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The Economics of Brand.

Long Term Profitability, how those ‘three little words’ could be the key to your future happiness, or not.....

At some point in the life cycle of the brand you own, run, or have been left in charge of, you will be confronted by a) an exit strategy via IPO, M&A, Leveraged Buyout or b) a need to raise external funding via Debt Capital, Equity Funding.

Both points a) and b), come in many forms, with varying challenges, and degrees of complexity. But, you’ll be pleased to know we will not be tackling any of that in this article. In the second of a series of articles on brand, we will be focusing on a subject close to the heart of any organisation with a mind to getting involved financially with a company. That is the ability to deliver long term profitability.

First a quick test. Lean back in your chair, place your hands atop your head, smile, and say the words “long term profitability”. It feels good right? If you already have LTP, stay where you are, keep smiling, enjoy the moment then read on. The world is not static and neither is your brand.

What has all this got to do with brand? Everything it turns out. Regardless of where your business is in its life cycle, how strong your brand is will play a major role in your ability to scale, adapt and/or raise finance.

Your brand is almost certainly your most valuable asset, and ironically, the hardest to pin down on the balance sheet. Your brand is what makes you, you and well, not them. It’s what makes you distinct from your competitors, makes people feel validated in buying your products and services and it’s what elevates you from being a simple commodity. When Unilever acquires a plucky DTC company, yes, it’s buying the products and infrastructure and customer base, etc., all of which, arguably, it could muster on its own (Dollar Shave Club - OEM razors & Graze - fruit, nuts & cardboard). But what it’s really buying is the brand and what that brand brings to their portfolio.

“Choice saturation is an issue, you need to stand out, be known for something that justifies your price point.”

Making, having and maintaining a strong brand is absolutely vital, repeat vital, for growth, investment and acquisition. Brand should be the main topic of conversation in every boardroom, management meeting and every work shindig from now till kingdom come.

For start-ups/disruptors/fast growth companies (DTC or not), your brand is your best pal when it comes to your ability to scale up in a very cluttered world. Choice saturation is an issue, you need to stand out, be known for something that justifies your price point and have an impact that will last all the way to point of purchase. Bloody difficult to pull off at the best of times, impossible if your brand is weak.

For more established organisations with an eye on an index placing, a strong brand has a big impact on share of voice, share of market, advertising efficiency and ability to price effectively.

Companies around the world are finally coming to terms with the notion that their brand is their most important asset. The obvious example, and one most used, is Apple. They make stuff, good stuff but take away the brand, and you’ve got just another manufacturer of stuff. Without the brand their price point drops to Lenovo levels and Apple has just wiped approximately $240 billion off its market cap, ouch.

A strong brand will get you more and better customers, keep your competitors on their toes, give you better leverage on distribution and wholesale and allow you to charge a higher price for your output.

Read any top notch business journal or investment publication and at some point the topic will turn to pricing power. Which is a brand’s ability to raise prices without losing market share.

Now some may be reading this and thinking “Why raise prices? If customers have to pay more we’ll lose them.” If that’s the case you’re really going to need to focus here. If your customers truly love the value your brand brings into their lives, they will be comfortable paying a little more, fact.

Remember value is not about how much something costs, it’s about what you offer that adds to or enriches their lives. If your brand is not providing the value customers want, then you have problems. If they are not willing to pay more, you have problems.

God’s gift to investing and professional rich man Warren Buffet says -

The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business….. If you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”

As well as increasing profit, the ability to raise prices sends out positive signals on two fronts. It shows your customers you are strong, confident, you are quality. It also shows the market you have the business moxie to raise prices, Buffet is right! Now, go the opposite way, start relying on sales activation and discounting and you send out a completely different message. Your customers think hmm, are they in a weak position, are they cutting corners and maybe quality? It tells the markets you cannot raise prices? Buffet is right again! And that is why Warren Buffet is so very very rich. The bastard’s almost always right!

“Strong brands generate 31% more return to shareholders than the MSCI World average.”

Here’s the science, increase your volume by running sales promotions and you will sell more, most probably. Increase the price slightly and you will sell slightly less, maybe, maybe not. But here’s the rub, the operating profit form a tiny increase in price is much greater than the operating profit from a tiny increase from volume.

  • 1% change in price creates a change in operating profit of 11.1%*

  • 1% change in volume creates a change in operating profit of 3.3%*

*Professor Ken Wong: Smith School of Business

If there is one thing that is an absolute must have, in terms of your organisation’s ability to grow, prosper and raise finance. Your ability to raise prices against your competitors, without losing share, is a direct result of the power of your brand.

