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: Brand Measurement, Brand Valuation, Business Value, Customer Value, Marketing Accountability, Marketing ROI

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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: Customer Value, marketing and finance

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One of the struggles in working with senior management groups on complex topics is the danger that the discussion begins to focus narrowly on one specific aspect of the topic on which a number of those present have deep expertise or strong opinions (or both).  It is totally natural that people want to find a way to simplify the complexity of the topic but the risk is that, all of a sudden, a decision about the whole strategy looks like it will be made on the basis of one relatively minor dimension.

I have found that a useful technique for preventing this is to attach an explicit financial value to the individual items on the agenda.  The number represents the additional financial value that could be generated by an insightful group discussion of that topic.  So item 1 “Minutes of the last meeting” will have a modest notional value attached to it but item 3 “Sources of incremental growth” might have a $500 million notional value.

I have found that this approach has two benefits:

• It ensures that the allocation of time in the meeting is in closer proportion to the financial importance of the topic than might otherwise be the case (participants will often cut short an unproductive discussions with the remark ”why are we wasting our time on a topic that has little financial value when there are other, more valuable items yet to discuss?”)
• It ensures that the discussion of a truly important topic is not allowed to hinge on a single, relatively minor aspect – even if there is strong debate about that aspect (participants will make a remark like “we are not going to let a $500mn decision hinge on the choice of stationery supplier”)

I encourage marketers to adopt this technique when presenting to senior leadership teams.  Begin your presentation as follows ”Our first topic – strategic positioning – is potentially a $50mn topic, so we would welcome a detailed discussion.  Our third topic – social media strategy for our holiday sales promotion – has a more modest upside value of $5mn but we would still welcome your input.” I guarantee that jaws will drop and your career prospects will rise…

Tagged as: Business Strategy, Business Value, Marketing Accountability

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The ANA has just released its 2009 State of Marketing report, subtitled “The Shift” in deference to Prophet’s sponsorship of the survey and the release of their senior partner’s book “The Shift: The Transformation of Today’s Marketers into Tomorrow’s Growth Leaders.”

The survey report serves as the basis for reiterating the key points from Scott Davis’s book, specifically the  five dimensions of the transformation that marketers need to make in order to make the move from “being merely a sales enabler to being a value driver across the enterprise”  – or, as the book terms it, to becoming a Visionary marketer. 

The language may be a bit self aggrandizing but the ideas are good, specifically the core idea about how the influence of marketers is in direct proportion to their contribution to driving the growth agenda of the business.  In finance theory, the value of a business is driven by three things – profit, growth and risk.  Scott Davis is right to get marketers to up their game from just a focus on marketing efficiency (that primarily sees marketing’s contribution in terms of margins and therefore profit) to one that focuses on growth.

This change of mindset is probably the single biggest thing that marketers can do to elevate their impact from the tactical to the strategic.

One critical component for doing so is for marketers to gain a deeper understanding for how the business actually works - my favorite data from the survey was the contrast of the level of cross-functional collaboration by “visionary marketers” vs. their visually-challenged peers.  60% of the visionaries claimed to collaborate closely with finance and 39% with operations vs. figures of 26% and 9% for their myopic peers.

PS The five dimensions on which marketers need to “shift” are:

• From creating marketing strategy to driving business impact
• From controlling your message to galvanizing your network
• From incremental improvements to pervasive innovation
• From managing marketing investments to inspiring marketing excellence
• From an operational focus to a relentless customer focus

Tagged as: Business Strategy, Business Value, Customer Value, marketing and finance

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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, Brand Valuation, Causal Model, Marketing Accountability, Marketing ROI

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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: Brand Measurement, Business Strategy, Causal Model, Marketing Accountability

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Gabi Salinas (with whom I had the pleasure of working at Brand Finance), now global brand manager at Deloitte Touche Tohmatsu, has just published her magnum opus on the topic of brand valuation.

The book is very thorough and a surprisingly easy read – a testament to Gabi’s ability to focus on the essential details of what is potentially a very dense topic.  It removes much of the mystery that currently surrounds the topic of brand valuation by outlining the core concepts and profiling the different methodologies in use.

