As a marketing company, we advise our clients that developing a strong brand will drive the number one metric that all owners, managers and board members should be focusing on – your company’s value. There are plenty of studies to prove that stronger brands demand, and are valued higher, than the general market. However, for many business operators, focusing on developing a brand comes behind other aspects of their business.
The reality is that the fundamentals to building a brand will help drive sales growth, profit growth and overall business success and more importantly, it increases your company’s value.
What does the research say?
Two major brand research companies release annual papers on the performance of the top global brands compared to their counterparts. Both Interbrand and BrandZ study the shareholder return for the top 100 brands and compare this to the Top 500 listed companies on the US Stock Exchange and the general market.
Both studies have consistently shown that the top brands outperform the rest of the market by considerable margins, and have done so through economic booms, and more relevantly, through the downturns in 2001 and the current GFC.
Furthermore, a study entitled ‘Brand Matters’ conducted by academics from the University of South Carolina concluded that $1000 invested in the top brands between 1994 to 2000 would have returned over 450% - over 40% more than the returns from the general market.
Not convinced yet – let’s look a little deeper?
You may say that big company research is all well and good, but does this apply to smaller companies? Key to comprehending this dilemma is an understanding of the components of brand strength, the mechanics of company value, and seeing how the two are inseparable in driving the success of your company.
What exactly is a brand?
Many think that a strong brand is developed by countless dollars invested in advertising like Coke, or through paid endorsements like Nike. And most believe that brands are the sole domain of large corporates with deep pockets. While advertising and promotions are often important aspects of building and strengthening a brand, they are just components within a bigger mix, and neither are core fundamentals (this applies equally to large corporates and smaller companies).
The fundamentals that underpin ALL successful brands are understanding who your target customer is, what you tell that target customer in order to make them purchase from you, in what manner (tone, colour, style, presentation, essence) that message is communicated, and when to present the message for best effect.
Even companies who developed global brands without any (or minimal) budget for advertising such as Krispy Kreme and Body Shop, understood that in order to grow as a company and a brand, they needed to communicate the right message to the right customer in a consistent fashion.
So how does a brand drive company value in private companies?
While the real value of a company is the amount a willing buyer is prepared to pay for its shares, we will examine the three most common methods used to realise company value:
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Paying for Goodwill |
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Multiple of earnings/sales or Price to Earnings |
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Present value of future earnings |
1) Paying for Goodwill.
The simplest way to value a company is to use book value as the starting point. Any amount you offer over the book value is, in accounting terms, referred to as “Goodwill” - according to Investopia:
| “goodwill is designated as an intangible asset. It is a blanket term that represents, in one lump sum, the value of brand names, patents, customer base loyalty, competitive position, R&D and other hard-to-price assets a company might own. It encompasses all the factors above and beyond book value that make investors willing to buy a business." |
This definition attempts to articulate some of the aspects that contribute to value. Already we see some areas of marketing, such as brand names, customer loyalty base, and competitive position, as contributors to greater company value and to brand value.
2. Multiple of earnings/sales or Price to Earnings
One of the most common ways to value a company (especially private companies) involves multiplying earnings by a multiple of X, being a number that represents the future earning potential of the company.
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Company Value=Profit × Multiple
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The higher the Multiple, the greater the potential of the company to provide future earnings. Note: the multiple is often represented as Price to Earnings ratio (also known as PE ratio) in Sharemarket reporting.
Getting the brand fundamentals right will impact both the Profit and the Multiple of a business and therefore increase the brand value.
Firstly, a brand will impact profit by:
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Communicating to better-qualified customers with a message that impacts them and differentiates you from your competitors therefore increasing sales. |
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Increasing customer loyalty. Importantly as we all know from first hand experience – loyal customers become your best (and cheapest) sales force extolling your virtues to their friends and family. A valued Brand also keeps the customer coming back, easing the pressure on your marketing acquisition efforts, lowering your overall total cost of sale. |
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Giving you permission to charge premium pricing. Recognised and understood brands command higher prices for their product because customers perceive added benefits from a brand they trust. Conversely a brand can better defend its pricing, rather than be forced into discounting during tougher times. |
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Differentiating you from your competition. Your product, organization or service can stand out from the competition, imbued with special qualities that are communicated via your brand. |
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Reducing marketing wastage by ensuring you are consistently marketing the ‘right message’ to the ‘right customer’ segments (see BrandQuest article How to Avoid Expensive Marketing Mistakes) and thereby improving your marketing to sales ratio. |
Secondly, by aligning your brand fundamentals you are increasing the confidence based around your future earning potential and therefore improving the Multiple that buyers are willing to pay for your company. The strength of your brand will impact on the three main factors in determining the Multiple:
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Leveragability - a brand increases the chance of success of expanding through continued growth or product/service extensions; |
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Replicability - it facilitates extending the product or service to new markets; and
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Defendability – a brand makes a company more differentiated and therefore at less risk to the impact of competition; |
3. Present value of future earnings
The third way to value a company is to project the future earnings or cashflows of the company into the future and then discount the cash flow based on a percentage (discount rate). The discount rate is equal to the risk of those cashflows continuing indefinitely.
As the risk increases, the discount rate increases. This approach applies similar principles as a bank charging interest on a loan - a low risk loan such as a mortgage on a house has a low rate of say 5 – 6% whereas a higher risk loan has higher rates such as credit cards at 15 – 20%.
According to Peter Doyle, a leading exponent of linking brand value to shareholder value, brands “de-risk” future cash flows in four ways, thus increasing the company’s value:
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They increase the level of cash flow by being able to charge a price premium (see above);
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They accelerate cash flows such that they are earned in earlier periods. Firms with a known brand can more easily launch new products/services and will start earning money from those new products faster because they can market them to their existing customer base who trust them
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They extend the duration of cash flows since customers will continue purchasing their tried and trusted product longer; and
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They reduce the risk which in turn lowers the rate at which the cash flows are discounted at
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Ultimately, the value of a company is based on its ability to grow profitably and continue to succeed into the future. This is intrinsically linked to the development of the business brand. The stronger the brand, the stronger the value of the company.
It is critical that you think of your brand as an asset to be nurtured and grown over time, and the sooner you start building your brand the sooner you can start increasing the value of your company.. As we often say everyday you are not doing this is a day wasted so to borrow from a well known brand: “just do it”