause of the problem – namely the lack of comprehension about the business benefits that marketing delivers.

I am particularly interested in learning about the accounting profession’s latest thinking about brands and intangible assets more broadly.  On the one hand, there is an acceptance that the current approach to “transaction based” balance sheet accounting is not providing the desired insight into the true resource base of a company; but on the other hand, the ongoing financial crisis is not an environment in which anyone is minded to make bold moves.  The whole “mark to market” idea was so good in theory, but proved a bust in practice because it permitted such a high level of subjectivity in valuation.

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One of the concepts that Chris Kenton and I discussed during our presentation at today’s B2B Social Media conference was the tendency to over-estimate the short-term impact of a new technology, and to under-estimate its long-term impact (a phenomenon formally known as “macro myopia”).

The hypothesis that we put forward was that the capacity for peer-to-peer communication had dislodged companies from the center of their customers’ universes.  Now that web 2.0 has enabled the creation of communities centered on common interests, companies have been relegated to the status of planets revolving around the true center of the customer’s universe – their specific topic of interest.
Our argument was that the strategic significance of social media lay in its ability to inform companies’ understanding of this new universe.  Just as companies were slow to understand the longer term implications of TQM (“what do you do when everyone’s products are of high quality?”), so we believe that companies may be slow to understand the implications of social media (“what do you do when customers no longer think of you as being the best source of information about your own products and services?”).

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According to my web analytics provider, this blog is now attracting over 5,500 unique visitors a month.  My question to you is “are you getting the value you want from this blog?”

The remit for this Marketing Finance blog is deliberately broad – anything to do with the business impact of marketing.  Because of my background in strategy and finance, my personal bias is to focus on the question “does marketing contribute to the creation of a business asset?” as this allows me to explore the topics of brand equity, customer value, brand valuation, and intangible value more broadly.

As regular readers of this blog will know, I do not spend that much time on Marketing ROI as it is traditionally defined (in terms of return on individual – or even integrated - marketing programs).  There are many other bloggers who provide more detailed insight on this topic.

I define my target audience in two ways:

1. Those who are interested in making the strategic case for marketing
2. Those who are not interested in marketing per se, but who are fascinated by how customers perceive value

My goal is to be a source of insight to you on a number of topics that are core to your interests.  Currently, my mental list comprises the following topics:

• Brand equity
• Brand valuation
• Corporate reputation
• Customer value
• Intangible value
• Marketing accountability
• Merger branding

Are certain of these more interesting to you than others?  Are there additional topics you want me to cover?  Send me an email at j.knowles@type2consulting.com to let me know..

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I have been trying to synthesize the findings of the interview program that I have recently conducted for a major B2B client.

There is a paradox about the type of relationships that this company has with its clients – on the one hand, they are highly transactional (in fact, there may be literally millions of client transactions in a given day); but on the other, the average relationship may last for upwards of a decade or more.

I sensed a basic tension that arises – every day is a new day in the sense that millions of new transactions need to be processed and the relationship will only be as healthy as the success rate in processing these transactions accurately.  Yet, in a very real sense, every new day is the continuation of a relationship that has been in place for several years.

What is the most appropriate way to manage these relationships?  I would suggest that you need to show that you want to “earn success every day” by focusing on faultless execution of the transactional mandate, while simultaneously demonstrating that you regard the relationship as a partnership in which you are invested in each other’s long term success.  This means observing the small niceties to which we as humans are so well attuned – it means showing initiative and thoughtfulness, sharing information, making plans for future collaboration.  It involves explicit effort to signal that although the relationship consists of a vast series of daily transactions, it is not defined by them.

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I was fortunate to be invited to present today to the Strategists’ Summit of MarketShare Partners on the topic of measuring and valuing brand equity.

It would be hard to imagine a more perfect group with which to have a detailed discussion about the business impact of branding.  These folk live and breathe marketing mix modeling, channel optimization and other forms of modeling designed to enhance the effectiveness and efficiency of marketing spend.  They are therefore well versed in the challenges of constructing the business case for marketing investment in ways that are both rigorous and intuitively appealing.  We observed that the majority of the money being spent currently is relatively short-term in its focus (designed to answer questions such as “how do I optimize my spending across channels?”) because there was such opportunity for revenue acceleration and/or enhancement of the efficiency of spend.  But a straw poll of the group revealed that they were universally enthusiastic about the opportunity to apply the same rigor to the measurement of marketing asset creation.

My only regret was that the hour passed so fast.  Given half a day with these folk, I believe we could have pushed the peanut forwards in a material way.

For now, I think that there are two areas in which we can make progress independently:

1. The creation of the high-level “air cover” for the economic significance of marketing (the work I have done on intangible value measurement, and the characterization of brands as economic assets fall into this category)
2. The gradual expansion of the elements that go into a marketing mix model that would enable the model to be more insightful about the factors that are driving changes in baseline sales

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One of the major challenges for a marketing services provider is to prove to a financial audience that they can have a material impact on the performance and valuation of a business.  Or, as academics and finance folk like to say, that it is “value relevant.”

Value relevance requires demonstrating that whatever you do has a material impact on one of the three drivers of corporate value – profit, growth or risk.  Influence any one of these for the better (higher profit or growth, or lower risk), and you have the attention of the finance folk and the whole management team.

This is easy to say, and remarkably hard to do.  There are two principal challenges.  The first is conceptual – the finance/business folk typically believe that customer purchase behavior is highly rational and so the impact of marketing is marginal and tactical.  The second concerns measurement – it is challenging to isolate the exact degree to which the customer decision was influenced by a wider set of human considerations rather than a narrowly functional view (what T2 calls the “Vulcan” versus “Earthling” perspective).

Much of the energy in marketing analytics is focused on measuring transactional efficiency – not because that is necessarily where the greatest value is being created, but because that is where it is easiest to demonstrate that some degree of incremental value is being contributed by marketing.

The tragic irony of this is that it is reinforcing the finance/business belief that marketing is a short term, tactical discipline whose full impact is captured in a simple ROI formula that considers investment and return in the current period.

