Treating The Brand Like A Long Term Financial Asset Instead of A Short-Term Profit Engine
Managing the brand is the most important thing on the CMO agenda, according to the most recent Duke CMO survey. But growing firm value is the lowest priority of marketers.
This dichotomy gets at the essence of why marketers struggle to communicate the importance of long-term sustainable investment in the brand to their leadership. These two goals – growing the brand and growing the firm – must be equal and connected business priorities if organizations expect to protect and grow the financial contribution of the brand to the business.
Brands are the most valuable financial asset of most organizations, according to a new report entitled Proving the Value of the Brand, by the Forbes Marketing Accountability Initiative and MASB.
Unfortunately for investors, most organizations don’t measure, report, or manage brands as financial assets. According to Professor Bobby Calder of Northwestern University’s Kellogg School of Management, expenditures for branding are still commonly treated as a expenses rather than an investment. This leaves CFOs and CMOs in the dark about what marketing is actually contributing. Understandably this lack of alignment often results in skepticism about marketing budget requests and under-investment in brands.
The consequences of not treating brands as financial assets are severe. The long-term sustainability and health of a brand has come to light as leading brands like Pierre Cardin, Kraft Heinz and P&G have lost Billions of dollars in financial value because of over dilution (Pierre Cardin), disinvestment (Kraft), and digital disruption (Gillette). In the last year Kraft-Heinz and P&G had to write down the value of some of their biggest brands by over $24 billion – including Kraft, Oscar Mayer and Gillette. P&G had to write down the value of the Gillette brand to account for the negative impact of digital disruptors like Harrys and Dollar Shave Club have had on the business. Kraft suffered the consequences of “zero based budgeting” cuts to strategic brand investments by Private Equity investors. And Pierre Cardin famously diluted a once valuable brand franchise by indiscriminately licensing the brand to 900 companies in an effort to accelerate short term revenues and profits.
“There is a growing movement to treat brands as financial assets as organizations increasingly recognize that brands are critical to economic viability and growth”, according to Professor Bobby Calder in his upcoming paper with Mark Frigo of Depaul, “The Financial Value of Brands” appearing in the October issue of Strategic Finance. Focusing on quantifying the financial value of the brand is important because it allows marketing to work with finance to allocate resources to strategies that maximize firm value and sustain and grow the brand assets that underlie current and future firm profitability.
Managing the trade-off between short term profit growth and long term firm value has become a critical issue the luxury sector of the economy – where the top 100 brands are worth over $240B and brands can contribute the majority of firm value. Leading luxury brands like Louis Vuitton, L’Oreal, and Chanel are worth over $20B each according to independent valuations by Forbes, Brand Finance, Brand Z and Interbrand. And according to Tapestry Inc. financial statements, over half the price they paid to acquire Kate Spade was for the $1.4B in intangible brand value of the Kate Spade Brand.
Luxury brands face a unique conundrum. The industry has established a tried and true set of formulas and rules for establishing a luxury brand which call for scarcity, heritage, sensory rich retail experiences, glossy print media and catalogs. But current consumer behavior trends and investor sentiments are putting pressure on luxury marketers to innovate, open new markets, develop digital channels and nurture social influencers. Investors are compounding these problems by pressuring CEOs to further monetize brands through licensing, line extensions, and expansion into new global markets and ecommerce channels.
Marketing executives must balance these trade-offs as they seek to grow profits sustainably while protecting their core brand assets as the traditional staples of luxury marketing – print catalogs, television, and flagship retail – fall into decline.
Marketers want to use digital, social, and mobile channels to better adapt to the behaviors a new generation of digitally savvy customers such as HENRYs (High Earners Not Yet Rich) and Chinese Millennials (the Moonlight Clan). But at the same time, they must balance the potentially negative effects commoditization, price transparency, broad availability, and comparability that digital channels can have on a premium brand.
This boils down to a battle between the traditional “anti-rules” of luxury which call for planned scarcity, heritage, sensory rich retail experiences, glossy print media and catalogs and the modern marketing mix preferred by a new generation of luxury buyers who prefer digital, mobile and social channels and innovation.
Leaders like Burberrys, Tiffany’s, and Gucci have had some success navigating this shift by making thoughtful investments in digital, mobile, and social channels and cause marketing to accelerate brand growth and appeal to a new generation of luxury buyers. Others like Pierre Cardin have stumbled and eroded valuable brands through over extension, over expansion and over licensing.
The key to balancing these competing pressures and making financially valid strategic trade-offs is for marketing, finance and investors to agree a common economic value and purpose for the brand. The problem is most marketing organizations focus most (68.5%) of their marketing efforts on short term marketing objectives and most (59%) cannot prove the contribution of marketing to the business quantitatively according to the Duke CMO survey.
There are two steps every organization should take to develop a financially valid growth strategy that effectively allocates marketing resource, maximizes profits and drives sustainable brand growth:
- Agree on the financial value of the brand. Leadership should agree on the financial contribution of the brand to firm value and future cash flow using new Brand Valuation and Evaluation Standards established by ISO and The Marketing Accountability Standards Board (MASB). This will provide a financially valid basis to make investments, resources trade-offs and strategic bets. The math that connects brand investment to firm value is explained in the Proving the Value of the Brand, by the Forbes.
- Properly measure the strength of the brand: Marketing needs to ensure their investment in qualitative and quantitative market research are structured to create valid measures of brand preference and track the top three or four primary drivers of choice that matter the most and predict business impact. This will allow leadership to track the progress of any brand building strategy and alert management to any risks or dilution of brand value in the marketplace.
The Forbes CMO Practice is hosting an invitation-only Luxury 20/20 event where industry CMOs can explore how the world’s leading luxury brands are adapting to this new generation of buyers and influencers and redefine what their brands stand for.
This article first appeared in www.forbes.com
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