Gabi’s obvious passion for the topic shines through.  Most other authors might baulk at the prospect of comparing and contrasting 40 different brand valuation techniques from more than 60 providers – but Gabi has painstakingly collected all this information and spends 180 pages (nearly half the book) reviewing and commenting on each model.

This dogged perseverence gives immense credibility to the other sections of the book in which she provides a higher level summary of the topic.  I would recommend the following three chapters in particular:

• Chapter 1 – the definition and economic relevance of brands
• Chapter 4 – summary of the main approaches to brand valuation
• Chapter 6 - classification of the 40 models reviewed

The book is a hugely valuable resource to anyone with a professional interest in brand valuation (and that is a wide set of audiences).   Despite the worrying frequency of equations with greek letters, the style is very light and the narrative very simple to follow.

For me, the one thing missing from the book is a clearer sense of how brand valuation fits into the broader topic of marketing accountability.  As it says in its title, the book is a “Manual” – it begins from the assumption that brand valuation is a valid goal to pursue, and provides the roadmap for achieving that goal.

Readers of this blog will know that my strong belief is that brand valuation is, with rare exceptions, a false trail for marketers to follow.  It does not provide definitive proof of the value of marketing, and it involves treating the brand as a separable asset of the business (an assumption entirely at odds with marketing’s goal of getting the brand embedded into all aspects of the business).  The uses of brand valuation are technical in nature, and few fall within the purview of marketing.

To be fair, Gabi did not conceive her mandate to be “brand valuation – what’s it for?” – she defines her remit as “brand valuation – how’s it done?”  She has produced a comprehensive overview of the topic and has documented in admirable detail the specifics of the various approaches and models.

Tagged as: Brand Valuation, Marketing Accountability

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I am just putting the finishing touches to the T2 Fall 2009 newsletter.

It has been a good opportunity to review the highlights of the past 12 months and, specifically, the progress made on advancing our research agenda.  Whatever else you can say about the GFC (global financial correction), it did at least provide an opportunity to push the peanut forwards on a number of projects that typically take second place to client work.

The newsletter reviews the key findings from our research in five main areas:

1. The scale of intangible value as a proportion of market value
2. The categorization and relative importance of intangible assets
3. Brand valuation
4. Brand strategy and post merger financial performance
5. Social media discussion of brand equity and marketing accountability

We certainly tried to follow Rahm Emanuel’s exhortation of “never let a crisis go to waste”…

Tagged as: Accounting, Brand Measurement, Brand Valuation, Business Value, Intangible Value, Intellectual Property, mergers

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This was the title of my presentation today at the town hall of a talented design and branding firm with which I have collaborated on a number of occasions.  Like so many others, they are grappling with the issue of how to respond productively to questions about ROI and the value of their work.

My mandate was simply to talk about the research and analysis I have been doing on a number of topics relevant to the business context and business impact of marketing.  I talked briefly about intangible value, brand valuation, the brand “bonus” and the relationship between brand strategy selection and post-merger financial performance (all topics on which I have shared topline results in this blog).

I hope I provided them with some interesting insights, and some confidence to engage in the discussion about the financial impact of marketing.  At the very least, I left them with a number of financial observations for use in their conversations with clients:

• Tangible book value represents only 21% of the value of US companies, and 33% of the value of Canadian companies
• Brand value represents an average of 15% of market value – but varies enormously by sector (ranging from less than 5% in energy and basic materials to over 40% in consumer goods)
• Strongly branded companies seemed to benefit from a cushion of 3 to 5% during the market meltdown of late 2008/early 2009
• In the two years following a merger, companies that used the more sophisticated forms of corporate brand outperformed those that used the two “expedient” forms of brand strategy by a margin of 5 to 10%

My parting advice to them was to use any request for ROI or brand value as an opportunity to engage in a discussion about the changes in customer and employee behavior that would result in signficant financial returns.  That would do two things:

• Convince the person asking the question that you are focused on improving the performance of the business
• Generate the working assumptions on which a credible model could be based

Tagged as: Brand Valuation, Business Strategy, Business Value, Causal Model, Intangible Value, marketing and finance, Marketing ROI, mergers

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I am in the process of responding to another RFP that stipulates that brand valuation is one of the deliverables.  Given the context,  it is clear that the client does not mean valuation in its financial sense.  What they appear to want is a methodology for brand evaluation.

