Brand Equity and Shareholder Value: The Big Divide

Marketing is essential to driving business. Without customer awareness of a product, no sales, revenue, or shareholder value is possible. With such an important task at hand, it’s crucial to measure marketing activity and productivity, showing the higher-ups the power of the marketing division.

But there’s a problem. Measuring marketing is often done with metrics that differ from those important to the firm and to shareholders. As a result, shareholders and managers are often unclear on the value provided by marketing. Brand equity and shareholder value seem to be concepts in different languages, unable to connect and resulting in disastrous marketing cuts.

How can shareholder value and marketing equity connect? In this article, we examine this question, analyzing the difficulties with current measurements. We look at theories and systems proposed throughout the industry to draw this connection and improve marketing’s standing. And we take a close look at one system that holds tremendous promise in clearly linking the marketing department and the boardroom.

The Trouble with Measurements

Kotler has defined marketing as:

“A management orientation that holds that the key task of the organization is to determine the needs, wants, and values of a target market and to adapt the organization to delivering the desired satisfactions more effectively and efficiently than its competitors.”

Doyle offered a definition that encompassed business reality. Marketing is:

“The management process that seeks to maximize returns to shareholders by developing and implementing strategies that build relationships of trust with high-value customers and to create a sustainable differential advantage.”

To make sure those entrusted with this grand task are doing it well, we use measurements of activity and productivity. Nonfinancial measures are the order of the day in marketing. Concepts such as perceived quality, customer satisfaction, brand loyalty, market share, awareness, and more are the standards of marketing success to all involved. These measurements are intangible and intermediate, reflecting the impact at the customer level, the step prior to the financial impact at the firm level. These measurements are difficult to capture in any uniform manner, and are highly subjective. They are also forward-looking measures, meaning they consider past, present but also future impacts of current assets and actions.

When it comes to the rest of business, however, the royal standard for statistics is accounting measurements, like stock price, market capitalization, profit, and more. These outcomes are used by CEOs and CFOs, as well as investors, administrators, and everyone related to the company’s success. They’re objective, and draw together multiple factors into structured, comprehensive figures. They’re uniform across divisions, between companies, and across industries, allowing comparison to take place between different business units and market participants. Finally, they’re retrospective, looking back on time that has passed and judging performance up to that point.

Accounting measurements are terrific in most of their uses. But using accounting measurements to encapsulate marketing performance is a losing proposition, one that fails to effectively describe what’s happening. The natural impetus for those in power at a company is to use the standard accounting measurements for marketing. But they cannot capture the intangible and intermediate nature of marketing measures. At the same time, these marketing assets, a brand’s equity, make up the majority of the firm’s value. They are absolutely essential for a firm’s survival.

Where does that leave us?

Drawing Links Between Shareholders and Marketing

Many analysts, administrators and academics have attempted to draw connections between the world of standard accounting measurements and the intangible value of brand and marketing equity.

The Balanced Scorecard method, developed by Kaplan and Norton, integrates financial and nonfinancial indicators to more thoroughly evaluate a firm’s performance. Balanced Scorecard is a management system that describes a process to change intangible assets into tangible outcomes. The theory behind it all is this: A company’s activities are a chain of effects that works to close the gap between customers’ needs and the organizations’ financial results, following a sequence giving customers first priority, then internal processes, and finally learning and growth. When it comes to scorecards and performance measurement, however, not much is offered. Critics say the Balanced Scorecard model is a powerful tool for managerial control, but does not solve the problem of connecting marketing performance indicators and a company’s ultimate value.

Another model is the Shareholder Value Approach. Since the primary goal of a company and its managers is to maximize shareholder value, this model looks at how business decisions and actions affect the company’s economic value. Shareholders are the owners of a firm, with managers working on their behalf. Managers are responsible for creating value by making strategic decisions that bring in cash flow; especially important is long-term cash flow to meet the long-term perspective of investors. Value is created when expected sales exceed all costs. The word “expected” is crucial – expectations of future performance play a major role in shareholder value creation, and align with the forward-looking measurements of intangible marketing assets.

While theories like these have been helpful in pointing the way to linking shareholder value and brand equity, they haven’t gone far enough, connecting the full chain of events and effects. The theory developed by Luigi Cantone and Alessio Abbate may be the one that points us in the most comprehensive direction for understanding the link.

The Virtuous Circle of Marketing Investments (VCM) encapsulates the long-term impacts of marketing investments in terms of shareholder value creation, connecting marketing strategies and financial outcomes. The circle is this:
o Brand building and sustaining activities generate innovation equity, encompassing marketing skills, capabilities and relationships.
o Innovation equity creates value for customers, called customer brand equity.
o This value encourages customers to change their behaviors towards the brand, creating value called organizational brand equity.
o Repeated customer action (buying the brand over and over) creates market-place performance.
o In the long term this means customer equity, with lower costs needed to get and keep customers and overall profitability.
o All these actions from investing in marketing means value for future projects too, creating trust equity.

