There are as many definitions of ‘brand’ as there are commentators on the subject. A reasonable aggregation of opinions and writings gives us ‘product plus other less tangible concepts like image, goodwill, reputation etc.’ as a working definition.
Design works against all these components, tangible and intangible. The look and feel of the product, its logo suite, packaging, advertising, all have a strong effect on the value of the brand and the contribution the brand makes towards the shareholder value of its owner.
Most design consultancies – and Pangaea is no exception – will promote good design as a key component of brand strength. But few design consultancies – and here Pangaea is an exception – truly understand the relationship between good design and shareholder value.
Starting premise: we know what a ‘strong brand’ is. We don’t propose to define a strong brand here, beyond this acknowledgement of a number of recognised components of brand strength: high levels of awareness, spontaneous and prompted, among the brand’s target and beyond; an ability to generate strong opinions even if these are polarised, with high ‘like’ and ‘dislike’ scores (a strong brand is defined as much by those it excludes as by those it welcomes); widespread availability and distribution; premium pricing relative to its competitors; clear and recognised utility (ie. customers know what the products in the brand portfolio are for and they all perform their intended functions to a high standard), and; strong sales levels and/or market/segment share; an acknowledged ‘brand leader’.
It’s possible to measure these components using survey data or empirical information from the brand owner’s accounts. It may not be possible to compare brands objectively, but this does not matter for the purposes of this discussion.
For reasons of brevity, we’re also not going to discuss ways to build brand strength. If we accept that the above are components of brand strength, then we can accept that each can be developed via investment in product development, distribution/supply chain, marketing and sales support.
Brands are sometimes valued as assets on a balance sheet. Creating asset value is rarely enough to drive share price up on its own, which makes brand value a relatively small lever when viewed in this way. Most CEOs are rewarded on the basis of share price, not their ability to create asset value.
A better way to create shareholder value is to generate cash and this is the basis of the relationship between strong brands and shareholder value: strong brands generate more cash than weak brands. The model opposite illustrates how this works.
There are six key effects of a strong brand which ladder up to increasing the capability of a business to generate cash.
1. Credibility to extend
Strong brands launch more successful brand extensions. The stronger the brand, the further from the core can the extensions be. Persil’s extension from washing powder through liquids and tablets to fabric conditioners and ultimately dishwasher tablets is logical and fairly conservative for a brand with a 24% share. Virgin’s airline, train, cola, entertainment, phone, space travel and financial services portfolio is more ambitious and could not have been achieved without a strong brand from which to extend.
Brand extensions launch a brand into new markets and increase weight-of-purchase from loyal customers, driving top-line sales and reducing the need for expensive launch marketing which in the absence of a strong brand, would have to work much harder to build base brand awareness and credibility.
Thus expansion of a brand portfolio is de-risked. The management of risk costs money in human and other resources, so de-risking reduces cost, which is another way of driving up cash and improving cash flows.
2. Price premium
Strong brands charge more for a given level of utility than weak brands. Assuming costs of manufacture to be broadly equal to everyone, the difference in price between a strong brand and a weak brand can be attributed largely to goodwill created by the strong brand. Apple MacBooks cost more than just about every other laptop because buyers believe that the premium is somehow worth it. This is the brand effect.
Charging more for every unit sold without associated cost of sales increases, generates more cash.
3. Faster market penetration
A tried and tested route to growth is expansion into new markets. A high level of awareness and a strong ‘system’ of distribution build, marketing, pricing and retail or wholesale planning means that distribution can be built more quickly and sales start sooner after the decision is taken to enter a new market.
If sales begin sooner, cash is generated more quickly and the ROI story for shareholders is more positive. Also, cash flows for longer, since there’s less messing about in the beginning trying to get the brand launched. An efficient machine operated by experienced leaders generates cash over an extended period.
4. Long term growth
Strong brands build for the future. They can leverage their distribution, design and awareness advantages to ride out market fluctuations and take a long term view when it comes to growth. They almost have to do this since consumers must experience reliable supply in order for the brand to grow strong in the first place.
Being in the market for longer, taking decisions on a strategic basis and building partnerships with distributors and retailers based on long term mutual profit, all contribute to a greater cash contribution over time.
5. Consumer loyalty
Customer loyalty and a high degree of repeat purchase help to build a strong brand. The brand-customer relationship is stronger as a result and this pool of regular buyers accounts for a high percentage of sales. This may be a volume base from which to build the brand further, it may be a ready-made community of willing testers for new products or extensions, but in any event this group’s loyalty delivers a reliable stream of revenue.
6. Barriers to entry
Distribution capacity is limited, particularly in a retail environment. Wholesalers and retailers can only accommodate a limited number of brands in any product category. They are more likely to stock brand leaders, strong brands that they know will sell rather than weaker
or newer brands which are unproven. In order to overcome an entrenched brand’s positions in the supply chain, and divert loyal consumers their way, new brands must spend much more on marketing. Both these factors create barriers to entry for new competitors by making it expensive to enter the market, and so protect the position of the strong brand.
This delivers reliable cash to the strong brand owner over an extended period and also reduces any costs associated with risk of competition and the potential need to defend a brand’s position.
Brands today have value and part of every CEO’s job as guardian of shareholder value is to create and grow brands that make their companies more valuable.
But how much more valuable? Giving brands a valuation on the balance sheet is becoming more
common. It’s difficult to ascribe value to intangibles until they’re sold; their value is defined by the price a buyer is willing to pay. In the absence of a sale, various methods exist for arriving at a number to place in the assets column. They are all useful as comparative measures.
Great design – however it manifests itself in the various components of a brand – adds to this value. Even if we can’t agree on an accurate way of defining that value, then at least with this paper we might begin to understand the routes via which such value is added.