I hate to pick nits but it is a source of considerable confusion when a term that has a specific meaning to a financial audience is used in a much broader sense by marketers.  Marketers are often guilty of using financial terminology to describe anything that involves measurement - they overlook the fact that many forms of measurement are non-financial (such as awareness levels, repurchase rates, willingness to recommend and so on).

For that reason, I have found it useful to make the distinction between two forms of brand measurement:

• Brand evaluation is the discipline of developing a quantitative (but non-financial) understanding of the strengths of a brand on multiple dimensions and with multiple audiences.  The focus of brand evaluation is understanding the level of customer value that the brand generates;
• Brand valuation is the discipline of determining the proportion of overall business value that is solely due to the impact of the brand on the behavior of key audiences.  The focus of brand valuation is on measuring the level of shareholder value that the brand generates.

 Brand evaluation is a discipline that should be embraced by any organization that wants to understand what is driving customer preference and internal engagement.  Brand valuation is a specialist discipline that is of particular value when an organization is contemplating a merger or licensing transaction, or when it is engaged in a trademark dispute.

Despite the popularity of league tables of the world’s most valuable brands produced by Interbrand, Millward Brown and Brand Finance or of the world’s most powerful non-profit brands produced by Cone, the managerial applications of brand valuation are surprisingly limited.  A brand does not become more valuable simply as a result of measuring it.  What actually makes a brand more valuable is when an organization is able to enhance the preference for the brand among its existing audiences, and how to promote the brand to new audiences.  The financial value of a brand is determined by the behavior of its audiences.

Brand evaluation is about strategy and management.  Brand valuation is about accounting.  My beef with brand valuation is that it distracts clients from the more productive task of identifying and measuring the sources of their brand’s value to customers, partners, and employees (brand evaluation) and on generating ideas for how this value can be increased.

Tagged as: Accounting, Brand Equity, Brand Measurement, Brand Valuation, Causal Model, Marketing ROI

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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: Brand Measurement, Causal Model, Marketing Accountability, Marketing ROI

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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: Brand Valuation, Marketing Accountability, marketing and finance, Marketing ROI

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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: Brand Equity, Brand Valuation, Business Strategy, Business Value, Intangible Value

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The question I posed in my last blog entry concerned the most appropriate way in which to measure the value of marketing.  To my mind, the best place to start is consider the entire “value added” of a business, then move on to consider what percentage of that value added can reasonably be ascribed to marketing.

Here are some key thoughts to bear in mind:

• All value added is the result of human ingenuity.  Tangible assets are inert – it is only the addition of human capital that makes a business more valuable than the sum of its tangible assets
• A company does not actually own its human capital (that is, the people themselves) but it does own the results of their work in the form of the unique business systems, new scientific discoveries, unique information and desirable brands that they generate
• Certain industries – basic materials and utilities, for example – rely heavily on physical assets, so the relative degree of value added of human capital will necessarily be lower than in industries – such as software - which employ very little by way of physical assets
• Just as the overall value added by human capital relative to tangible assets varies by industry, so does the relative importance of different forms of intangible value.  For example, scientific discovery is the dominant form of intangible value in the pharamceutical industry but, for consumer goods, it is effective brand management

My belief is that a convincing argument for the value of marketing needs to begin by documenting the importance of intangible value in each industry, and then advancing a compelling argument about the relative importance of marketing vs. other disciplines in creating that intangible value.

My next post will try to establish some rules of thumb.

