MANAGING BRANDS FOR PROFIT

by Professor Guenther Mueller-Heumann, Emeritus Professor of Marketing (Otago),

business consultant, seminar leader, Auckland, New Zealand.

One of the latest fashions from the USA is to require marketing managers to provide
proof of the financial return on marketing expenditure. In most instances a straight ROI
cannot be worked out because of long/short-term allocation problems of marketing
expenditure and thus the "qualitative" (not immediately recognisable sales) nature of
marketing spending and marketing itself.

It is, however, a challenging idea to relate the core of marketing spending, namely the
money invested in brand building and brand management to the basic formula for ROI
which is: ROI equals profit (as sales minus costs) over the capital invested for the
brand.

Financial Brand Asset Values

Starting back to front, what can be said about "capital invested", that is ultimately part of
marketing budgets? The asset value, the capital invested in brands, was first formally
recognised when in 1984 the News Group (Rupert Murdoch) put financial values for
some of their "mastheads" (publishing titles) into its balance sheets.

What may look like a breakthrough in marketing orientation was, however, quite a
different story: Goodwill write-offs from many acquisitions had reduced much of the
reserves in the balance sheets of the News Group and in particular the debt to equity
and other financial ratios which banks are terribly interested in.

A trend of balance-sheet brand valuations started, stretching from the UK to Australia

and elsewhere. . The challenge though to the accounting profession is to develop a
"brand accounting system" - far beyond the occasional brand valuation.

Annual Brand Asset Valuation

e=a-b+c-d

a. Brand Asset Value (from the previous year)

b. Depreciation ("natural decay" of brand asset value without marketing
support)
c. Net Brand Marketing Contribution during the year*
d. "Waste Factor" (due to competition, government influence etc.)
e. Brand Asset Value (for the year)

*Note: ‘Net’ means that part of the annual marketing expenditure that is
effective for building or maintaining brands. This would normally be only a
proportion of marketing expenditure. Some of the total marketing
expenditure would show up under d. (“Waste Factor”), for example that
part of marketing spending that is required to compensate for competitive
pressures. The Net Brand Marketing Contribution could even be negative
in any one year. For example if much of the marketing budget has been
spent on short-term sales promotion and the effective residual marketing
 budget is not sufficient for brand maintenance (compensating for the
“natural decay” and competitive pressure on the brand).

Consumer-Based Brand ‘Equity’ Value

There is another kind of brand ‘equity’, sometimes referred to as 'consumer-based

brand equity', which also determines brand profitability. It reflects the strength of a brand
in the consumers’ mind. It can be seen as an indicator of the durability of a positive
brand image and thus of profitability.

Brands, in a way are a "silent salesmen", selling the product even when the sales
people are not there. Brand profit therefore depends on the strength of the brand and
how well it is managed. The continuous presence of a strong brand in consumers'
minds can create enormous marketing productivity effects.

The strength of a brand depends entirely on what consumers (users and non-users)
think of it. Consumers accumulate consumption and non-consumption experiences
(including word-of-mouth) of known brands in their mind. These "experiences", many
but not all caused by marketing strategies, build up over time, and become "imprinted"
in people's minds.

As a little experiment, just consider two simple brands - JVC and SHARP . . . By just
thinking about these brands, not only "pictures" of the actual products associated with
them pop up automatically, but also one's personal brand preferences. Surprisingly,
apart from the brand names no other marketing input is required to bring up these
preferences!

Brand Triggers and Associated Images

Differentiating between the brand triggers such as a brand name, a distinctive logo or
even a distinctive product design (ie. the shape of a BMW), or a colour scheme (BP) etc.
and the brand associations (brand image) triggered by them is a first step to
understanding what makes good brand management. Since these triggers are learned
- and often loved - by consumers, they have to be kept consistent over time.