The bigger contribution of marketing – the development and management of profitable customer relationships – is ignored.  It may be harder to measure, but this represents the larger component of the “value relevance” of marketing and branding.

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Over the past 18 months, I have periodically reported on progress on some fascinating research that I have been conducting with Natalie Mizik and Isaac Dinner of the Graduate School of Business at Columbia into the value impact of branding on post-merger financial performance.

I am delighted to report that the results have now been published as Marketing Science Institute Working Paper 10-119 and the full paper can be accessed at:

http://www.msi.org/publications/publication.cfm?pub=1815

Our results are exciting because they suggest that corporate brand strategy may be a material factor in determining the post-merger financial performance of companies.  If this is true, then companies should regard the choice of corporate branding as a critical element of their strategy for maintaining the strength of their franchise with customers and employees, instead of treating it as a matter of corporate ego or horse trading.

Our starting observation was that one of the perennial conundrums of business strategy is the continuing popularity of mergers and acquisitions as tools of business growth despite the well documented evidence that, on average, mergers destroy value.  Researchers have failed to isolate the factors that explain why certain mergers succeed where others fail – in reviewing the various theories and empirical evidence, King, Dalton, Daily and Colvin concluded that “despite decades of research, what impacts the financial performance of firms engaging in M&A remains largely unexplained” and that “researchers simply may not be looking at the ‘right’ set of variables as predictors of post-acquisition performance” (see pages 197/198 of their 2004 paper “Meta-Analyses of Post-Acquisition Performance: Indications of Unidentified Moderators” in the Strategic Management Journal).

Our hypothesis was that corporate brand strategy was a variable that had hitherto been overlooked.  If the reason why most mergers fail to create value is not the failure to trim costs sufficiently but rather the shortfall in revenue growth (as reported in the May 2008 edition of HBR based on an analysis of 270 mergers by Rothenbuecher and Schrottke), then a critical factor in post-merger success was the maintenance of the health of the customer and employee franchise of the merger company.

Could it be that certain forms of corporate brand strategy were more effective in maintaining the strength of the external and internal franchise than others?  It seemed intuitive reasonable that a strategy of “pure acquisition” (under which one of the two merging brands simply disappears) was likely to result in greater attrition of customers and employees.  On the other hand, the additional costs of maintaining multiple brands might overwhelm the positive impact that this strategy had on customer and employee attrition.

It would be fascinating to see whether the data indicated that there was evidence of the consistent superiority of one approach over the others….

Here’s how the abstract of the published MSI paper summarizes the results:

“Most academic research on mergers has focused on the role and impact of the internal resources of the merging organizations on post-merger financial performance. In this report, Natalie Mizik, Jonathan Knowles, and Isaac Dinner take an external resource perspective and explore the value relevance of corporate branding’s role in communicating context- appropriate positioning and messaging to customers, employees, and investors. They investigate whether branding-related information is priced into merger valuations, both at announcement and over time.

Using a sample of 216 large mergers undertaken during 1997—2006, they classify merger transactions into three groupings according to the post-merger corporate branding: acquisition (the identity of one of the merging companies is discarded and it is rebranded with the other firm’s name and symbol), business-as-usual (both firms continue to operate under their own corporate names and symbols), and fusion (elements of both corporate brands are maintained in the new brand). They undertake event study and time-varying calendar-time portfolio analyses to assess potential differences in the value implications of corporate branding in mergers.

They find significant differences in the immediate market reaction to the merger announcements and significant differences in the post-merger performance across the three corporate branding types.

Firms using the more expedient and cheaper acquisition and business-as- usual branding strategies underperform firms that choose the more sophisticated and expensive fusion branding. Surprisingly, the market is better able to recognize the negative consequences of acquisition- branded mergers early on: the valuation of these firms is adjusted immediately at the time of the merger announcement, and there are no significant future-term adjustments following the merger completion. Only the business-as-usual branding mergers experience a significant post-merger negative adjustment in valuation: for them, the initial negative reaction to the merger announcement is compounded by further negative adjustment over the ensuing three years. Fusion-branded mergers do not experience negative market reaction at the time of the merger announcement, and the researchers find no systematic negative future-term adjustment in the valuation of these firms.”

Pretty cool finding, no?

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I attended the Canadian Marketing Association’s Marketing Analytics conference today.  As is usually the case with such conferences, a minority of the speakers deliver “blow your socks off” brilliant presentations, while the majority of speakers provide limited insight but a collection of helpful anecdotes, and then there is always one speaker who abuses his/her position at the podium to do an overt sales pitch for their product or services.

Those in the “blow your socks off” category included Gareth Herschel from Gartner who delivered a fabulous “state of the union” overview of the customer analytics industry, and Paul Tyndall from Royal Bank of Canada who gave a highly informative overview of the uses of text analytics.

A consistent theme of the day was how the true power of analytics lay in testing hypotheses about the optimal strategy for a company to pursue, rather than simply being used as a set of tools for optimizing whatever activities the company was already doing.  However, most of the presentations featured analytical approaches that fell into the latter category.  I came away impressed by the inventive use of technology to optimize existing media spend and to streamline the sales transaction process.  The remarks by Matt Ariker of Rogers Communications provided an eloquent explanation of why I always feel like my dealings with Rogers end up with them extracting the maximum value from me as a customer in exchange for them delivering the bare minimum value to me.

I came away from the conference admiring how analytics was being used to achieve much greater efficiency in marketing communications spending and sales funnel management.  But, at the same time, I was depressed by how marketing was being defined as “transactionalism” – the promotion of an efficient process for maximizing the transactions that could be stimulated from a particular customer set.  The focus is entirely on value extraction from customers, not value creation for customers.

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Over the past two years, we have been compiling a database of online conversations/references that fall under the broad topic of marketing finance.  By “marketing finance” I mean any conversation that addresses the topic of how branding and/or marketing enhances the performance of business.

Few of the conversations actually use the term “marketing finance” – most occur under the banner of “brand value” or “brand equity” or “marketing ROI” or “marketing measurement” or a host of other similar terms.  And therein lies the challenge – it is impossible to capture the full range of conversations using a single keyword search.