Looking at marketing investments with this perspective, it is easier to demonstrate the intrinsic value of marketing from a business perspective: reducing marketing comes at the direct expense of customer satisfaction, cutting the company’s ability to respond to needs and resources available to build marketplace advantage. It will cost more to acquire and retain customers, and profitability decreases. Less marketing investment ruins the virtuous circle and instead creates a vicious circle.

Equity and Shareholder Value in the VCM

Describing the aspects of this theory in detail more clearly illustrates the proposed links between shareholder value and brand equity. Marketing and brand equity is broken out here into multiple, interconnected ideas driving inexorably towards ultimate shareholder value. Let’s take a look.

Innovation equity. Brand building and sustaining activities create this kind of equity. In this stage, customers are attracted to the company and its products because of a perceived unique advantage over other entrants in the market. By focusing on innovation, production and flawless delivery of products and services, a company is able to create value in some way for these customers and subsequently generate customer brand equity. The customers’ perceptions of the business’s capabilities grow. Of course, these processes require a company to maintain a strong customer orientation, a view to match customer needs with innovative products. So innovation equity is made through the company’s skills, capabilities and relationships.

Organizational brand equity. When a company is able to encourage customers to change their behaviors towards a brand, this creates organizational brand equity. Part of encouraging customers to purchase and remain loyal towards a certain brand is restricting competitive forces. Focusing on the competitive dynamic, and doing everything legal and ethical to maintain a competitive advantage, enables customers to make the initial purchase and then repeat those behaviors again and again, driving market performance. Whereas before customers transformed from strangers to “acquaintances” with the company and the brand, through organizational brand equity customers become “friends.”

Customer equity. In the long term, companies want repeat customers, but they want this customer base with lower costs and enhanced profitability. Firms distinguish between short-term customers and long-term, pinpointing profitable segments to focus on. By identifying the customer base that can be developed into relationships and partnerships, and jettisoning major efforts to retain other fickle customers, companies can provide even greater value and build customer equity.

Trust equity. By creating innovation equity, building organizational equity, and maintaining customer equity, companies are investing in marketing and creating value for customers and future projects. Taken together, this builds trust equity. The firm has shown superior ability to understand customer needs and wants, and to act shrewdly in the competitive sphere. This means a company has a demonstrable ability and experience to create more products and invest in new business ventures, something very attractive to shareholders. The cycle starts again.

The Measurement Issue, Again

This theory makes sense. It sounds great. But what about the pressing problem of appropriate measurements? How can we link the traditional marketing measurements and bigger-picture accounting metrics? Through this virtuous circle, a gradual transition occurs that brings us there.

o Innovation equity. This kind of equity is focused on building a business’s capabilities and demonstrating value to customers. Therefore, useful metrics for evaluating performance in this stage are customer satisfaction, perceived quality and customer brand equity. These are “customer mind-set” measures, and are extremely useful as a beginning.
o Organizational brand equity. This equity is about developing competitive advantage, defending customer brand equity and leveraging brand differentiation. It’s about the position the firm is able to obtain in the market relative to competitors. Measures then are focused on market share and brand loyalty.
o Customer equity. This kind of equity is focused on building customer relationships while minimizing cost and maximizing profitability. The firm must identify profitable segments of the customer base. Useful metrics revolve around customer-related margins, churn rate, opportunity cost of customers, share of wallet, and more.
o Trust equity. This is the end result, where all the previous goodwill and equity means success to demonstrate to shareholders. With trust equity, a business can comfortably and knowledgably invest in additional business ventures. Metrics here revolve all around the shareholders, and utilize financial measurements that speak their language.

Following these different types of equity from start to finish, and demonstrating this circle to investors, provides the link between marketing activity and brand equity to shareholder value. It also allows the transition from nonfinancial measurements to the more accepted business metrics. Analytical approaches that link all these areas with traditional financial measures may be the best proof marketers have to prove the inherent value of brand equity. Unsurprisingly, Eularis also conduct analytics on these areas.

Conclusion

Shareholders aren’t the alien enemies marketers might think they are. They are logical, knowing that marketing efforts drive company business and overall value. They just need proof, and they need it in their language. While drawing links between the intangible world of marketing to the clear-cut vocabulary of business performance has been difficult, several systems are available that provide the necessary connection and transition.

Author:
Dr. Andree K Bates
Eularis
www.eularis.com

If you would like to see how these approaches can work for your company and brand, please contact the author, Dr. Andree K Bates, at Eularis, www.eularis.com for more information.

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