products due to the issue of selling Nestlé’s baby milk to poor mothers in Africa.
These functions are neither laws nor dues, nor are they automatic; they must be defended at all times. Only a few brands are successful in each market thanks to their supporting investments in quality, R&D, productivity, communication and research in order to better understand foreseeable changes in demand. A priori, nothing confines these functions to producers’ brands.
Moreover, several producers’ brands do not perform these functions. In Great Britain, Marks & Spencer (St Michael) is seen as an important brand and performs these func- tions, as do Migros in Switzerland, the Gap, Zara, Ikea and others.
The usefulness of these functions depends on the product category. There is less need for reference points or risk reducers when the product is transparent (ie its inner qualities are accessible through contact). The price premium is at its lowest and trial costs very little when there is low involvement and the purchase is seen as a chore, eg trying a new, cheaper roll of kitchen paper or aluminium foil. Certain kinds of shops aim primarily at fulfilling certain of these functions, for example hard discounters who have 650 lines with no brands, a product for every need, at the lowest prices and offering excellent quality for the price (thanks to the work on
reducing all the costs which do not add value carried out in conjunction with suppliers).
This formula offers another alternative to the first five functions: ease of identification on the shelf, practicality, guarantee, optimisation at the chosen price level and characterisation (refusal to be manipulated by marketing). The absence of other functions is compensated for by the very low price.
Functional analysis of brand role can facil- itate the understanding of the rise of distrib- utors’ own brands. Whenever brands are just trademarks and operate merely as a recog- nition signal or as a mere guarantee of quality, distributors’ brands can fulfil these functions as well and at a cheaper price.
Table 1.6 summarises the relationships between brand role and distributors’ own- brands’ market share.
How brands create value for the
company with brands the financial analyst is acquiring near certain future cashflows.
If the brand is strong it benefits from a high degree of loyalty and thus from stability of future sales. Ten per cent of the buyers of Volvic mineral water are regular and loyal and represent 50 per cent of the sales. The repu- tation of the brand is a source of demand and lasting attractiveness, the image of superior quality and added value justifies a premium price. A dominant brand is an entry barrier to competitors because it acts as a reference in its category. If it is prestigious or a trendsetter in terms of style it can generate substantial royalties by granting licences, for example, at its peak, Naf-Naf, a designer brand, earned over £6 million in net royalties. The brand can enter other markets when it is well known, is a symbol of quality and offers a certain promise which is valued by the market. The Palmolive brand name has become symbolic of mildness and has been extended to a number of markets besides that of soap, for example shampoo, shaving cream and washing-up liquid. This is known as brand extension (see Chapter 12) and saves on the need to create awareness if you had to launch a new product on each of these markets.
In determining the financial value of the brand, the expert must take into account the sources of any additional revenues which are generated by the presence of a strong brand.
Additional buyers may be attracted to a product which appears identical to another but which has a brand name with a strong reputation. If such is the company’s strategy the brand may command a premium price in addition to providing an added margin due to economies of scale and market domination.
Brand extensions into new markets can result in royalties and important leverage effects. To calculate this value, it is necessary to subtract the costs involved in brand management: the costs involved in quality control and in investing in R&D, the costs of a national, indeed international, sales force, advertising costs, the cost of a legal registration, the cost
of capital invested, etc. The financial value of the brand is the difference between the extra revenue generated by the brand and the asso- ciated costs for the next few years, which are discounted back to today. The number of years is determined by the business plan of the valuer (the potential buyer, the auditors). The discount rate used to weigh these future cash- flows is determined by the confidence or the lack of it that the investor has in his or her forecasts. However, a significant fact is that the stronger the brand, the smaller the risk.
Thus, future net cashflows are considered more certain when brand strength is high.
Figure 1.2 shows the three generators of profit of the brand: the price premium, more attraction and loyalty, and higher margin.
These effects work on the original market for the brand but they can be offered subse- quently on other markets and in other product categories, either through direct brand extension (for example, Bic moved from ballpoint pens to lighters to disposable razors and recently to sailboards) or through licensing, from which the manufacturer benefits from royalties (for example all the luxury brands, and Caterpillar).