So we have tried multiple keywords and a number of different web crawling techniques to identify the relevant conversations.  We are now sitting on a database of 20,000 incidents gathered since October 2008.

Now the challenge is to identify the signals amongst what I suspect is a very noisy dataset.  My goals are to identify:

1. Some basic volumetrics – what is the volume of incidents referencing each of the key search terms?
2. Opinion leaders – who is consistently addressing the topic of the business impact of branding and/or marketing?
3. Discussion venues – where the best conversations on this topic are taking place?
4. Major themes – what are the major topic areas that generate the greatest interest and discussion?

 I have enlisted the support of two trusted partners – SocialRep and Custometrics – to assist in this process of sifting through this mass of data to provide answers to the four questions above.

Watch this space for news!

Tagged as: Business Value, Customer Value, Marketing Finance, Measure Value

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It has been a long time coming – but we are now ready to submit the article on the value relevance of corporate branding strategy during mergers. 

In a nutshell, there are two significant findings:

• first, our analysis replicates the common observation that, on average, mergers destroy value (thus suggesting that our sample is representative of the broad universe of mergers)
• second, it identifies factors that are relevant in explaining why certain mergers perform better than others

It is really exciting to demonstrate financially why it is important that companies take account of a broad set of human factors when undertaking a merger, rather than focusing simply how to combine the “hard” resources of the two companies.   This type of work truly does “make the business case for branding.”

I will share the details of the analysis once we are ready for publication.

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I have been thinking further about the appropriate measures of intangible value and wanted to share my conclusions.  It seems to me that two approaches make sense:

• A “top down” approach that compares the book equity of a company (its total assets minus its total liabilities) to the market value of that equity (its market capitalization)
• A “bottom up” approach that compares the tangible assets of a company (the sum of its net property, plant and equipment, plus its net working capital) to its total value (its market capitalization plus long term debt)

The first approach reveals the excess of the market value of a company’s equity over its book value and is easy to calculate (which is why this metric is often published).   But it suffers from the weakness that book equity is a “plug” whose value is defined by “whatever number is required to make the balance sheet balance.”  It is therefore not immediately obvious what book equity represents other than the excess of the reported assets of a company over its liabilities.

If your interest is in how much of the total value of a company is represented by the tangible assets on its balance sheet (physical and financial), then the “bottom up” approach is the way to go.  The premise is simple – you can observe what value the market is putting on the total assets of a business (financial, physical, intellectual and human) - the question is “what proportion of that value is represented by ‘hard’ assets and how much is due to the ‘soft’ assets that do not appear on the balance sheet?” 

As regular readers of this blog will know, our interest is in the second approach because we believe this provides greater insight into the true asset base of a company – that is, the full range of resources that are responsible for generating the future cash flow of a business (and therefore its value).

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One of the areas of debate in determining the extent of intangible value is how the proportion of intangible value should be measured.  There are two big decisions:

• Which measure of corporate value to use (total enterprise value vs. market capitalization)
• Which measure of the asset base to use (tangible book value or net tangible assets)

The differences between these measures are significant.  These are the numbers based on my analysis of the 12,400+ non-financial companies with a total enterprise value of more than $100mn as at end September:

• Aggregate enterprise value was $40.7 trillion while aggregate market capitalization was $31.7 trillion (the difference representing the $9 trillion in debt and minority interests)
• Tangible book value was $8.1 trillion vs $17.2 trillion in net tangible assets

My interest is in calculating the proportion of the value of a company that is represented by its physical assets.  For this purpose, the most appropriate approach is to compare a company’s net tangible assets (the sum of the productive, physical assets of the company – its working capital plus its property, plant and equipment) to the amount you would need to acquire the company from both its shareholders and lenders (that is, its total enterprise value) as this is what you have to pay to gain the right to all the future cash flows generated by the company.

The alternative approach is to take the book value of the company (its total assets minus its total liabilities) and deduct the declared intangibles (which represent the goodwill and other intangibles that resulted from the acquisitions the company has made) to arrive at a measure of tangible book value. 

Which measure you use depends on the point you are trying to illustrate.  If your interest is in the excess of the value of a company over the net value of its assets and liabilities as declared on its balance sheet, then you will base your calculations on book value or tangible book value.   If, like me, you are primarily interested in the asset side of the balance sheet (as these represent the resources used to generate the cash flows of the company), then you will base your calculations on net tangible assets (and even choose to restrict the definition of the net working capital to accounts receivable plus inventory minus accounts payable).

Either way, you are forced to conclude that the physical assets of a company account for less than half of its value.  Put another way, you are compelled to acknowledge that it is human value-added that causes companies trade at a premium to their physical assets (a phenomenon that is unique to the past 30 years).

The extent of this human value-added is astounding:

• Based on tangible book value, human value-added represents 80% of the value of companies
• Based on net tangible assets, human value-added represents 58% of the value of companies

Tagged as: Business Value, Measure Value

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The latest edition of WIRED (May 2010) contains a great article entitled “Do you speak statistics?” that argues that one of the US’ biggest political problems is the widespread lack of statistical literacy. Being able to evaluate the evidence on issues such a global warming or crime statistics or same store sales is impossible without a basic grasp of statistics.

Failure to understand data and to be able to calculate simple probabilities means we are likely to make stupid decisions about important things. The article concludes with “We often say, rightly, that literacy is crucial to public life. If you can’t write, you can’t think. The same is now true of math. Statistics is the new grammar.”

This is especially true in the marketing arena. Historically, it did not matter that many marketers were more or less innumerate because there was not a lot of data around to be analyzed. Good intuition and a keen sense of observation truly were far more important skills for a marketer to have. The situation has changed dramatically over the past 20 years due to two important developments:

• The emergence of shareholder value as the pre-eminent language in the boardroom
• The increasing measurability of marketing

Statistics is now part of the core skill set for marketers.

Tagged as: Business Value, Marketing Finance, Marketing Performance, Measure Value

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Such a seemingly simple question.  But when the [X] is marketing, branding or social media, it is best to consider what the motive is behind the question.  My experience is that the question is actually about one of three issues:

• The first is alignment – are marketers serious about trying to make a contribution to the success of the business?
• The second is relevance – how significant a business asset is brand/identity?
• The third is measurement – how should the effectiveness of marketing be measured?

