The financial benefits of brands

Producing fancy name and nice logos for products is one thing, developing a brand and using the brand to add to your bottom-line is another. For branding to be successful it has to be producing a financial return over and above generics or own-labels.

Brand Equity is used to measure the value of the brand. It is important to recognise how a brand adds value.

Value from brands

To understand value that you can get from brands, we need to look at a little economics. One of the core ideas of microeconomics is that in a truly competitive market, the price of goods will drop to the point at which they match long-run average costs of production (these are total costs which an average level of return to shareholders). This means that in purely competitive situations there will be continual pressure on prices.

Where marketing is just about promotion, at one level all the company is doing is shouting, increasing the competitive temperature in the marketplace.

The key for successful companies who want to deliver above average returns to shareholders is to find ways in which they can create mini-monopoly positions where they can defend prices from competitive pressure in order to maintain profits above normal. We describe these positions as points of defendable differentiation.

Companies can establish these points by creating a leading technical position using intellectual property, leveraging scale advantages, or by creating customer loyalty. Marketing at a strategic level is more about creating these types of differentiation than it is about promotion and the brand is the main mechanism for creating defendable differentiation as technology can be copied, superseded or rendered obsolete.

If we went back to look at the Brand Pyramid, at the lower levels of the Pyramid, the simplest way in which the brand works is as short-hand or a mnemonic for a specification or guarantee. If a brand is to be adding value financially at these levels then it needs to be acting to help reduce total communication and sales costs. The brand is a promise of a certain level of delivery, consequently showing the brand communicates the promise - we don't have to explicitly say what the promise is every time we make a sale. For a brand to successful at this level it has to be widely recognised (high brand awareness). However, at the levels of specification and guarantee it can be copied and so long term will not act as a barrier to price competition.

Where the brand does come into its own is at the higher emotional levels of the brand pyramid, where the brand is a mark of association or a mark of emotional involvement. Top brands establish emotional linkages and promises that cannot be copied by competitors. An own-label Cola is not Coke. This means that the brand can be defended against price-competition. It may compete with other brands, but it is rare for an individual brand to compete on price as it has the potential to devalue the brand (and reduces the long-run potential for profits). As ever there are exceptions and brands that can maintain a position of quality while being cheaper than competitors can steal market share from rivals.

Nonetheless maintaining a brand is not a cheap option - it doesn't just happen. The brand has to maintain relevance and connection with its target customers which means advertising to reinforce position and meaning, rather than just awareness. For a company looking at the financial return it gets from brands, it has to take into account the extra income it receives from having a strong brand against the costs of maintaining the brand.

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