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At best ‘brand’ is a useful word. At worst, it’s a dangerously misleading management tool. It’s hard to talk about marketing without using the word brand (or one of its derivations). Believe me, I’ve tried!

But in spite of (or, perhaps, because of) its useful nature, the word brand is functionally bankrupt.

More often than not, its use hides sloppy thinking and, worse still, the wastage of frightening quantities of valuable corporate resources.

Everything and nothing

Over time, marketers have extended the meaning of the word brand to mean so many things that it is now basically meaningless (you may recall that I’ve leveled the same criticism at the word marketing).

The word brand used to refer to the trademark or distinctive name identifying a product (or manufacturer).

This definition makes sense. Its relation to branding’s genesis — involving the use of a hot iron to provide evidence of ownership on the hide of an animal — is obvious.

Today, the word brand refers to the product or organization itself (and not just its mark). It also refers to the goodwill associated with that product.

The word brand is commonly used as a verb. Branding refers both to the application of a name (or mark) to a product, and to every activity that impacts in any way on the development of goodwill (or brand equity, as it’s commonly called).

Answer me this: what do all of the following have in common?

  • Designing a logo.
  • Running an advertisement.
  • Creating a new product.
  • Answering the telephone.

That’s right. According to branding experts these are all branding initiatives.

Of course this liberal approach to the definition of the word brand may be in the best interests of branding consultants — at least in the short term. (For the uninitiated, branding consultant is the title assumed today by opportunistic graphic designers.)

But, unfortunately, it has some unintended (negative) consequences for the rest of us.

Are we really this silly?

For a start, it makes marketers look sillier than we really are. In her best-selling, anti-corporate rant, No Logo, Naomi Klein quotes marketing executives, who should know better, saying things like the following:

 

 

"The product is nothing but the most important marketing tool.": Nike

"We made the fatal marketing mistake of thinking we were a camera [when] really, we are a social lubricant.": Polaroid

"Products are made in the factory, but brands are made in the mind.": Senior advertising executive

As you’d expect, Klein uses these delusional utterings as evidence in her nonsensical argument that brands are responsible for social ills ranging from the exploitation of children in sweatshops, to the murder of a Nobel Peace Prize winner, and a crime she refers to as ‘brain stealing’!

Unrelated cause and effect

A critical reader of Klein’s book will rapidly draw the conclusion that that she has grossly overestimated the potency of this thing she calls the brand.

The sad thing is that marketers (as evidenced by the comments above) are suffering under exactly the same misapprehension.

The exaltation of the word brand (almost to the point of a religion) is based upon a widely-held premise that brands create sales. This thinking is an example of what is perhaps the most common logical fallacy: the fallacy of causation.

The fallacy of causation (also referred to as unrelated cause and effect) is committed when we either mistake correlation for causation or, more seriously, when we actually assume that the effect of an action is its cause.

The assumption of the marketing executive above is that Nike sells lots of shoes because it has a great brand.

When you consider that the sale of shoes preceded the development of the Nike brand (goodwill), you would have to conclude that a great product is the cause and brand equity is the effect.

The real cost of irrationality

It’s bad enough that this sloppy thinking is used against us by the anti-business activists in our midst.

But what’s worse is the economic cost of the erroneous management decisions underpinned by this lapse of reason.

The basic problem is that the premise that brand equity drives sales gives marketers permission to engage in an expensive and elaborate ritual that is totally quarantined from the objective of the organizations writing the checks: to make money, now and in the future.

The ritual looks something like this:

A marketer runs a promotional campaign with the intent of building a brand.

He detects a resulting increase in brand equity (typically by measuring the change in market awareness of the brand). He concludes that this campaign was a success, and goes to work planning the next. He wonders occasionally why he needs such complex formulas to attempt to model the correlation between brand equity and sales revenues.

If this marketer realized that branding is a by-product of sales (and not an antecedent), he would apply himself to those activities that drive sales — and ignore brand equity altogether. His objective would be a derivative of his company’s objective: to make sales, now and in the future.

He would measure his success by observing the correlation between the money he invests in promotional campaigns and the resulting change in sales revenues.

Accounting for delayed promotional returns

But (I can hear you thinking), what about the fact that a promotional dollar invested today may not produce a return until some point in the future? Isn’t that why we need to measure brand equity?

Well if (and only if) you know for sure that your promotional expenditure does deliver delayed returns, it may make sense to establish a proxy for these future revenues.

The problem with using brand equity as a proxy is that (as I’ll explain in a moment) it’s almost impossible to measure.  Accordingly, you will need to find a metric that does reflect the correlation between promotional expenditure and future revenues. In our experience, the best proxy for future sales is current ones. In other words, the best indicator of the long-term effectiveness of a promotional campaign is its short-term results.

So, is a brand actually worth anything?

If we take the word brand at its original meaning (the trademark or distinctive name identifying a product) it seems fair to assume that brands can acquire some intrinsic value. Let’s see how this assumption holds up to logical scrutiny.

The logical way to measure the value of a brand (brand equity) would be to observe the premium that the market is prepared to pay in order to purchase a product bearing a particular brand, in preference to a competitive product, that is identical in every other way.

Because every product has a brand of some kind, this is only a relative measure. This means that you can only value one brand relative to another. It also means that when products are not identical in every way, brand value is likely to be incalculable.  (If products are not identical in every way, it is impossible to determine what percentage of the premium the market is prepared to pay should be allocated to brand equity — as opposed to product value.)

Let’s imagine what would happen in case of true product parity. If two products were in fact identical in every way, what is the theoretical value of each brand? That’s right, nothing!

In an efficient (fully informed) market, customers will obviously not be prepared to pay a premium for a product when there’s a truly identical alternative.

In other words, if customers are currently paying a premium for a product when there’s an identical alternative, that brand equity is a temporary phenomenon, reflective only of market inefficiency. As share traders know, this kind of arbitrage opportunity tends not to last long.

This line of reasoning illustrates that a brand itself has no long-term intrinsic value.

It also highlights that the premium a customer is prepared to pay for one product over another is (in the long-term) directly proportional to the degree of differentiation of that product.

In summary:

  • Brand equity results from the creation (and sale) of a great (differentiated) product.

  • Brand equity is proportional to the degree of (meaningful) product differentiation.

  • The absence of product differentiation, any residual brand equity will rapidly dissipate.

It’s time us marketers faced up to reality. If we are operating in the best interests of our organizations, we are not building brands, we are making sales.

We also need to recognize that our ability to drive sales amounts to little more than an arbitrage play. In the long run, the most successful products will always be the better products (those that provide customers with the greatest value).

The fact is, business growth has precious little to do with brand equity today. And, if anything, its significance will reduce as time passes and markets become more efficient.

The example most often raised to challenge my position on brands is Coca Cola. ‘Why then,’ the question typically goes, ‘does Coca Cola still outsell Pepsi, even though the two colas are all but identical?’

The answer is quite simple. Coca Cola outsells Pepsi because of its vastly superior distribution. (Statistically the distance between you right now and the nearest Coca Cola, is likely to be significantly less than the distance between you and the nearest Pepsi.)

So, even though the sugared waters are very similar, the products, in their broader context, aren’t. (Availability is certainly a product attribute.)

To observe the effects of an efficient market on brand equity, note the variance in the prices charged for standard unleaded petrol at competing, (neighboring) petrol stations.

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