 As a rule of thumb, at least 80% of the time, it is the first two issues that lie behind the request for demonstrating the ROI on marketing spend, or for a brand valuation.  Responding to the request at face value is therefore a mistake because a ROI or valuation model will not address the underlying concern about marketing’s lack of alignment with business strategy, and skepticism about the significance of the impact that brand/identity can exert on overall business value.

 Finance people are not being deliberately difficult when they ask the question – they are genuinely unsure about whether marketing, branding and identity matter.  They inhabit a Vulcan world of rational economic maximization in which all decisions are based on a sober assessment of functional performance and price.  They therefore have real difficulty in understanding why all this talk about positioning, identity and brand essence is relevant to the business.

 In many cases, therefore, the best response to the Value/ROI question is to draw an influence diagram to illustrate the ways in which identity, branding and marketing add to the value of the business.  This turns the conversation into a productive, strategic discussion about the sources of customer value and the role of identity, branding and marketing in enhancing the perceived attractiveness of the company’s products and services.

 In a minority of cases, the Value/ROI question genuinely is a question the third issue – measurement – and therefore requires a numeric response.  But before you can determine what kind of measurement is relevant, I believe you need to further clarify the question on two dimensions:

• Are we looking for quantification in terms of customer value or financial value?
• Are we primarily interested in the short term or the longer term?

 If the interest is short term and financial, then you genuinely do need to measure ROI.  If it is long term and financial, you need to perform some kind of valuation.  But if the interest is in the extent of the customer preference we enjoy, then your answer should not involve financial numbers at all – your numbers should be to do with client acquisitions, engagement scores, average purchase frequency, willingness to recommend, brand equity and a host of other measures of customer preference and behavior.

 There are multiple motives that can provoke the question “what is the Value/ROI of/on [X] ?” and a formal valuation is only an effective response in a minority of the cases.

Tagged as: Customer Value, Marketing Finance, Marketing Performance, Measure Value

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I define Marketing Finance to refer to any effort to quantify the contribution of marketing to increased business value.

This is because I am interested in marketing in its broadest and most strategic sense, namely as the “creation, communication and delivery of customer value.”  The focus of Marketing Finance is therefore the quantitative measurement of any action designed to increase customer value.

I am aware that this is a broader definition than others use where the term refers to the economic and financial modeling of marketing actions.  The problem with this narrow focus is that it restricts the field of study to those marketing activities that can be explicitly modeled in terms of a supply and demand curve or directly linked to specific transactions.  It excludes activities that are indirect in their impact (for example, investments in customer service) and/or take time to have an impact (for example, a change of corporate identity).

Much of the focus of marketing performance measurement is on the near term.  This is not because that is where the impact of marketing is greatest – but simply because this is the time frame over which our measurement approaches are most developed.   In that sense, I think of marketers’ fascination with ROI in much the same way as drunkards who have lost their keys think of lampposts.

I see a clear business need for the articulation of the contribution of marketing to business value over the longer term, and via a coherent set of activities rather than just a single activity in isolation.  In other words, the quantification of the contribution of marketing strategy to business value.  From a Finance perspective, anything that causes a change in the profit, risk or growth profile of a business necessarily has an impact on business value.

The focus of this blog is on the linkage between customer value and business value.  That’s what I mean by Marketing Finance.

Tagged as: Marketing Finance

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Marketers face two big challenges:

• The first is external: how to develop ways of increasing the perceived and actual value that the company delivers to its customer
• The second is internal: how to demonstrate its value to a skeptical business audience

Few marketers do both tasks well.  The goal of this blog is to help them do so.

As of today, I have introduced some changes to the structure of this blog to make it easy to identify the posts that focus on the external challenge of creating, communicating and delivering customer value; and those posts that focus on how marketing performance should be measured.

Unifying these two core strands is the overall theme of “marketing finance” – how to create marketing strategy that delivers the numbers.

My conviction is that business is a balancing act between customer value and shareholder value. Favoring one too strongly over the other is a recipe for business underperformance as it will either lead to insufficient levels of profitability (the consequence of delivering customer value at excessive economic cost), or stalled growth and a weakened customer franchise (the consequence of focusing on profits and ignoring the customers whose satisfaction is the source of those profits).

Tagged as: Creating Value, Marketing Finance, Measure Value

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I promised to report back on the reaction to our mini white paper on “Does this soft stuff matter?” among the senior leadership team.

It was a gratifying experience.  The “brand framework” provided a clear model for debate around what the relevant messaging was for external audiences versus internal audiences.  It demonstrated why not every expression of the brand needs to tell the whole story (the reason why previous versions of the vision, mission, promise, value proposition, positioning etc had all sounded pretty much the same).  And it reinforced the need for simplicity - agreeing on a single idea that they could make their own.

There remains a healthy level of debate about what that single idea is, and how it should be expressed.  But the path to getting there is now clear.

Tagged as: Business Value, Creating Value, Marketing Finance, Marketing Performance

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In collaboration with a client, we have produced a mini thought piece under the title of “Does this soft stuff matter?”

As you might imagine, the target audience is the group of brand skeptical business leaders to whom we will be presenting later today.  We have three objectives:

• To allow them to review the “business case for brands” at their preferred speed (the document is laid out so that it can be skimmed – or read in detail)
• To provide a reference source should there be questions during our presentation
• To demonstrate that we are serious about using branding to drive the success of the overall business

To my mind, this last point is key.  Marketers consistently underestimate the degree of mistrust of their motives and priorities.  I believe this mistrust needs to be acknowledged and dealt with.  Doing so involves three things:

• Relevance:  our document explains the “brand value chain” of how marketing aims to increase the value of the business
• Alignment:  our document summarizes the evidence for the impact of marketing – measured in terms of financial value
• Rigor:  our document lays out the brand framework we are using, and explains the role of, and specific audience for, the various components (such as vision, purpose, promise, values etc.)

I will report back tomorrow on the degree of success of this approach!

