Most business leaders agree that brand equity is a thing, having a lot of it is an even better thing, and it makes sense to invest in it. If they forget, numerous rankings of “the world’s most valuable brands” come around every year to remind them.
But brand owners struggle to quantify the true return on investing in brand equity or “brand ROI.” That can be exasperating for everyone. CFOs get tired of the leaps of faith required to approve investments in brand-building, CMOs get fed up with having to prove something (investing in brand equity) they know is worthwhile, and CEOs get frustrated with not knowing how a dollar of investment in brand-building compares to investing it in something else such as a sales force expansion, new manufacturing line, or product acquisition.
The problem starts with the definition and measurement of brand equity itself. For example, at one company, it’s “likes” or awards for the creative teams, “brand power” for the research teams, and “unaided awareness” for the boss. How do you measure brand ROI when the key stakeholders don’t agree on what the “I” in ROI is meant to increase? Getting brand ROI right begins with getting brand equity metrics right.
But that’s not all. Another part of the problem is the most popular measure of return used in the marketing world. This is “Marketing ROI” or “ROMI” – return on marketing investment. It calls for attributing revenue “lift” to a marketing initiative and comparing that to the initiative’s cost. While that seems sensible, it tragically fails as a measure of brand ROI because it completely misses the impact of brand equity on corporate value. And as we’ll see, that leads to chronic misallocation of resources from errors of both commission (overinvestment in things that work against brand equity) and omission (underinvestment in things that work for it).
The link between brand equity and corporate value
CEOs are mandated to create corporate value and they look to their teams to help them do that. This includes their CMOs. So, it behooves CMOs to understand what drives corporate value and how brand equity contributes to it.
From a financial perspective, there are two drivers of corporate value: revenue growth and revenue quality. Here, “quality” refers to profitability – profit margins and return on capital – and sustainability or stability (the opposite of risk and uncertainty). The more profitable and certain a dollar of future revenue, the higher its quality and the more corporate value it has.
Brand equity plays a central role in both drivers of corporate value. For example, it affects revenue growth through its impact on:
- product and service choice during purchase and usage occasions.
- repeat purchase.
- ability to win distribution.
- customer permission to offer new products or services and enter new categories or lines of business.
And it affects revenue quality through its impact on:
- willingness to pay, and thus pricing power.
- customer acquisition and retention costs.
- required ad and trade spend.
- customer loyalty and lifetime value.
- ability to fend off competitors’ pricing and promotional attacks.
Brand equity also affects revenue growth and quality through its impact on employee acquisition and retention costs, as well as greater staff loyalty, productivity, and motivation.
You’d expect, therefore, that brand equity is a reliable leading indicator of both revenue and value. And indeed it is if you measure and define it in the right way.
Quantifying the link
BERA maintains a database comprising hundreds of “mono brand” companies with a brand that represents at least three quarters of their revenue (for example, Southwest, Apple, and McDonalds). The database has a complete range of quarterly financial metrics over several years for each brand. This includes revenue growth, margins, return on capital, marketing spend, stock market valuations, and total shareholder return. We also collect our own independently-sourced brand equity metrics for each brand, also on a quarterly basis (as well as weekly and monthly) over several years.
With this combination of quarterly time series on financial and equity metrics for each brand, BERA can quantify the financial response of brands to changes in their brand equity, and thus make tangible the financial difference brands make to their companies.
For example, BERA’s research shows that if a typical brand growing three percent per year increases its brand equity by four percent, its top line growth rate will increase by a third, from three percent per year to four, and its corporate value growth will increase by 1.5% per annum. For a billion dollar brand, this means revenue growth of $40M rather than $30M every year, and $85M of value growth instead of $70M, year in and year out. That will pay for a lot of investment in brand-building.
This is a big deal. It supports a long-held assertion which is near and dear to CMOs: brand equity really does drive financial growth and returns!
What this tells us about brand ROI
By getting brand equity metrics right, you can link it directly to its impact on corporate value to get a true measure of brand ROI. Here’s what that looks like for three brand owners who use BERA’s platform to help them optimize their investment in brand equity:
The first thing to note in the table above is the strength of brand equity’s contribution to current revenues. Brands are typically viewed as slow-moving, intangible assets that have little impact on revenues in the short term. But these brand owners proved to themselves that the revenue impact of thriving or stagnating brand equity is immediate, quantifiable, and predictable.
The next thing to see in that table is much more important: brand ROI is uniformly higher than ROMI. This is because successful brand-building not only lifts current revenue, it boosts the quality of the entire revenue base while also increasing its future growth potential. ROMI misses this; brand ROI accounts for it.
This helped the three brand owners realize that they are underestimating the return on marketing investments if those investments support brand equity growth. And worse, ROMI overstates the return on marketing investments – such as media campaigns, promotional programs, sponsorship, and performance marketing – if they boost short-term results, but at the expense of brand equity. The value of boosting revenue is more than outweighed by the hit to its quality.
It also opened their eyes to how high the return on successful brand-building can be. This encouraged the brand owners’ CEOs who were questioning whether to invest in their brands and gave them pause with regards to investing in anything – advertising, new products, customer service, digital marketing, and so on – without knowing its impact on brand equity.
Finally, there’s one more thing in the table above to highlight. You’ll see that the brand ROI for the fast food and airline brands is higher than the average across all brands. This is because they compete in enormous categories with intense price competition. For them, even small improvements in their brand equity turbocharges three engines of corporate value growth: new-customer acquisition, repeat purchase, and pricing power. That’s worth a lot in high-volume, highly competitive categories.
All three brand owners realized that getting brand ROI right gave them a simple and powerful tool to elevate their brand management capabilities. They now select their brand growth strategies based on brand ROI and their brand managers are accountable for delivering it.
Moreover, they now measure the brand ROI attributable to every marketing campaign. This shows them that brand-friendly marketing produces a much higher return than they thought because of the value multiplier effect that ROMI misses. It also revealed just how costly marketing is when, however inadvertently, it works against brand equity rather than for it.
Finally, these brand owners realized that Marketing’s role is more than driving revenue growth, but also its quality, and that investing in brand equity is worth a lot in the here and now, as well as the long-term. That not only makes their CMOs happy, but also their CFOs and CEOs!
What’s in it for you when you get brand ROI right?
Getting brand ROI right enables you to bring robust financial measurement to your brand growth strategies. For example:
- Will investing in brand equity with our most loyal customers produce a higher return than brand-building with prospects, or vice versa?
- Which brand partners offer the highest ROI for our brand?
- What allocation of marketing across our brands/markets/audiences optimizes brand ROI?
These are just some of the questions that you can answer by getting brand ROI right. And both your CFO and CEO will thank you for it.
Ready to for more? Request BERA’s free brand assessment to learn more about how we can help you achieve your brand goals.