If brand triggers change suddenly (creative people in agencies love to do that), the
access to the associations stored in the mind can get irritated. Consumers ask
themselves, "Is this really still the same product?" A suddenly changed brand trigger
can cost millions of hard-earned brand-equity dollars and ruin brand profits by throwing
consumers back into a search mode.

Brand triggers not only have to be consistent over time to ensure consumer trust, but the
elements that make up the trigger - brand name, design and other distinctive features -
have to be consistent internally. Certain colours, for example, go better with certain types
of products than with others. (For example, green men's shoes are definitely a small
niche product.)

Harmony between the visual elements of the brand trigger - including name, logo,
design, packaging etc. - has to be found. This is the high art of branding building which
neither academic research nor marketing practice has found hard and fast rules for -
yet! The image projected, for example, in advertising, also should be consistent with the
appearance and the "meaning" of the brand triggers.

It is interesting to observe that the strength of the primary image of the brand triggers is
more important for new brands than for established ones - for which consumers have
built up associations that are "imprinted" in their minds. However, even established
triggers have to be applied consistently.

Brand Equity and Brand Loyalty

Consumer-based brand equity goes far beyond just the trigger communication. It
comprises the long-term market benefits for the company from customer satisfaction
and brand loyalty, caused by positive brand imprinting of customers. The latter is
achieved through the net effect of a brand-conscious marketing strategy, product/service
usage and word-of-mouth effects. Advertising is but one part of the whole process.

From the consumer perspective, the three fundamental building blocks for building
brand equity are a) brand/name awareness, b) perceived product quality image, and c)
perceived "extended brand image".

Awareness is necessary as a base for good brand management, because without

awareness, the two - holistically perceived - image components can otherwise not be
"hooked in". As a cardinal rule, it is important that both the perceived product/service
quality image and the perceived extended images are distinctive - and synergistic! A not
very distinctive commodity-quality-like product (or service) is difficult to brand. A brilliant
luxury-quality product with a weak "extended image" is equally difficult to market.

Segment-Specific Brand Images, B2B, Service Branding and Corporate Identity

It is important - and usually ignored - that different consumer segments can perceive the
mix of product quality and extended image in different weight combinations. Take as an
example what image combinations a middle-of-the-road brand of modest-quality cask
wine generates in the mind of a very ordinary wine drinker as compared to that of a
connoisseur. Survey research-based "perceptual mapping" can assist here determining
where products and their various image components "sit" versus different benefit-
seeking segments of consumers.

In business-to-business branding, trigger and various image associations also apply.

The contents of the image components may, however, be more business-related and
not necessarily more "rational" as naive academic textbooks claim! Business-related
images usually contain factors such as effective product information, prompt delivery,
reliability, competitive pricing, after-sales-service etc. Also, marketing to an organisation
means taking into account the various roles played by various people in the "buying
centre".

The concept of the "moments of truth" helps: At each point of contact between the
marketing organisation and the various people in the customer organisation, a small
part of the overall brand image of the marketing organisation and/or its products is
formed, changed and stored. This emphasises the importance of staff performance in
all customer contacts for brand building. One factor that complicates image building in
service businesses is that the production and selling/marketing of a service are usually
"intertwined" - and the customer is involved in the production/selling/marketing process.

Finally, "corporate identity" is a form of macro branding of the whole company. It is

bigger than mere marketing. The classical tools of corporate identity management are:
a) "what you market"
b) "where you make and market it"
c) "how you communicate with all your 'publics' - not just the market; and
d) "how people in the organisation behave towards customers in all the publics"

In summary, it is not too far-fetched to ask the question whether financial return is
achieved by a brand, or the market expenditure fuelling the brand - and how much.
Although in most cases the actual financial return calculations cannot be worked out
precisely, the principle of brands being investments that generate a return is a solid
one. When more senior managers have realised that brands are in fact investments
and marketing supports those investments, a big shift will occur from the current,
widely-held, perception that marketing is just an add-on cost to all the other costs!