Tagged as: Business Value, Creating Value, Marketing Finance, Marketing Performance

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Another day, another request (relayed via an agency) for a brand valuation.  As best I can tell, the client’s interest in brand valuation is purely a function of the desire to prove that marketing is important.  Like many others, this client appears to believe that the business case for marketing and the demands for marketing accountability will all be met by a brand valuation.

Regular readers of this blog will know why I consider this belief to be misguided.  Others with the desire to find out can review the posts and articles in the brand valuation section of the topics tab of this website.

If brand valuation is not the answer, then what is?  Well, the answer is a function of the question.  In my experience, there are four big questions as regards the measurement of marketing performance.  The first step towards demonstrating marketing accountability is working out which of the four questions you are really being asked.

The four questions populate the four quadrants of a 2×2 matrix.  On one axis is the focus – customer perspective vs. financial perspective.  On the other axis is the time frame – short term (next 12 months) or long term.  All important questions to do with marketing accountability and measurement fall into one of these four quadrants.

The four questions can be articulated as follows:

• How do our customers behave? (customer perspective/short term)
• What is the impact of marketing on current sales and profit? (financial perspective/short term)
• How strong is our franchise with customers? (customer perspective/long term)
• What is the impact of marketing on our business value? (financial perspective/long term)

All four questions are worthy of study – and there are specific measurement techniques appropriate to each.  Brand valuation is a partial answer to one of them (the financial perspective/long term one).

Tagged as: Marketing Finance, Marketing Performance, Measure Value

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Type 2 Consulting was created to serve an evident need for more business-literate marketers.  Our explicit ambition was – and remains – to support the emergence of a “next generation” of marketers who are able to integrate marketing and finance.  We consider this combination of skills to be essential for the creation of strategies that balance the needs of customer value and shareholder value. 

Marketing and finance is only one dimension of the integrated thinking that we believe is necessary for this “next generation” of marketers to demonstrate.  We believe that business-literate marketing involves having a working understanding of strategy, technology and (in a services company) HR as well.  But the integration of marketing and finance is our primary focus.

We were aware that only some marketers would be interested in our services, although we believe passionately that all marketers should consider that basic fluency in finance to be essential.   But it took a remark by one of the other speakers at the Thunderbird Winterim two weeks ago to crystallize my thinking about the segmentation of Type 2′s audience.  Perceptively, he remarked “The participants wanted to hear about my topic – but they needed to hear about yours.”

I am totally OK with the fact that most marketers do not like finance.  But we all like respect.  If the answer to the title of this blog post is “the respect of my business colleagues”, then I see basic financial literacy as something that all marketers should want, not just need.

Tagged as: Business Strategy, Creating Value, Marketing Finance, Marketing Performance

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I am presenting to an EMBA class at Columbia this evening on the topic of brand equity and marketing accountability.  I am looking forward to it – EMBA students always ask great questions.

The gist of my presentation is that brand equity represents an important bridge between the worlds of marketing and finance.  Marketers intuitively think of brand equity as a measure of the strength of the brand’s franchise with customers; Finance folk intuitively think of it in terms of the incremental profit/cash flow that is generated by the brand.  The two definitions are compatible but they do not describe the same thing.  The marketers view of brand equity represents the potential for value; the finance view represents the realization of value.  In that sense, a marketing definition of brand equity will always be larger than the financial defintion because it does not allow for all of those potential brand sales that failed to occur due to lack of distribution or stock outs or a host of other factors that may prevent customers acting on their stated “intention to purchase” (one of the key measures of brand equity from a marketing perspective).

Should be a fun session.

Tagged as: Brand Equity, Marketing Finance, Marketing Performance, Measure Value

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I admire Millward Brown for its efforts to “talk the language of business” by trying to link brand equity and brand value to overall business value. But sometimes these efforts merely illustrate a lack of understanding for what constitutes a credible case.  For example, when the estimate for brand value exceeds the market value of a company (as was the case with Google, Starbucks and a couple of other brands in their 2009 survey), anyone half proficient in valuation is led to question how much of a “reality check” was done on the data.  For brand value to exceed market value, the aggregate value of all of the assets of the company other than the brand would have to be negative…

The latest example is the announcement that “Millward Brown Shows Stronger Brands Recover From Recession Faster” at the end of September.  The basis for this statement was a comparison of the performance of a portfolio of companies for which “brand contributes more than 30% of earnings” versus the overall market.

The problem is that the data does not prove the claim (any more than if the claim had been that “companies beginning with letters in the first half of the alphabet outperformed the market”).  The 30% criterion means that the Millward Brown portfolio is heavily skewed towards consumer industries  (such as food, retailing, consumer electronics) – and these industries have outperformed the overall market.  Therefore much of the outperformance of the Millward Brown portfolio is likely due to sector exposure, not branding.

To deliver a robust analysis about whether stronger brands recover faster, Millward Brown would have to show that its portfolio of strongly branded companies outperformed a portfolio of companies in the same industries, not the overall market.

Tagged as: Marketing Finance, Marketing Performance, Measure Value

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In my previous post, I committed to a course of having “the serenity to accept the things than cannot be changed” – at least as regards the loose use of “ROI” as a catch-all for marketing accountability.

You might therefore be interested to learn how I responded to a client’s suggestion about incorporating “ROI” measurement into our messaging assignment.

The points I made were as follows:

1. It is a great idea for us to discuss how we can explicitly articulate the commercial benefits that we expect to accrue to your company as a direct result of this assignment
2. There are a number of ways of doing so, including an actual ROI calculation or a formal brand valuation
3. In my experience, what the senior leadership actually values is a simple model showing how our work is aimed at changing external and internal perceptions and behaviors that in ways that result in changes to the growth and cash flow of the business
4. Such a model has three benefits – it communicates that we care about the business, not just marketing; it clarifies our hypothesis about how marketing works (this can be debated and tested); and it demonstrates that marketing is about more than just the short-term response to changes in communication
5. The best starting point for developing this causal model is to ask the senior leadership about the changes they would like to see in terms of perceptions and behaviors (internally and externally) and how they believe that the achievement of these changes would translate into improvements in revenue, growth, margin and volatility
6. This model would deliver two benefits:  consensus at the senior level of the company about “how marketing adds value to the business”; and as a roadmap for defining the quantitative and qualitative research necessary to measure progress on the key dimensions identified
7. This, in turn, would lead naturally to the creation of a marketing scorecard
8. The process might culminate in a formal financial calculation – either in the form of ROI or brand valuation – though such point measurements typically only justify their costs if you are using the results to inform your actions in a merger, securitization, trademark infringement or licensing transaction

I will report back on the response from the client.  I certainly felt more “serene” in crafting this response rather than one that directly addressed the misuse of “ROI”…

Tagged as: Marketing Finance, Marketing Performance, Measure Value

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My admonition to marketers to be specific in their use of the “ROI” term makes me feel like King Canute, commanding the incoming tide to retreat.  If anything, the use of “ROI” as a general catch-phrase for “marketing accountability” is becoming more embedded.

