What’s the business case for branding?

How do I justify spending money on identity or brand-building work when I could assign it to shorter-term, measurable, activities?

What is a strong brand anyway?

If you’ve asked or been asked these questions, you’re not alone.

Most people we speak to are trying to understand and unpick the commercial benefits a strong brand can bring. And it’s tricky – when a definition is as loose as a “gut feeling about a company, product or service” (Marty Neumier), who can blame us for failing to immediately grasp the potential benefits of a strong brand?

Certainly, most of us ‘get’ it in theory – we understand intuitively that consumers pay more and buy more from well-branded companies, but how do we prove that quantifiably?

And what’s the optimal mix between brand building and more measurable, short-term activities?

Let’s dive in.

Summary

A strong brand (more on that later) has the effect of moving the demand curve up and to the right, enabling brand owners command higher volumes, prices, or a combination of both.

It does this by increasing brand preference – which simply means a consumer prefers the brand to similar alternatives.

We’ll unpick strong brands and how to drive brand preference later but suffice it to say for now that a strong brand unlocks incremental cashflows for a business thereby increasing brand valuation and ultimately shareholder returns.

Let’s see what the studies show:

Sales

Strong brands deliver between 3 – 5 times the volume of sales of low and medium-strength brands, according to a large study by Kantar Millward Brown.

Strong brands in this study are defined as Meaningful (the extent to which brands build an emotional connection and are seen to deliver against functional needs) and Different (the extent to which brands set themselves apart from the category)

Price

Two key studies underpin the price premium strong brands can deliver.

In the above mentioned study, Kantar Millward Brown found that strong brands deliver a price premium of up to 13%.

And in a study in the Food & Bevarege category, Marketing Science Institute found that strong brands can deliver up to a 26% price premium, even when product quality was the same.

Margin

In a study of food and beverage brands, brand-centric companies achieved 20% to 30% operating income margins versus single-digit operating income margins among commodity-type or distribution-based competitor companies.

Growth

Strong brands are 4x as likely as weaker brands to grow in the following 12 months.

Asset value

If sales and margins are increasing, shouldn’t asset value?

This study showed that intangible assets have gone from representing 17% of the balance sheets of the S&P 500 to 84% by 2015.

And another study by Type 2 Consulting showed that Brand Value represents c.20% of market cap on average.

So, at least a fifth of the S&P 500 combined value is attributable to brand.

Shareholder Returns

Highly branded companies – organisations whose financial brand value makes up a high proportion of overall enterprise value - achieved stock market returns 78 percentage points higher than the S&P 500 index between 2015 and 2020. Highly branded companies’ returns were less affected by the impact of COVID-19, suggesting highly branded companies were better placed to weather market volatility.

The data shows a clear case for brand building. Strong brands unlock brand preference which results in incremental cash flows, improved growth opportunities, and higher shareholder returns. But how do we begin to think about splitting budget allocation between longer term brand building, and shorter term activation?

The split between brand and short term activity

The case for brand investment is clear but one of the challenges of understanding the value is that benefits accrue over a longer time horizon.

Take this for example, showing the longer time horizon of brand building and why measurement is critical over longer time periods.

So, what’s the optimal budget split between brand and marketing activities?

It varies by sector but the most commonly cited split is the 60/40 in favour of brand awareness activity (Binet & Field, 2013)

Any lower on the brand building spend won’t have the desired effect of building incremental brand preference thereby reducing the ability to drive future cash flows. Any lower on the sales activation means less conversion of sales potential as brand equity grows.

Conclusion

It’s not as easy to define, measure or track brand ROI. But it’s just as, if not more, important than measuring digital and short-term marketing efforts.

Building long term preference, improved incremental cash flows, and deeper market penetration, is deeply linked to brand building.

To underpin long-term growth, brand building is an essential element of the mix.

Our next piece will detail how to build a strong brand to deliver the returns we outlined here.

Finally, if you’d like to read more please see our White Paper: “Branding – A Commercial Case”. Just click the link below to receive a copy.