BUILDING BRAND IS BUILDING WEALTH
While the power of strategic branding (we’re not talking logo design here) to help companies increase financial returns, both operationally and in M&A transactions, is understood and acknowledged, it is, inexplicably, still lost on some. Forget the unfortunate reality that some people limit their understanding of “brand” to a visual identity; the challenge is that the inherent power of branding is intangible by nature. It is emotional. It is an abstract dynamic that grows value exponentially over time. It is not always an “invest X and get Y” type of deal. In today’s real-time ROI mindset of clicks, likes, and shares, this is at the core of the challenge.
But things have changed. Successful leaders know a brand-driven approach to value creation is a philosophy, a way of building the financial value of a business, and that it requires investment and commitment. It’s a fundamental best practice, and they know that the significant and tangible returns are undisputed. This is how they build business. Brand values, those often intangible attributes, are a main reason why the market capitalization of well-branded companies exceeds their book value when selling, acquiring, or merging.
Like any relationship, building brand equity is a process that delivers increasing benefits over time. Apple has always been brand-driven, and the benefits are obvious. They have always approached business this way. They control the hearts and minds of their people and their audiences through every experience and touchpoint. Apple is an obvious example, but the benefits hold true for any company, regardless of size, category, B2B or B2C. Thinking this way can return incremental millions to firms that operate with this philosophy.
SOME FOUNDATION
It is universally understood that a company’s value is directly reflected in a buyer’s assessment of its current and future earnings potential, driven by both tangible and intangible assets. Future potential is a direct reflection of brand equity and goodwill, and also a source of negotiating leverage.
Brand value and the equity therein are viewed as intangible company assets that directly affect purchase price. Beyond IP, trademarks, patents, and copyrights, intangible brand attributes are significant drivers of purchase price above book value and earnings. A strong brand is found to have a significant impact on enterprise value on a contemporaneous basis and on a 1-year time-lagged basis, indicating brand value has a lasting effect on firm valuation over time. 1
Brand equity is the term used to describe the value of all attributes of a brand, with an understanding that direct strategic, operational, and marketing actions can result in improved outcomes and add value for the brand (Keller, 2003). According to David Aaker (1992), brand equity is attached to the brand’s identity and experience, providing incremental value to both the customers and to the firm. Further evidence of this value is supplied by recent examples of the substantive sale price of a brand even after bankruptcy and liquidation of a firm’s remaining assets (Zipkin, 2009). Aaker originally maintained that five key brand equity assets provide the source of value for a firm: brand loyalty, brand-name awareness, brand quality, brand associations, and other proprietary brand assets. (Aaker, 1992). In today’s environment, across B2B and B2C, Aaker’s view is expanded to include considerations such as behavioral loyalty, attitudinal loyalty, brand awareness and preference, brand experience and brand salience, purpose and relevance (brand attributes that a consumer perceives as personally and emotionally relevant).1 Bottom line: properly executed strategic branding builds significant equity and goodwill – the drivers of improved market performance, revenue, and increased transaction multiples. The drivers of value.
WHY IS IT STILL LOST ON SOME?
Okay, given all the undisputed proof, where’s the gap in understanding? Because the word “brand” is a bit of a misnomer and often misused. Throw out the way you might traditionally think of brand. Every company is a brand, and company positioning is brand positioning. It pays to think in these terms. Without thinking about a company as a brand, only tangible brand attributes are applied to value. In which case, much of the value is missing.
Branding is a very calculated model of emotional manipulation. There’s a business, product, or service, and the job of brand is to build relationships that embed love, preference, and loyalty in the brains of both the firm and the marketplace. The psychology of relationships comes into play here. Relationships take time; they grow and endure when all parties are treated well, have common ground, and all believe in the same things. All this drives loyalty and long-term value. Building this value requires exploiting all the tangible attributes of a strong brand, like IP, the offering, and, more importantly, the intangible brand attributes like sentiment, preference, awareness, saliency, loyalty, etc. This understanding of brand psychology and its strategic application is precisely what brand believers know that separates successful brand-driven leaders from those still focused solely on traditional metrics. Thinking this way has historically been anathema in the B2B space, and often a hard sell in the consumer space, where cost against return is the driver of decisions.
EMBRACING BRAND
These days, successful leaders in the PE/VC community are embracing brand in a way that it historically has not. These leaders understand that positioning a brand (a business) for optimal performance leverages all the tangible as well as intangible attributes of what a brand is, and they are aligning with companies to integrate these capabilities, whether for brand due diligence, optimizing market performance, or positioning for exit. Proper brand positioning not only looks at the offering, the market, the competition, and the investment goals, but also all the psycho-drivers and intangible attributes that accelerate performance and value. It is a strategic, enterprise-wide, and market-wide effort. The struggle in the past was that many of the things that need to be leveraged can’t be articulated on a balance sheet. Factors such as perception, social responsibility, preference, likability, sentiment, brand purpose, values, relevance, etc, are attributes that are hard to specifically quantify and measure. But when exploited collectively and synergistically, they are acknowledged as the core drivers of long-term value and increased ROI.
Smart brand strategy positions businesses for market dominance, increased equity value, and maximum investment outcomes. Strong brands improve employee retention, satisfaction, and performance. Strong brands drive differentiation, sustainable preference, and competitive advantage in the market. Strong brands build equity, which in turn drives goodwill and the promise of future performance – the single most critical factor for increasing transaction multiples. For leaders ready to implement this strategic approach, building high-value brands provides the foundational framework for systematic brand development. Simply, companies with well-structured and strategized brands dominate in the market and are worth more at exit or IPO.
REAPING THE REWARDS
Leadership for successful private equity and venture firms are implementing these best practices for building value by leveraging resources that can seamlessly integrate these brand assessment and optimization skill sets in services ranging from brand due diligence to re-positionings to asset performance improvement. They know that initially, brand strategy has nothing to do with the tactical execution of marketing, collateral, logos, or ads. Rather, branding is the seminal, foundational business strategy that incorporates and optimizes all the psychological intangible drivers of value across all constituents; only then is that strategy extended to execution. Leading PE/VC firms today know that the benefits of this approach to building equity have value across all aspects of their portfolio businesses, internally and externally. They see the cumulative benefits over time, each compounding the benefit of the other. They know that being brand-driven dramatically increases performance and market value. They consider the benefits of leveraging brand attributes in aggregate and know they become the catalyst for competitive advantage, premium pricing, resistance to competitive attack, and market fluctuations; the list goes on. And to realize 12X instead of 4X on a transaction. And yeah, shareholders like that.
For leaders who demand that their portfolio businesses dominate in the market and realize maximum investment returns, thinking this way has become standard operating best practices for building value. Successful leaders are brand-driven from day one. Their firms and their shareholders will realize significantly greater market performance and investment outcomes, guaranteed. Building brand to increase investment outcomes has definitely found its stride.
We like that.
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The Impact of Brand Value on Firm Valuation: The Moderating Influence of Firm Type. Journal of Brand Management, June 2013
