Brands are multipliers, not assets in themselves

Brands act to accelerate the value of a business model rather than being assets in themselves. Framing brands as standalone assets will simply serve to alienate finance.


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Marketers love to describe brands as assets, hoping that this will cause other business disciplines to view marketing as an investment, not a cost.  This description fails to impress either the CEO, the chief finance officer or even the chief accountant.

Let’s start with the latter. The accounting rules define an asset as “a resource that is owned or controlled by the business” – brand equity does not meet the requirement of being legally enforceable property (only the trademark does).

Similarly, the CFO expects an asset to have an earnings stream attached to it.  He or she observes that customers buy branded products and services, but they do not buy brands themselves.

To generate value, a brand must be attached to a good service offering and an efficient business model.

Most importantly, the CEO cares about the performance of the overall business – and specifically how its success in the marketplace shows up on the top line and bottom line of the income statement, and in the operations section of the cash flow statement. Assets appear on the balance sheet and this rarely gets a mention on earning calls.

It is more compelling and more accurate to describe brands as multipliers, not assets.

Tim Ambler, the CMO of the predecessor company to Diageo and a senior fellow at London Business School, famously described marketing as “the sourcing and harvesting of inward cashflow”. The CEO and CFO are most definitely interested in things that accelerate the speed and scale at which the company converts its invested capital into cash flow.

This is why innovation is always a key topic on earnings calls.  Innovation is known to influence current earnings (for example, observe how often AI is described as a source of cost savings) and the trajectory of future earnings (for example, the impact of GLP1 drugs, such as Ozempic, on the future demand for snacks and processed foods, which may drag on the future cash flows of the likes of Kellogg and Kraft Heinz).

Marketers should be describing brands as accelerants rather than assets.  Brands are valuable because they accelerate, increase, and sustain cash flow by attracting more people to buy more often and at higher prices.  Their effect is to magnify the value of the underlying business model.

Twenty years ago, I was fortunate to have the chance to combine two data sets that allowed us to measure the relationship between brand strength and operational performance.

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BrandEconomics, where I was senior vice president, was the joint venture between Young & Rubicam, the storied advertising agency and the creator of BAV (the ‘BrandAsset Valuator’ methodology for measuring brand health), and Stern Stewart, the financial advisory firm and the creator of EVA (the ‘Economic Value Added’ methodology for measuring financial performance).

By integrating the BAV and EVA data for a large sample of companies, we measured the degree to which the value of a business was a function of the efficiency of its operating model (its EVA performance) and the strength of its customer franchise (its BAV performance).

It was a complicated undertaking but the results are summarized in this simple two by two grid that shows the relative impact of improvements in operational efficiency versus customer franchise:

The bottom left quadrant contains the companies that performed below average on both dimensions – we indexed their value to sales ratio at 1.0 so we could observe the change in value from moving to the other quadrants.

What we discovered was that companies that focused on improving their operational efficiency (measured in terms of their EVA margin) nearly doubled their value (their value to sales ratio rose to 1.9).

Companies that strengthened their customer franchise (measured in terms of their BAV brand strength score) but did not improve their operational efficiency only increased their value by 20% (their value to sales ratio rose to 1.2).

Businesses that managed to improve their performance on both dimensions nearly tripled in value (their value to sales ratio rose to 2.9).

The 1.2 quadrant consists of companies that developed strong brands but struggled to operate a business model that enabled them to monetise this brand strength.

The 1.2 quadrant is unwelcome news to marketers who want to believe that a “strong brand equals a strong business”. The stock market rewards companies who deliver cash flow – it does not reward companies that develop strong brands but struggle to operate a business model that enable them to monetise this brand strength.

Bed Bath & Beyond is a prominent example of this phenomenon. The household goods chain is a well known name in the US and has existed for over 50 years, expanding to more than 1,500 stores at its peak. However, it went bankrupt last year. The brand was acquired by ecommerce business, which then rebranded its entire business to Bed Bath & Beyond. Commenting on the change,’s CEO called Bed Bath & Beyond a “much-loved” brand with an “outdated business model”.

Finance cares about the performance of the overall business system, not the value of any single asset.

To generate value, a brand must be attached to a good service offering and an efficient business model.

By contrast, a good service offering and an efficient business model alone can generate value – the 1.9 quadrant consists of “no name” companies that are extremely good at the technical and operational side of their business.

This could contain NVR, the home building and mortgage company, whose shares have risen by more than 5,000% in the past 20 years, or IDEXX Laboratories which specializes in veterinary products. The market rewards these companies with high value to sales multiples because of their proven ability to generate cash flow.

The 2.9 quadrant consists of companies that were both excellent operators and great brand builders: for example, the Apples or Microsofts of the world.

The single most important insight that comes from this research – and the one that has guided my thinking ever since – is that brands are multipliers of the value of the underlying business.

Observe how brand strength increases the value multiple of a company with a weak operating model by 20% (moving it from the 1.0 quadrant to the 1.2 quadrant) but by 50% for a well-run company (moving it from the 1.9 quadrant to the 2.9 quadrant). Brands are more valuable to companies with strong operating models.

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This is why I am sceptical about brand valuation as a practice (and I worked in the industry for several years). Brand valuation involves treating the brand as if it was a standalone asset with its own earnings stream. This approach may create common ground with accounting – but it misses the mark with finance.

Finance cares about the performance of the overall business system, not the value of any single asset.

The simplest model for valuing a business is the Gordon Constant Growth model which estimates the value of the business as its profit divided by its cost of capital minus its growth rate.

This model illustrates that there are only three sources of value creation – increasing the profit margin of a business, or increasing its rate of growth; or increasing the certainty of those future profits (that is, reducing the risk of them not materialising).

CMOs will find that they have a much more productive conversation with their CFO if they frame marketing activities (and budget requests) in terms of improving the growth, margin, and cash flow profile of the business rather than in terms of increasing brand value. In other words, talking about the brand as a multiplier rather than an asset.

Jonathan Knowles is the principal of Type 2 Consulting, a firm that specialises in developing market strategy for companies in the 1.9 quadrant.   He is the author of “The Strategy of Change” series for the MIT Sloan Management Review.