I am conflicted about this – part of me delights in seeing marketers embrace the need for demonstrating accountability for their use of company resources (my new client last week even beat me to the punch in suggesting that we should articulate the commercial benefits we expected to result from our messaging assignment – amazing!); but part of me despairs that the ROI moniker will encourage financial types to see marketing as an essentially tactical discipline whose impact can be fully captured within the 12 to 18 month horizon typical for ROI measurement.

As any of you reading my posts on a regular basis will know, I have three main issues with the financial measurement of marketing and/or brands whether in the form of ROI or brand valuation:

1. First, it involves treating marketing/branding as an activity that is separate from the other operations of the business (which seems crazy for a discipline that claims to focus on the overall customer experience, rather than just its communications)
2. Second, it is hard to do.  It is genuinely difficult to construct a model that demonstrates the delta between “company with no marketing” and “company with marketing” – most people end up with a model that merely demonstrates the impact of marketing communication (in which case, my first point applies)
3. Thirdly, a financial model is rarely what the senior leadership of the company wants to see.  In my experience they are much more interested in an answer to the question “how is this investment in marketing going to impact the overall performance of the business?”

I have mentally committed to “having the serenity to recognize the things that cannot be changed” and to use each reference to “ROI” as the opportunity to discuss the nature of accountability rather than the trigger for launching into a lecture about the correct use of financial terminology.

Tagged as: Marketing Finance, Marketing Performance, Measure Value

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Vic Cook has posted his research into whether the stock prices of companies with stronger brands fared better in the downturn than those of companies with lesser brands (www.customersandcapital.com).  Whereas I used a classical finance approach (branded companies vs the general market) for my analysis of the brand “bonus”, Vic looks at relative performance within the set of branded companies.

He divides the set of 62 companies (the publicly-traded parent companies of the brands on the 2008 Interbrand list) into four quadrants based, first, on whether brand value represented a greater/lesser than average proportion of market value and, second, on whether the company suffered a higher/lower than average decline in its market value.

I encourage you to read his post in full, but would still like to share the conclusions here:

• The more valuable brands accounted for 33% of the total pre-crash value. The companies that owned those brands incurred losses in their market cap amounting to only 10% of the losses suffered by all firms in the study
• The less valuable brands accounted for 25% of the total pre-crash value. Their owners incurred losses amounting to 50% of the total sustained during the storm.
• The brands with inconsistent performance (defined as being greater/higher or lesser/lower) accounted for 42% of the pre-crash value and 40% of the losses in market cap incurred by all firms in the sample.

Vic ends his piece by saying “One can conclude with high confidence that, as a rule, companies with better brands suffer less than those with lesser brands.”

I find this a compelling piece of analysis that supports the (somewhat counter intuitive) conclusion that brands are a class of asset that has lower volatility than that of other forms of corporate assets.

Tagged as: Business Value, Marketing Finance, Marketing Performance, Measure Value

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There is something very appealing about the simplicity of the argument that brands provide protection in a downturn.  I have been privileged to share ideas on this topic over the past few weeks with Raj Srivastava (Provost and Professor of Marketing at Singapore Management University), Dave Reibstein (Professor of Marketing at Wharton) and Vic Cook (Professor of Marketing at Tulane).  Both Raj and Vic have forthcoming articles on this topic that are well worth reading (based on the drafts that I have seen).

The articles take rather different tacks – Raj’s focuses on the mechanisms whereby brands deliver a financial bonus, and the need to maintain brand investment in a recession; Vic’s focuses on the magnitude of the bonus delivered, and whether it is a function of the relative importance of brand as a proportion of overall market value.

I will post links to both pieces once they are available.

Tagged as: Business Value, Marketing Finance, Marketing Performance, Measure Value

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Vic Cook, Professor of Marketing at Tulane, has suggested that the scale of the brand “bonus” should be correlated to the proportion of brand value to overall market value.  I had resisted using the actual dollar values in any of the brand valuation league tables because of my skepticism about their accuracy (see “My Brand’s Bigger Than Your Brand”) but I have to admit that Vic’s suggestion is irresistible.  

If we can show that the level of the brand “bonus” enjoyed by a company was proportionate to the relative importance of its brand, this will be strong evidence that brands are a class of asset whose value is less volatile than the overall market.

Tagged as: Business Value, Marketing Finance, Marketing Performance, Measure Value

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My previous post (about whether there is any evidence that companies with strong brands suffered lower than average declines in their market value during the recent market decline) has generated a lot of interest, plus some suggestions for how the analysis could be extended and improved.

One idea was to extend the reference period to three months so as to capture the 2008 low in the S&P 500 on 20 November, and to extend the recovery period to three months from the S&P 500′s 2009 low on 9 March. 

This produces very similar results.  Once again, there is a nice symmetry in that the market decline in the “down” period is now 41% and the percentage gain in S&P 500 during the “up” period is 39%.  And once again, the portfolio of strongly branded companies registered a decline in value that was 6 percentage points less than the overall market (the aggregate market value of the 101 companies in this portfolio fell by “only” 35%).  During the market upturn, there was no significant difference between the performance of the branded portfolio and the overall market.

So there does appear to be empirical support for the intuition that brands provide some degree of downside protection…

Tagged as: Business Value, Marketing Finance, Marketing Performance, Measure Value

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People like to assert that brands provide some cushion for a company when markets are falling, and help them bounce back faster when the market begins to recover.