Brand has a massive impact on pricing ability which has a massive impact on everything else, including enterprise valuation. Not sure? Here’s some brand statistics from some of the worlds best research, analytics and management consultancies -

  1. Brand valuation accounts for more than 30% of the stock market value of companies in the S&P 500 index.1

  2. Three-fifths of CEO’s say corporate brand and reputation represented more than 40% of their company’s market capitalisation.2

  3. Strong brands generate 31% more return to shareholders than the MSCI World average.3

  4. People’s willingness to buy, recommend, work for, and invest in a company is driven 60% by their perceptions of the brand and only 40% by their perceptions of their products.4

  5. B2B companies with robust brands perform 20% better than companies with weak brands.5

  6. Strong brands capture three times the sales volume of weak brands.6

  7. Strong brands can command a 13% price premium over weak brands, and 6% above the average brand.7

  8. Consumers are willing to pay more for strong, familiar brands.8

  9. In the consumer service sector, brand value accounts for 43% of total market capitalisation.9

1) Kantar Millward Brown, 2) World Economic Forum/Fleishman Hillard, 3) McKinsey & Company, 4) Reputation Institute, 5) McKinsey & Company 6) Kantar Millward Brown, 7) Kantar Millward Brown, 8)ThinkBox, 9) Type 2 Consulting.

A strong brand delivers intrinsic value, better performance and higher profitability. It also has an impact on people’s willingness to work for you.

“I’d like to bet WeWork has very different people today than it did say 4 years ago.”

Having a strong brand will help you attract the best and most talented people and will enable you to retain those good folks for longer. It’s no surprise to hear that companies with good people who stay have better companies. Dedicated, motivated, valuable employees make dedicated, motivated valuable brands.

Your brand has an impact on your employees and how they feel about where they work, have you ever met one of those smug people who work for Apple in California? It also has a big impact on attracting the best talent. Good people know where the good places are.

I’d like to bet WeWork has a very different calibre of employee today than it did 4 years ago. There’s a separate article, or book, or Netflix mini series around WeWork’s astonishing fall from grace and SoftBanks horrendous walk back. The slide above is from an actual quarterly earnings call, hands up who wants to present that slide to the shareholders? Some fantastic column inches have been dedicated to this debacle, feel free to google them. The main things to take away are the keywords governance, leverage, valuation, hype, oh and morale rectitude.

As someone who has worked for some prestigious brands over the years, it’s comforting getting up in the morning knowing you work for, and therefore you, yourself must be, the best. Working for the best/cool/well known brand does wonders for your self esteem and interestingly your willingness to go the extra mile. Dedicated, motivated, valuable employees make dedicated, motivated, valuable brands.

Finally, it would be crazy to talk about the importance of brand without touching on the decades long research of marketing effectiveness champs, Les Binet and Peter Field. Their work has had a deep impact on lots of very good marketeers, if they made a Netflix mini series about their work, I would watch it in a heartbeat! Their most cited, and probably most well known doctrine is the 60:40 ratio. It’s like Einstein’s general theory of relativity, but for brand marketing. Here’s a fun representation -

E = 60:40

E (effectiveness) = 60% (long term brand) + 40% (short term performance)

Their work has shown that over time, something every brand should want to be around for, long term brand building activity pays dividends, very literally (see point 3 above). That is not to say short term sales activation is not effective, far from it. But what their work shows is that a split in focus and budget by 60% for long term brand and 40% for short term sales activation will deliver the most effective returns.

Look at the chart above. Now, imagine your brand is the red line, and your closest competitor is the blue line. How do you feel? Would you be happy taking this chart into the next AGM? Or would it be quietly filed away in a very, very deep sales folder on an obscure computer found in a part of the basement you only use to store old chairs?

“The real uplift, and resultant growth, comes from your long term brand building activity.”

In the short term, sub 6-9 months, sales activation does provide better uplift compared to brand building activity, no argument there. It’s easy to see why boardrooms and management teams see this as attractive. You’re getting numbers on the board, positive things to report, sales are up, everything is going well, hooray.

However, at some point someone "upstairs” is going to pipe up about growth. And this is where the true ballers can roll up. The real uplift, and resultant growth, will come from your long term brand building activity. Yes, it’s a long road, and yes, it takes a little time to get up to full tilt, but once you’re past the 9 month period, you’re like Pusha T leaping from the free throw. From this point onwards, you’ve got numbers on the board that you really want people to see.

I realise I have made a big assumption here that your brands have the chops - products, people, innovation, infrastructure, distribution, and yes brand - to pull this off. But if you’ve got this far through the article, you almost certainly have!

Make building your brand a top priority. You can start today, the sooner you do it the quicker you will see results. Start with a simple meeting where you decide to implement the 60:40 ratio, there you go, the first step is almost done. Take steps, do things that build your brand and your department and/or business will deliver profit and growth over the long term.

Long term profitability will be the major focus when it comes to funding or acquisition. Those three little words, long term profitability, are literally music* to the ears of anyone considering investing in, or raising capital for, your business.

*Vocal sounds combined in such a way as to produce a beautiful form.

Join us next time where we will be looking at the elements you need to develop and sustain a strong brand.

BANG YOUR DRUM is a Specialist Audio Design Agency.


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