Tagged as: Accounting, Business Value, Intangible Value, Intellectual Property

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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: Accounting, Business Strategy, Business Value, Intangible Value, Intellectual Property, Marketing Accountability

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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: Causal Model, marketing and 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: Brand Measurement, Brand Valuation, Business Value, Marketing Accountability, silver bullet

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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: Brand Measurement, Business Strategy, Causal Model, Customer Value, Marketing Accountability

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I am co-hosting a webinar next Tuesday (May 26) on brand valuation as part of the ANA’s Marketing Accountability series so forgive me as I rehearse my position on this topic.

For me, the key points are that brand valuation:

• Involves valuing the brand as if it were an independent asset of the business
• Is a specialist discipline with considerable value added to specific commercial contexts
• Is – contrary to popular belief – NOT a very effective mechanism for demonstrating marketing accountability
• Is often commissioned for reasons of corporate ego, not business insight

One of the exhibits I am creating for the webinar is “What does it take to get onto the list of the top 100 brands in the world?”  If you believe Interbrand’s data, you need a brand that is worth $3bn to crack the top 100. If you believe Millward Brown and Brand Finance, you need a brand that is worth $6bn (I have pointed out the inconsistency between the agencies in earlier posts so will not dwell on this now…)

For fun, I have decided to work out what kind of a revenue base you require in different industry sectors in order to have your brand appear in the global 100.   The ratio of brand value to revenue depends on two key factors:

• The relationship between market value and revenue for that sector
• The proportion of brand value as a percentage of market value for that sector

Using these two variables and a target brand value of $6bn, this is what I found to be the qualifying revenue levels per industry sector:

• IT – $30bn
• Healthcare – $34bn
• Consumer Staples/Durables – $36bn
• Financials – $77bn
• Industrials – $130bn
• Utilities – $175bn
• Energy – $190bn

Truly it is harder for a camel to pass through the eye of a needle than for an energy company’s brand to make it onto the list of 100 top global brands…

Tagged as: Brand Measurement, Brand Valuation, Business Value, Marketing Accountability, silver bullet

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I often like to ask my clients this question because it reveals their belief about what a brand can – and cannot – do for their business.

I am always surprised when they choose a strong brand over a strong business model. The evidence from my research (see particularly my article on Value-based Brand Management and Measurement) is that a strong brand magnifies the value of a strong business model, but does little to increase the value of an unprofitable business. Based on a sample of 140 companies over a 10 year period, we found that brand strength increased the value of low profitability companies by 20% versus their more weakly branded peers, but increased the value of high profitability companies by over 50% versus their more weakly branded peers.

The implication of this is that we need to think of brands primarily as a means to magnify the value of already successful companies, not as a means to redeem poorly-performing companies.  A brand’s value is largely determined by the quality of the underlying business.

As an aside, that is why I find the issue of brand valuation so misleading – it encourages you to think of the brand as a separate asset rather than as an integral part of your “go to market” strategy.

Tagged as: Brand Measurement, Brand Strategy, Brand Valuation, Business Strategy, marketing and finance

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Last week two brand valuation agencies released their 2009 league tables of the 100 most valuation brands in the world. It is depressing to see that only 58 brands are common to the two lists.  How are we meant to take the topic of brand valuation seriously when two of the prominent agencies in this field disagree so widely about which are the most valuable brands in the world?

My general stance is to applaud anyone who tries to put financial or other business parameters around brands as a way to communicate the significance of their contribution to business performance. But I have to wonder whether the topic of brand valuation is not actually doing a disservice to the cause of marketing accountability by revealing such a lack of consistency in the results.

This inconsistency is everywhere – which brands make it into the top 100 list; what the value is of a specific brand (for 15 brands, this differs by a factor of more than 2 between the two lists); even whether the value of a brand has gone up or down over the past 12 months (for 21 brands, the two lists disagree about whether brand value increased or decreased).

The good news is that brand valuation is largely irrelevant to the issue of marketing accountability – see my earlier post on “Measurement is not the same as Accountability.”

Tagged as: Brand Valuation, Marketing Accountability

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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: Brand Valuation, Causal Model, Marketing Accountability, Marketing ROI, silver bullet

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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: Brand Measurement, marketing and finance, Marketing ROI

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