Once these levers are measured in euros, yen, dollars or any other currency they may serve as a base for evaluating the marginal profit which is attributable to the brand. They only emerge when the company wishes to strategically differentiate its products. This wish can come about through three types of investment:
l Investment in production, productivity and R&D. Thanks to these, the company can acquire specific know-how, a knack which cannot be imitated and which in accounting terms is also an intangible asset.
Sometimes the company temporarily blocks new entrants by registering a patent. This is the basis of marketing in the pharmaceu- tical industry (a patent and a brand) but also of companies like Ferrero, whose products are not easily imitated despite their success.
Patents are on their own an intangible asset:
the activity of the company benefits from them in a lasting manner.
l Investment in research and marketing studies in order to get new insights, to antic- ipate the changes of consumers’ tastes and life-styles in order to define any important innovations which will match these evolu- tions. Chrysler’s Minivan is an example of a product created in anticipation of the demands of baby boomers with tall children.
An understanding of the expectations of distributors is also needed, as they are an essential component of the physical prox- imity of brands. Nowadays a key element of brand success is understanding and adapting
to the logic of distributors, and developing good relations with the channels (even though it is still necessary when valuing a brand to make a distinction between what part of its sales is due to the power of the company and what part to the brand itself).
l Investment in listing allowances, in the sales force and merchandising, in trade marketing and, naturally, in communi- cating to consumers to promote the uniqueness of the brand and to endow it with saliency (awareness), perceived difference and esteem. The hidden intrinsic qualities or intangible values which are associated with consumption would be unknown without brand advertising.
CORPORATE RESOURCES
EXTENDING BRAND EQUITY BEYOND ITS CATEGORY AND COUNTRY
MKTG INVESTMENTS FORECASTING CHANGES
OF CONSUMER VALUES AND LIFE-STYLES
BRAND RELEVANCE AND ADAPTATION TO ITS PRESENT MARKET
PERCEIVED VALUE VIS-À-VIS COMPETITION
INCREMENTAL ATTRACTION AND LOYALTY INVESTMENTS:
PRODUCTIVITY, R&D KNOW-HOW, PATENTS
LEVEL OF
OBJECTIVE QUALITY COST OF QUALITY
COMPETITION – OTHER BRANDS – DOB'S
– HARD DISCOUNT
LEVEL OF SUSTAINABLE PRICE PREMIUM
DISTRIBUTION INVESTMENTS (PROXIMITY, AVAILABILITY) AND COMMUNICATION
SHARE OF VOICE SHARE OF MIND SHARE OF SHELF
CUSTOMERS' – INVOLVEMENT – PRICE SENSITIVITY – BUYING CRITERIA
COST ADVANTAGES DUE TO MARKET LEADERSHIP BRAND SALIENCY
Figure 1.2 The levers of brand profitability
The value of the brand, and thus the legit- imacy of implementing a brand policy, depends on the difference between the marginal revenues and the necessary marginal costs associated with brand management.
How brand reputation affects the impact of advertising
Brands are a form of capital that can slowly be built, while in the meantime one is growing business. Of course it is very possible to grow a business without creating such brand capital:
a push strategy or a price strategy can deliver high sales and market share without building any brand equity. This is the case for many private labels or own-label brands, for instance. The volume leader in the market for Scotch whisky in France is not Johnnie Walker or Ballantines or Famous Grouse but William Peel, a local brand that aimed all its efforts at the trade (hypermarkets) and sells at a low price. It has almost no saliency (spontaneous brand awareness).
Now managers are being asked to build both business and brand value. Their salary is indexed on these two yardsticks: sales and reputation. One should not see them as separate, leading to a kind of schizophrenia.
Chaudhuri’s very relevant research (2002) reminds us that advertising and marketing are the key levers of sales. However, their effects
on market share and the ability to charge a premium price (two indicators of brand strength) are not direct but are mediated by brand reputation (or esteem). In fact, as shown by the path coefficients of Figure 1.3, brand reputation is created by familiarity (I know it well, I use it a lot) and by brand perceived uniqueness (this brand is unique, is different, there is no substitute). Advertising does play a key role in building sales, but it has no direct impact on gaining both market share and premium price. This is most inter- esting: in brief, it is only by building a reputa- tional capital that both a higher market share and price premium can be obtained.
Reputation also adds to the impact of adver- tising on sales. It is well known from evalua- tions of past campaigns that the more a brand is known, the more its advertisements are noticed and remembered. It is high time to stop treating brands and commerce as opposing forces.