The hottest and most perplexing term in branding these days is so-called brand valuation, or how to measure the contribution a brand makes to a company’s overall performance. I caught up with branding pioneer Jim Gregory, CEO of CoreBrand (Corporate Branding LLC based in Stamford, Conn.) recently, and asked him about the subject.
Why is brand valuation such a hot topic?
Because financial people are finally starting to accept that brands are among a company’s most valuable assets, and it bothers them that they can’t put a specific number on the size and relative importance of that asset. People can’t even agree on how to define brand equity, let alone how to measure it.
So how do you define brand equity?
We say that brand equity is the percentage of a company’s total market capitalization that is directly attributable to its corporate brand.
It’s nothing like home equity–the difference between what you owe and what your asset is worth?
CFOs would laugh you out of the room with that analogy. There is a difference, of course, between book value and market cap, and brand equity is part of that difference. But there’s a lot more to it.
How important are brands in influencing a company’s performance?
Very important. We have tracked more than 1,000 companies since 1990, and our top quintile companies exhibit more than three times the brand equity measured as a percent of total market capitalization vs. midpack companies. The ratio is roughly the same when you compare market cap to book value of a company’s stock.
How do you calculate your “BrandPower” ratings?
Each year we interview approximately 10,000 management-level people from companies generating the top 20% of U.S. sales revenue. We ask them to rate about 40 companies on familiarity and favorability issues. Then we compare those ratings to each company’s financial information and third-party data.
What do you mean by favorability?
We look at three aspects of favorability: company reputation, perceptions of management strength and investment potential. Then we combine those scores and weigh the total response based on how familiar they were with the company. We normally end up with about 400 individual scores for each of the 1,200 companies in our BrandPower rankings.
How does the CoreBrand approach differ from other brand valuation methods?
Well, I can’t really speak for all other methods, but we look at two significant results in our ranking system: how brand power affects stock price and market capitalization and how brands influence revenue generation.
Everything in our methodology is objective and quantifiable. We try to take the subjectivity out of brand valuation. It starts to be a slippery slope if you have to apply “expert opinion,” no matter how knowledgeable the expert.
How important are financial performance factors?
We think they’re critically important. We look at everything from cash flow, expected cash flow and expected cash flow growth to things like dividends, earnings and projected earnings. We also use third-party ratings of financial strength.
Can you demonstrate the ROI for a branding program?
Absolutely. Many of our long-time clients receive quarterly updates. Others prefer annual scorecards. Almost all want to see how they performed relative to a small group of key competitors.
Can you isolate the contribution that advertising makes?
Yes, we can. Advertising is the single biggest factor that impacts brand image. Historically, we attribute 30% of a company’s brand power to advertising.
What makes up the rest?
Company size is next, followed by public relations, investor relations and employee relations. The final 25% of brand power can be traced to such factors as low dividends, sales growth rates, market volatility and other considerations.
How important is branding for business-to-business marketers?
Almost as important as for business-to-consumer companies. Our top quintile b-to-c companies demonstrate an average brand equity as a percentage of market cap of 15.6%. The top b-to-b companies have 13.3%.
So what does that mean?
It means that more than 15% of the top-performing b-to-c companies’ total worth can be linked directly to brands, and more than 13% of b-to-b company value is the same. By the same token, the bottom quintile companies in both categories can claim brand equity of only 0.6% of market cap. If you’re truly interested in maximizing shareholder value, you need to ask yourself what you’re doing to build brand strength.
Can we expect an apology from the budget-cutters anytime soon?
Probably not, at least not a public one. But we are seeing a lot more acceptance of the idea that advertising is an investment vis-à[left-leaning accent]-vis discretionary expense, and that’s an important step in the right direction.
How did you get started in this business?
In early 1990, I was challenged by Richard Costello, who was manager of marketing communications for General Electric at that time, to come up with a way to quantify the financial impact of corporate reputation on stock price. Later, when Richard became president of the Association of National Advertisers, it became an ANA project. We started studying relationships between various financial and image factors in late 1990, and by 1993, when we felt the results were provable, we presented our process to attendees at the ANA national meeting.
What would it cost to add a corporate brand to your database?
We don’t have an introductory rate per se, but for less than $100,000 we can conduct the calibration research, comparing your brand to your closest competitors and produce a 60-page deck analysis (a presentation of the results plus potential ROI of advertising investment) with an executive summary that shows how you are doing. That would also include a formal presentation to your company’s senior management.
Does your system provide a numerical rating or a dollar value amount?
Both. The BrandPower ranking is a composite number that is useful in comparing your brand strength to major competitors. But we also provide a brand equity dollar amount, so if you wanted to add it to your balance sheet someday, you could.
Do you see that day coming?
I hope so. Assets should be reported and scrutinized. Brands are among any company’s most valuable assets, so why wouldn’t you want to proudly feature them in your annual report?
Why not, indeed.