That may be an overstatement. Then again, it may not. Rance Crain asked me about the changes I've seen in advertising research during my seven-year tenure as president of the Advertising Research Foundation. What we have learned about brands but continue to ignore comes immediately to mind.
To some, a brand is a product name. To the experienced, it includes trademarks, such as logos, slogans and trade-dress. To the enlightened, it's the intangible benefit that differentiates an otherwise readily substitutable product in a highly consumer-relevant way. As such, it is the source of superior unit sales volume, revenue, margin, income and shareholder value.
We've learned a great deal about brands-but little of it is applied to advertising. In part, it's because, for accounting reasons, we refuse to look beyond short-term return on investment to long-term investment value.
Driving short-term incremental sales with advertising is like hammering a nail with a screwdriver: Nothing much gets accomplished and someone usually gets hurt. There are exceptions. Advertising can be extremely effective in generating awareness and trial for a new product. But what it does best is make the brand more valuable, first to the consumer and then to the brand owner. It drives brand value. Unit sales volume is just one component and may, in itself, be inadequate to pay back.
Brands add value in four ways. Consumers will choose a brand more often because they prefer it to comparable products; they will pay more for a brand because they value it above comparable products; and they are loyal to a brand longer because they trust it over comparable products. Finally, it costs less to market a brand because consumers and retailers alike respond more readily to a brand that is more familiar to them.
Ads build brand value
In addition, there are well-documented secondary business benefits (enhanced investor confidence and improved recruitment and retention of top-notch employees, among others).
More unit sales volume, revenue, income and less risk result in more reliable future cash flow streams (the stuff that makes businesses valuable). Finance people capture all this in a single measure, discounted cash flow (or DCF), typically over a fairly long time horizon. When advertising makes a brand more valuable, it generates incremental DCF. Increased brand value is precisely equivalent to sustainable, profitable growth, the mantra of CEOs around the world.
This works for different brands in different ways, depending upon the business model. It's what my partner, Stuart Agres, would call the alignment of the brand's marketing with its profit philosophy. There are but a handful of profit philosophies. For example, does the brand make money by refilling a leaky bucket of deal-seeking customers? Or by extracting a premium price from loyalists who value it highly? If advertising is to build the brand's value, its objectives must be aligned with the profit philosophy.
Marketing and market-research people have long quested for the meaning of "brand equity." Finance people, who ask only one question ("What's it worth?"), have been more successful in defining the ultimate measure of brand value. Even researchers must admit the figures with dollar signs matter most, certainly to senior management!
Discounted cash flow is a protean factor. Is a brand seeking sustainable, profitable growth? That goal is mathematically identical with increasing DCF. Has management committed to build total shareholder returns? That goal is synonymous with increasing DCF. Do you need to protect brand equity? Then guard the brand's DCF. If advertising doesn't build a brand's value, as measured by its incremental DCF, the ad budget is better spent on more effective marketing activities-or dropped to the bottom line.
When does a consumer prefer a brand? When it is differentiated in a relevant way from competitors. The key is the product but marketing communications, and especially advertising, is often next most important.
Now we can begin to solve some pretty major problems. Need growth? Let research point to how advertising can engender adequate differentiation in the minds of consumers to make them prefer, value, trust and respond to your brand to a greater degree. How much advertising? How much will you generate in additional unit sales, price paid and reduced risk to create additional DCF, which results in a positive ROI for the campaign? It may be a multi-year payback scenario. But now we have the metrics for evaluation.
Need to grow total shareholder returns? It's the same drill.
The simplicity of the concepts belies the complexity of the work required. But a simple concept makes it easier to stay on track. Advertising builds brands. Brands build the business. Let the discounted cash flow! n
Jim Spaeth, president of the Advertising Research Foundation, New York, is joining Sequent Partners, Cambridge, Mass., in July.