News update - January 2007

Since this update is about returns, it is appropriate to hope that you were able to take off some time over the festive season and have returned to the 2007 task, full of vigour, energy and resolve. We certainly have. Our new association with TBWA through The Disruption Consultancy is the platform from which we hope to see BrandMetrics enter the world arena. We have the experience and a world class model and we now have the support of one of the world’s most respected communication groups.

What makes the BrandMetrics model especially appropriate to the era ahead, is its ability to translate brand equity measurements into financial reporting instruments. The fundamental reason for this is the present value calculation that is at the approach’s core.

The talk in the marketing literature for some years now has been the need for marketing to gain boardroom relevance; for it to apply metrics that contribute to management conversations about the financial health of the enterprise; and, for marketers themselves to learn, understand and apply financial tools that allow them to demonstrate the return shareholders are earning on their marketing investment.

This only becomes possible when you recognise that marketing is a function whose sole task is to protect and enhance the brand asset. With the recent introduction of accounting standards that acknowledge that brands are assets, this is no longer in doubt. And since the value of an asset is based on the income stream that the resource generates there can equally be no argument that customer equity is the measurement of the brand’s income stream. Customer and brand equity are part of the same calculation.

Understanding Return

The word return is basic to the language of finance. It must become as critical to the work of marketers. The problem is that it is used in the marketing conversation, but with confusing ambiguity.

In finance it is used to express various achievements and expectations. Return on assets; return on equity; return on investment and return on share portfolio are a few of the measures. It also explains the expectations of investors. The expected return is a term used to illustrate the hurdle rate or the very minimum that investors expect from their investment.

Return on Investment (ROI) or Return on Marketing Investment (ROMI) has become common currency in the marketing literature. Writers and scholars are quick to point out that this is what shareholders expect and it is what marketers must produce. According to a participant in the recent American Marketing Association (AMA) sponsored MPlanet conference held last November in Florida, ROI when properly used changes the way management views marketing from a “discretionary expense” to a “managed investment”.

Moreover, the same commentator says that the real value is that it provides marketers with the ultimate board reporting tool. The sheer process of estimating ROI provides savvy marketers with a vastly improved ability to manage and build the brand.

Applied to Marketing

What do we mean when we talk of Return on Marketing Investment? Is it a calculation akin to those described above as used in corporate finance circles, or, have marketers devised an entirely new interpretation?

The basic measure of shareholder return is the return they get on their invested capital (ROIC). Companies know what return the investors who finance their enterprise expect. Their task is to match this at the very least and if they are to grow the business, exceed it. What they are doing is ensuring that they add to shareholder wealth by exceeding the cost required by the investors for the capital they provided.

ROIC is based on historical performance. It is a calculation based on the capital invested and the profits earned by the company. Expectations are, by definition, forward looking.

The Marketing Linkage

Marketing Return on Investment should follow a similar course. The investment is what the board allocates for the task. The return is some measure of how this investment adds to shareholder value. That is the only interpretation that makes sense.

Return on customers or customer equity are good measures because they place a value on the source of a company’s revenue. Customers are responsible for the revenue side of the income statement and income is the basis of the “future economic benefits” line in the accountants’ asset definition statement.

But customers do not buy commodities. They do not shop in a vacuum. They have to have something to link their preference to and to differentiate their choice from other possibilities. That of course is the brand. Customer expenditure is irrevocably linked to the brand. This linkage is what has become known as brand equity.

As soon as marketing expenditure is associated with the brand asset, investment in it is linked to return. What you spend on marketing must produce a brand equity effect. In practical terms this is persuading existing customers to buy more; chose more broadly from the range; pay higher prices and recommend the brand to others. Moreover, it should try and crack the two hardest nuts: acquire new customers and prevent existing ones from defecting.

2007 – the new 1984

A number of forces are converging at this very moment that could make this year that we have just entered the year when marketing takes the critical leap. Once it is understood that the brand is an asset and that it is the customer revenue stream that gives the asset its value, the connection is made. All marketing activities are then focused on building the brand asset, or at the very least, ensuring that it loses no value. Expenditure allocated for this purpose is an investment in the asset and can be judged by reference to finance tools such as net present value (NPV) and ROI.

There are at least three compelling reasons why marketers will be forced to take this step:

• As boards of directors deal with the new accounting standards and notice the portion of their market value brands represent, they will take the marketing investment (which is what marketing allocations will become) very seriously indeed.

• Already companies are including mention of their brand asset worth in the narrative portion of their annual financial statements. Once analysts and investors latch on to this, it becomes a merry-go-round from which you can never dismount. The board then has to answer questions from analysts about the brand asset and what they are doing to protect and build it.

• Marketers who start reporting to the board in financial terms rather than trying to interest top management in marketing industry metrics, will find their level of importance very satisfactorily enhanced.

On which note the best we can do is wish you many happy and rewarding returns.