Gregory Milano is founder and CEO of Fortuna Advisors LLC and author of Curing Corporate Short-Termism, Future Growth vs. Current Earnings.
There are two general categories of marketing: promotion, such as coupons and point-of-sale displays, and advertising, such as television advertising and sponsorship. While promotion drives current sales, advertising can create longer-term consumer desire, which can affect both current and future results, depending on objectives and effectiveness.
Companies driven by quarterly and annual financial goals often focus their marketing efforts on promotion to drive sales in the current year. But by doing so, I think they’re missing out on a more important and sustainable opportunity to create value through brand building.
With inflation reaching its highest level in four decades last year, companies trying to maintain their profit margins experienced vastly different levels of success in raising their prices. Some with strong brands maintained market share as prices increased. But if your brand isn’t as meaningful and unique to consumers, you risk losing market share when you raise prices.
Prioritize advertising over promotion
When I discuss this with business leaders, they often agree, but point out that many investors focus on quarterly results and that promotions often provide better value for money in the short term. However, there are investors who think more in the longer term. Take the case of Heinz in 2006 when Nelson Peltz of activist Trian Partners took a large position in Heinz stock; he described how Heinz “…should reinvest money in the company’s brands through increased consumer marketing and product innovation.” Peltz understood that brand building through better marketing and innovation often yielded much greater cumulative value.
Data-Based Evidence: Purpose as Differentiation
In a CFO article I helped write, using BERA’s brand database, my colleague and I examined the link between brands and business performance and valuation. Our findings showed that strong brand scores were associated with more growth, higher profit margins and better return on capital. We found a positive relationship between valuation multiples, such as P/E ratios and EBITDA multiples, and various brand metrics. Effective brand-building investments in “meaningfulness” and “uniqueness” led to higher valuation multiples, demonstrating that investors expect brand-building investments to increase future cash flows.
Together with another colleague and some employees of Chief Executives for Corporate Purpose, I continued this brand research. We published in 2020 and 2021 studies showing that brands perceived by consumers as operating with above-average target scores had higher growth, profit margins and return on capital, as well as stronger valuation multiples and superior total shareholder return. Our results showed that target can indeed be a source of differentiation.
There is also a lot of confirmatory research from others. In 2009, for example, Professors Natalie Mizik and Robert Jacobson published “Valuing Brand Companies” in the Magazine for Marketingusing brand data from Young & Rubicam’s Brand Asset Valuator, and found “that brand metrics have statistically significant associations with valuation multipliers.”
Financial and brand statistics
I think this extensive capital market research enables two important ways to align finance and marketing teams towards a common goal of value creation. You can reshape the way your company allocates marketing resources and improve manager accountability to get a return on that investment.
By integrating financial and brand metrics, you can develop objective, evidence-based grounds for allocating marketing resources and holding managers accountable. With younger companies still growing their brand, it’s usually better to sacrifice current profits by investing more in brand-building advertising. In such cases, instead of waiting quarters or years to assess payouts, you can hold managers accountable almost immediately for improving brand differentiation in the eyes of consumers. If it has improved, the lower current performance is more than offset by the increase in the implied valuation multiple. In other words, the value of the brand is higher even at lower current revenues.
To illustrate this, consider a brand investment that reduces profits by 10% and is expected to improve brand scores and increase valuation multiple by, say, 20%. The total value of the brand will be higher. If the back-end brand metrics improve less than expected, the valuation multiple may rise as little as 15%. In this case it was still a good investment as it more than offsets the drop in profits.
There are many applications for this. When a brand manager submits a plan, the company’s staff can objectively check whether they are investing enough in brand building to achieve the planned growth and profit margin. When seeking approval for specific brand investments, brand and financial information can be combined to provide a new and actionable view of whether the investment has a positive net present value (NPV). And if an ad spend should increase meaningfulness and uniqueness scores by a certain amount, you can evaluate progress in project “look-backs”. Such periodic reviews should consider whether the increased investment has resulted in sufficient improvement in brand score to be worth the investment. Based on these assessments, multi-brand companies should allocate resources to the brands with the best return on investment.
You could even go so far as to create an incentive plan based on a proxy share price for a brand, using financial and brand information, treating the brand manager as an owner with full responsibility for the financial performance and health of the brand . With such measures in place, I think managers will be less inclined to use promotions and discounts to meet arbitrary short-term revenue targets, and more likely to focus on the actions needed to achieve sustainable growth and pricing power over time. to accomplish.
While these applications are viable and exciting, I think most companies should start small by collecting brand data and financial information for their brands to see if they are indeed allocating brand-building investments in a way that optimizes value creation. They then need to integrate these analyzes into their planning and decision-making processes. If that goes well, you can think about the accountability ideas mentioned above. Ultimately, I think those who embrace this innovative approach are likely to deliver better long-term value creation.