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The financial benefits of brands

X27_1_brand_finance_9601.jpg A name and nice logo is not the same as a 'brand'. Developing a brand requires investment to make the brand stand for something - quality, value, effectiveness - and for this to translate to a value benefit for customers in terms of purchase consideration and willingness to pay. To be successful this investment also has to result in a financial return over from using and supporting the brand, over and above generics or white-labels.

Branding is thus an investment decision in addition to being a promise to the customer. Brand equity is used to measure the value of the brand, as it is important to recognise how a brand adds value and what that value is in financial and investment terms.

Value from brands

Economic theory gives an insight into why and how brands are valuable. One of the core ideas of microeconomics is that in a competitive market, the price of goods will drop to the point at which they match long-run average costs of production (these are total costs which an average level of return to shareholders). This means that in purely competitive situations, there will be continual pressure on prices as products battle to make sales.

Where marketing is just about promotion, at one level all the company is doing is shouting, increasing the competitive temperature in the marketplace. Each offer or promotions is another way of reducing prices.

The key for successful companies who want to deliver above average returns to shareholders is to find ways in which they can move above this competitive situation, effectively finding mini-monopoly positions where they can defend prices from competitive pressure in order to maintain profits above normal. We describe these positions as points of defendable differentiation.

Companies can establish these points in a number of ways. For instance, by creating a leading technical position using intellectual property, leveraging scale advantages to become the lowest cost producer, or by creating customer loyalty with consistent excellence, or by creating bonds that connect emotionally through design and image.

Marketing at a strategic level is more about creating these types of differentiation than it is about promotion, and the brand is the main mechanism for creating defendable differentiation, as technology can be copied, superseded or rendered obsolete.

 

Purely as a guarantee offers low levels of brand value...

Using the Brand Pyramid, at the lower levels of the Pyramid, the simplest way in which the brand works is as short-hand or a mnemonic for a specification or guarantee. If a brand is to be adding value financially at these lower levels, it needs to be acting to help reduce total communication and sales costs by adding reassurance.

In this case, the brand is a promise of a quality of delivery, and the brand communicates the promise - we don't have to explicitly say what the promise is every time we make a sale.

For a brand to successful at this level it has to be widely recognised (ie it requires a high brand awareness for the guarantee effect to be recognised). However, just at the levels of specification and guarantee it can be easily mimicked, and so long term will not act as a barrier to price competition. Generics and white label can also offer similar specification and guarantees.

 

Higher levels of brand value require deeper connections and offer higher return...

Where the brand does come into its own is at the higher emotional levels of the brand pyramid, where the brand is a mark of association or a mark of emotional involvement. Top brands establish emotional linkages and promises that cannot be copied by competitors. An own-label Cola is not Coke. This means that the brand can be defended against price-competition.

Thus a leading brand may compete with other brands, but it is rare for an individual brand to compete on price, as it has the potential to devalue the brand (and reduces the long-run potential for profits). As ever there are exceptions, and brands that can maintain a position of quality while being cheaper than competitors can steal market share from rivals.

Nonetheless maintaining a brand is not a cheap option - it doesn't just happen. The brand has to maintain relevance and connection with its target customers which means advertising to reinforce position and meaning, rather than just awareness. For a company looking at the financial return it gets from brands, it has to take into account the extra income it receives from having a strong brand against the costs of maintaining the brand.

 

The type of approach to branding is a choice and a strategic decision that requires decisions about investment with commitment. As such they need to be made using solid evidence and long-term monitoring.

For help and advice on building a branding strategy contact info@dobney.com


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