The last twelve months provide a wonderful testing ground for this theory in that we have had a period of rapid market decline (Sept/Oct last year) and a period of rapid recovery (March/April this year).   Interestingly, the percentage changes were almost identical – in the first period the S&P 500 fell by 35% vs. a rise of 37% in the second.

My question is “How did a portfolio of strong brands perform relative to the market?”

The answer (based on a portfolio of 102 companies measured relative to the S&P 500) is that strongly branded companies enjoyed a brand “bonus” of around 4% during the market crash.   In the rising market, they outperformed by less than 1%.

I actually constructed a number of different portfolios to see if a portfolio based on any of the major lists of “the world’s best brands” outperformed the market.  I created 9 portfolios in all using the Fortune, Interbrand, Millward Brown and Brand Finance lists, and combinations thereof.

The portfolio that registered the best performance in the down market was one based on the Fortune list of most admired companies (it beat the S&P 500 by 7%).  The portfolio that did best in the up market was a blended portfolio comprising companies that appeared on at least 3 of the 4 lists (it beat the S&P 500 by 15%).   Across the up and down markets, the blended portfolios performed the best.   

Maybe this is another case of “the wisdom of crowds”?  Across market cycles, a portfolio based on a synthesis of the Fortune, Interbrand, Millward Brown and Brand Finance lists outperforms portfolios based on any one of them…

Tagged as: Business Value, Marketing Finance, Marketing Performance, Measure Value

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Apologies for another somewhat technical post – but it concerns the appropriate metric by which to measure the contribution of marketing. 

A company’s value is typically expressed in two ways – market capitalization (the market value of its equity – the amount you would need to pay to buy all of the shares) or enterprise value (the total of its equity and debt – the amount you would need to pay in order to have outright ownership of all of its assets).   

The success of a company in “adding value” is typically measured in terms of its intangible value, which represents the excess of its market value over its book value.  Book value is defined as the difference between the total assets on its balance sheet and its total liabilities.  Given that the value of the assets on the balance sheet are recorded at the lower of “historic cost or net realizable value” rather than their replacement cost, there is an argument that a more accurate measure of the amount of “value added” is the difference between market value of a company’s equity and the replacement cost of its assets – this is known as Tobin’s Q.  Unless you do this adjustment, you do not know whether intangible value is just a reflection of the undervaluation of the assets on your balance sheet (the difference between their book value and their “true” market value, or replacement cost) or the proof of the existence of assets other than those that appear on the balance sheet.

So far so good?  The picture was relatively clear so long as the only assets on the balance sheet were tangible (either financial or physical).  The situation has become more complicated now that certain forms of intangible asset are allowed to be shown on the balance sheet.  These intangible assets represent specific forms of intellectual property such as patents, contracts, copyright and trademark.  Because these represent legally enforceable ownership rights, the accountants are content to see them recognized on the balance sheet – but only when they are acquired from another company (it is still not possible to show assets that were created in house on the balance sheet).

Given this context, my interest is in determining the most appropriate terms in which the value added of marketing should be expressed.  First of all, should we look at market value or enterprise value?  Second, should we measure the “value added” of a business relative to its book value , or its tangible book value (book value minus the intangible assets on the balance sheet), or Tobin’s Q – or a modified version of Tobin’s Q that restates only the book value of the tangible assets on the balance sheet?

My next post will suggest a couple of different measures that may make sense.

Tagged as: Business Value, Marketing Finance, Measure Value

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By my calculation, I have sat through close to thirty presentations over the past two days at the Marketing Sciences INFORMS conference.  Each of the seven 1 1/2 hour sessions has comprised 4 or 5 individual presentations.  It is a bewildering amount of information to absorb – but the conference functions very effectively as a form of intellectual “speed dating,” allowing you to get a great overview of the body of research that is currently underway in any one of the 15 topic areas that the conference covers.

So, who did well in the dating stakes?  The best received presentations seemed to share the following characteristics:

• Outline an interesting hypothesis that seems intuitively reasonable
• Create an elegant, but robust, way of testing the hypothesis
• Draw clear implications for how the resulting information can be used

A common factor among the presentations that were less well received was, curiously, not the absence of the second and third elements.  It was the presumption that the importance of your topic was self-evident to your audience.

This reminded me of why the dialog between Marketing and Finance is often so difficult – it is because we make the mistake of assuming that the importance of marketing is self-evident.  We need to be more adept at articulating the basic hypothesis for how marketing adds value to the business.

Tagged as: Business Strategy, Creating Value, Marketing Finance

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I delivered a webinar earlier today on the topic of “Frameworks for Brand Valuation” as part of the ANA’s marketing accountability series.  The series culminates in next week’s marketing accountability conference in New York.

It was a well attended session, reflecting the ongoing hope in the marketing community that there is a “silver bullet” out there that can definitively prove the value of marketing.

These were my conclusions for how marketers should think about the topic of brand valuation:

• It is very important for marketers to be able to explain how marketing is adding to the overall value of a business
• Brand valuation appears to offer the promise of providing definitive proof of the value of marketing – but this is, sadly, an illusion
• Brand valuation is a valuable tool when it is necessary to calculate a financial value for the brand as an independent asset
• However, it rarely makes sense to treat the brand as an independent asset for marketing evaluation purposes as this inevitably leads to conflict about the definition of brand and the extent of impact that brand has on the customer purchase decision
• It is more productive to think of brands as having a magnifying effect on the underlying performance of the business (the value of the brand is therefore contingent on the quality of the business it supports)
• The extent of magnification should be measured in terms of the three key drivers of business value – profit, growth and risk
• The differential impact of branding on any one of these three variables is definitive proof of how branding is enhancing the value of the business

Based on feedback so far, the material was well received.  But I am left with the sense that I have “rained on the parade” by revealing some of the practical problems with brand valuation.

Tagged as: Marketing Finance, Marketing Performance, Measure Value

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Anyone who reads this blog will know that I regard most questions involving ROI as being ill-conceived.  Don’t get me wrong – I am 100% in favor of demonstrating the business impact of marketing.  It’s just that ROI is rarely the best way of doing this.  This goes for social media as well as any other form of media.

