If you are like most marketing managers, you base your argument on research demonstrating that loyalty and evangelism can accrue from investments to build brand equity. Perhaps you provide your own consumer-based evidence of the power of branding, using psychological concepts such as perceived value, brand preference or brand awareness and recall.
Unfortunately, these are not ideas that persuade a CFO. Void of a direct link to the pivotal financial concepts of profitability and risk, the clout created by the strength of a brand gets little credit, if any, for driving company success.
Moving the needle
Brand-equity measurement is a messy, complicated task that has always left managers uncomfortable drawing a solid conclusion about the role brand plays in affecting the bottom line. It's therefore no wonder that company bean counters view branding as the proverbial black hole: a drain on corporate resources that offers little proof of comparative investment returns.
Cultural barriers further separate creative marketing minds from analytically savvy finance executives; the two simply don't conduct business by the same lexicon or against the same goals. Marketers focus on the emotional and psychological aspects of their brands: How do consumers think about a particular company or brand? How does the brand make them feel? How do brand perceptions compare across competitors?
Marketing success is measured through metrics that seem one step or more removed from the bottom line: brand share of market, brand salience, customer satisfaction, brand loyalty. Professional training for the marketing practice seems esoteric to those outside the craft. What can art, entertainment, negotiations and creativity skill sets have to do with accounting and finance? Marketing jargon abounds. Brand marketers claim perceptual spaces, craft brand personalities, engineer experiences. The black hole indeed seems endless.
Speaking the language
Certainly, such questions are important for brand benchmarking. But only by demonstrating brand-building's effects on the company's bottom line will marketing executives generate C-level support for their branding plans. To attain a rightful place in the company as equity-enhancing mechanisms, brands must be reframed from assets to be managed or expenses to be controlled. The focus of marketing accountability must shift from demonstrating branding's impact on the creation of customer value to a dual role that jointly considers the brand's influence on creating shareholder value for the company as well.
Our new study, "Brands Matter: An Empirical Demonstration of the Creation of Shareholder Value Through Branding," may help marketing management cross the chasm to achieve this goal. The major finding from our research is that strong brands deliver greater stockholder return at less risk than other brands. The effects of brands on shareholder values were powerful and dominant and far outweighed commonly acknowledged factors such as market share and firm size. The major implication is that brands can and should be considered as corporate risk-control mechanisms and not just bundles of meaning that distinguish products and companies in consumers' minds. A point I want to make clear: We used accepted, proven and well-researched, widely published models from the finance sector, not some proprietary model where no one knows how it works or how the results were obtained. We successfully married proven financial models commonly used in determining shareholder value creation with the bottom-line returns of a group of corporations identified by Interbrand as among the world's most-valued brands, creating a direct link between the two.
To demonstrate, we evaluated a portfolio of major corporations with an emphasis on branding and modeled their financial performance during a seven-year period, from 1994 to 2000. We used the Fama-French model, a respected mathematical model that takes into consideration an investment's riskiness when evaluating its effect on the financial performance of the firm. This model also considers the fact that value and small-cap stocks -- companies valued between $300 million and $2 billion -- tend to outperform markets on a regular basis, and adjusts for return differences typically observed for high book-to-market vs. low book-to-market firms, rendering it a more powerful tool for evaluating the financial performance of a given firm.
Beating the market
What we found is corporations that have developed strong brands create value for shareholders by yielding returns that are greater than relevant market benchmarks. For instance, if an individual invested $1,000 in August 1994 in the 111 strong brand companies composing our portfolio, that investment would have more than quadrupled to $4,525 by December 2000.
In contrast, the same $1,000 investment in the overall stock market would have yielded $3,195 by the end of 2000. The extra $1,330 gained for the study portfolio represents a tangible demonstration of the shareholder value created through strong brands.
As any finance executive will tell you, our finding concerning increased returns for branding vs. market benchmarks is not our most significant result. Firms that developed strong brands created shareholder value not just by yielding returns that were greater in magnitude than the market as a whole. They did so with less exposure to risk.
Consumer researchers have long talked about brands as risk-control mechanisms. Strong brands reduce the financial risks consumers face in making wrong decisions. With our study it becomes possible to make a direct link between brands and risk, not only at a psychological level, but from a corporate financial perspective as well.
The implications of this mind-set shift can be significant. How will our brand architectures change if we consider brand extension and co-branding decisions as mechanisms for controlling investment risk? How does brand risk affect brand portfolio size? Is the corporation exposed to more risk with a Branded House strategy or one that supports a House of Brands? Does brand repositioning increase or decrease the company's exposure to risk? How should our brands be repositioned if risk serves as the optimization criterion at hand?
Our findings support a value-based view of branding that refocuses the entire marketing organization toward more comprehensive concerns about the processes that create (and destroy) equity for the company as a whole. Let the presentations to CFOs begin!
Susan Fournier is an associate professor of marketing at Boston University School of Management. This article is adapted from an award-winning study, "Brands Matter: An Empirical Demonstration of the Creation of Shareholder Value Through Branding," co-authored by Thomas J. Madden, University of South Carolina; Frank Fehle, Barclays Global Investors; and Ms. Fournier; and appearing in the Journal of the Academy of Marketing Science.