Why brand equity is the true measure of success

Brand performance is a better way to forecast profit trends than profit and loss accounts. The problem is how it should be measured.

So Coca-Cola has lost 13 per cent of its brand value from 1999 to 2000, while Ericsson, bless it, lost 47 per cent. Meanwhile, according to the latest Interbrand/Citibank survey of the world’s top 75 brands, Microsoft gained 24 per cent (that’s $14bn (£9.3bn) of brand value) in one year, while Nokia rose by 86 per cent.

Two questions. Do you believe exact “scientific” numbers like these? And are they really useful?

Here’s a suggestion: put league tables like these in the same category as a Hello! magazine list of the 20 most eligible bachelors. It’s great fun. But it isn’t really serious. These brand valuation tables tell you little you didn’t already know about the brands concerned. And the numbers yo-yo wildly up and down from year to year – just like companies’ profit and loss results do – because that’s what they represent: extrapolations of current performance based on publicly available marketing and financial information.

Naturally, the numbers are adjusted for various things, including a proprietary black-box “role of branding” index. But in the end, the methodology takes current financial numbers to estimate future operating profits: “the net present value of the profits likely to be generated by products carrying the brand name,” as the FT explains it.

This sort of brand valuation gets short shrift from London Business School professor Tim Ambler, who has just completed a two and a half year research project on marketing metrics. Don’t let jargon such as “net present value” blind you, he suggests in his new book “Marketing and the Bottom Line”. This is “guesswork, not science”. It is “especially illogical to judge the performance of today’s brand managers on the basis of what their successors may achieve”.

Ambler’s alternative is intuitively much more appealing. The natural life-cycle of brands doesn’t fit the timescales of the annual financial statement. Brands grow and decline over much longer periods, like the level of water in a lake as opposed to the amount of water flowing in a stream during a dry spell or after a storm. The profit and loss account measures these short-term flows. But what companies need is a measure of the water in the lake, and whether it’s rising or falling. And that figure cannot be found by brand valuation techniques which extrapolate from those short term flows. It can only be found by measuring brand equity: “what is in people’s heads about the brand”; “the storehouse of future profits which result from past marketing activities”.

Companies which develop good measures of their brand equity have an early warning indicator of likely future profit trends, and can get a much better feel of the dangers of short-termism, suggests Ambler. If brand equity is falling, you’re storing up trouble for yourself. Just look at Marks & Spencer. If brand equity is rising, you’re investing in future performance, even if it’s not showing through in profits today. Real business performance therefore equals short-term results plus shifts in brand equity, and “for every business, brand equity should be the prime measure.”

“Back in the Eighties, no companies were formally measuring brand equity. By 2010, no professionally managed business will fail to do so,” declares the professor.

Trouble is, brand equity remains an elusive beast. Ambler recommends using a mix of three different types of measure: inputs such as share of voice or marketing as a percentage of sales; intermediate measures such as perceived quality, awareness and customer satisfaction (preferably relative to the competition); and actual behaviour, such as market share, relative price, customer gains and retention and so on.

Pretty familiar stuff, in other words. But the critical issue is which measures to use. Each business needs a robust set of measures that dovetails with its particular business strategy and which (assuming the strategy itself is correct) help it pinpoint how well it’s making progress towards its goals.

There’s no one size fits all solution. Simple example: if you are a dot-com in launch phase, awareness is a critical measure. If nobody knows you exist, you’re sunk. But if you’re Dulux in the UK DIY market, adding an extra percentage point to your awareness score is hardly relevant. “You’ve got to work out which milestones reflect your strategy,” says Ambler.

Also, internal and external measures need to chime. If your brand equity is driven by successful innovation, for example, then internal measures such as “active innovation support” and cultural attributes such as “appetite for learning” or í”freedom to failí” are likely to be crucial indicators.

A rigorous approach to such metrics has many benefits, Ambler suggests. For example, “measures put meaning into the jargon”. Everyone agrees that customer loyalty is crucial, but it only becomes clear they have different ideas about loyalty when you say, “OK. So how shall we measure it?”.

Likewise, focusing on metrics helps communication. Every business person has some sort of mental model as to how business actions translate into revenues and profits. But Ambler asks, “Is this mental model explicit? Is it shared by every member of the board?” Getting the metrics sorted is one way of making the implicit explicit and of uncovering hidden but potentially damaging misunderstandings and disagreements. “You can’t look at your metrics without looking at your strategy.”

All this goes beyond familiar debates about marketing accountability and advertising effectiveness. And it may just improve the status of marketing.

According to Ambler’s research, on average, boards spend 90 per cent of their time discussing operational issues, supplies and suppliers, corporate governance, financial matters and so on, but only about ten per cent of their time focusing on the motivations of the ultimate customer. In other words, they “devote nine times more attention to spending and counting cash flow than wondering where it comes from and how it might be increased.”

Yet that is what marketing does. It focuses on the source of all the company’s cash flows: the customer. Marketing, says Ambler simply, “is about generating cash flow”. Perhaps, he muses, “if we started talking cash flow rather than marketing, then British industry would pay more attention”.

Alan Mitchell


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