My recommendation is that, whenever you are faced with a request for ROI, you ask for clarification.  Specifically, you ask which of the following two questions better expresses the reason for the ROI request:

• “Is it strategically important and economically rational for us to invest in social media?”
• “Would the overall effectiveness of our marketing strategy be enhanced by allocating a certain portion of our marketing budget to social media?”

If it is the first question that you are being asked, you should respond with an articulation of why customer engagement and community building is a vital part of the company’s “go to market” strategy.  You should provide data on the major drivers of the customer purchase decision and the influence that social media has on each of these drivers, and at which points in the purchase cycle it is most effective.

If it is the second question that you are being asked, you can assume that the strategy is not in question, merely the most effective way of achieving it.  In this case, you could propose a media mix model to show the impact of adding social media to the marketing mix on overall purchase volumes and margins.

Is it ever correct to respond to a request for ROI at face value?  Yes, but only when you are being asked to evaluate social media as a standalone sales channel.

Tagged as: Customer Value, Marketing Finance, Marketing Performance, Measure Value

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This is an esoteric point – but one on which I would welcome input.  It seems to me that there are two ways of looking at the relationship between what a company reports on its balance sheet and the value attributed to it by the market.

The first approach is to take book value (defined as total assets minus total liabilities) and subtract any reported intangible assets.  This gives you the tangible book value as reported on the balance sheet.  You can then compare this number to the market value of the company’s equity to arrive at the percentage of market value accounted for by the tangible assets reported on its balance sheet.  As I mentioned in an earlier post, this number is around 15% for US companies.

The alternate approach is to begin with the financial and physical assets that you know that a company is using in the course of its business – its working capital plus its property, plant and equipment – and define these as the productive base of the company.  You can then compare this net tangible asset number to the total enterprise value of the company (the sum of its market value and long term debt) to arrive at the ratio between the physical assets of the company and its market value.

For reasons too numerous to list here, the results of these two approaches are comparable but the net tangible asset gives higher numbers for the proportion of market value explained by physical assets.

I calculate using both approaches but would welcome any comments or suggestions as to which you find the more compelling approach.

To my mind, the first approach has the virtue of simplicity and comprehensiveness.  The second has the virtue of transparency but cannot be performed meaningfully for financial services companies (due to their massive amounts of short-term debt, and issues to do with the calculation of total enterprise value).

Your views?

Tagged as: Business Value, Marketing Finance, Measure Value

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Marketers have a poor record of responding effectively to requests from their business colleagues (especially those in Finance) for evidence of the effectiveness of marketing.

Too often our response is to look for a “silver bullet” – a single financial metric that provides definitive proof of the value that marketing is adding to the organization. Our obsession with ROI and with brand valuation are classic symptoms of this “silver bullet syndrome.”

The problem is that we have misunderstood the nature of the request being made by Finance. We are NOT being asked to provide a single financial number. We ARE being asked to provide a compelling argument for how marketing is adding value to the business and why we are effective investors of the company’s money.

There is a tragic irony about marketers’ embrace of ROI. Finance types view ROI as a short-term efficiency metric, not a gauge of strategic effectiveness. Marketers’ embrace of ROI is, tragically, serving to reinforce Finance’s view of Marketing as a tactical, short-term discipline.

I have found that the demonstration of marketing accountability involves three elements:

• Evidence of the extent to which the customer purchase decision is driven by factors other than simply functionality and price (this establishes the strategic role of marketing in generating customer value);
• Development of a comprehensive “go to market” strategy for delivering customer value across the full range of possible sources (including product functionality, purchase convenience, service quality, perceived value – not just communications);
• Identification of the business metrics on which the impact of this “go to market” strategy will be most powerfully observed.

When Marketers recognize the true nature of the accountability request (the business case for marketing, not just a defense of the efficiency of certain forms of communications spending), a much more productive collaboration with Finance can be achieved.

[BTW this post is an adaptation of a somewhat longer piece I wrote for the ANA's Marketing Accountability blog last month]

Tagged as: Creating Value, Marketing Finance, Marketing Performance

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Earlier in my career, I believed that Marketing, Finance and Accounting inhabited different universes and spoke mutually unintelligible languages. But the topic of Brand Equity has convinced me that these worlds are actually aligned.

In Accounting, the focus is on the reporting of value; in Finance, the focus is on capturing value; and in Marketing, the focus is on the creation of the customer value that is the precursor to either measure of financial value.

It is therefore appropriate that the each discipline has its own definition of Brand Equity that corresponds to its specific definition of value. This definition broadens from the trademark (recognized by accounting), to brand-induced customer behavior (recognized by Finance), to the potential for value due to brand preference (recognized by Marketing).

I used to see the topic of Brand Equity as the battleground for the mutually incompatible world views of Accounting, Finance and Marketing. I now see that their respective definitions represent different points on a single spectrum, and that this perspective provides a powerful basis for the effective collaboration between the three disciplines.

Tagged as: Brand Equity, Brand Valuation, Business Value, Creating Value, Marketing Finance

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Marketers have a tendency to confuse measurement with accountability. We assume that every request for marketing accountability needs to be answered in terms of ROI.

In my experience, the issue of marketing accountability revolves around three issues:

• Relevance: explaining where and how marketing adds value to the business
• Alignment: proving that marketers are focused on the success of the business, not just the size of their budget or health of the brand
• Rigor: developing a fact-based, disciplined approach to marketing strategy and execution (to include relevant forms of measurement)

Until marketers demonstrate these qualities, their colleagues in Finance will continue to ask the ROI question (which is their way of asking “can I trust you to spend the company’s money wisely?”). When marketers begin to behave in ways that explicitly demonstrate these three qualities, the requests for ROI miraculously disappear.

As a former Finance person, I can assure you that Finance people do not want more ROI models to review – they just want Marketing colleagues they can trust.

[BTW a version of this post now appears on the ANA's Marketing Accountability blog]

Tagged as: Marketing Finance, Marketing Performance, Measure Value

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