Well-managed brands can generate earnings indefinitely.
The focus of innovation is often new technology, processes and products. If successful, these assets can be game changers. But their economic life is usually short due to the pace of tech evolution. In contrast, well-managed brands can generate earnings indefinitely. An achievable form of alchemy is to transition the reputational benefits of technical innovation into brand equity, thereby extending the length and extent of the economic benefits. Successful off-patent pharmaceuticals illustrate the ability of a strong brand to maintain price and volume premiums after the erosion of product differentiation.
As a result of corporate transactions, enough multi-billion dollar brands appear on balance sheets to illustrate the attractiveness of brand economics. Further proof is provided by the magnitude of royalty earnings from brand licences.
Before considering how to use technical innovation to grow brand value, it is helpful to clarify the terminology and to consider brand economics.
Brand valuation has entered the corporate finance mainstream as a result of its use for purposes as diverse as financial reporting, tax compliance, litigation and strategy determination. Marketers use the term ‘brand equity’ more often than ‘brand value’. Is this the same thing? And what role does intellectual property play in all of this?
The intellectual property that protects the name, logo and other aspects of a brand’s identity is fundamental to its value, but is not solely responsible for generating brand earnings. Brand equity is the other contributor to the value of brands. The term describes the extent of a brand’s reputation among its stakeholders. Brand equity is gauged through measures such as familiarity, perceived quality, image and affinity. It can be regarded as a stock as it is continually augmented and depleted by stakeholder interactions with the brand.
Brand equity influences consumer behaviour and generates value through premiums in price and volume. In other words, brand equity measures consumer perceptions, while brand value is the present value of incremental earnings generated by a brand. The incremental earnings are driven by brand differentiation and the extent to which this creates favourable brand equity. Brand differentiation is communicated to stakeholders through the use of all components of brand identity and is protected through trademarks, copyright and designs.
The strength of the causal relationship between changes in brand equity and changes in revenue varies between industries and brands. It can be quantified if adequate metrics are maintained.
Migrating tech innovation to brand equity
Having established that brand equity drives brand value, the next step is to determine how technical innovation can increase brand equity.
Market researchers quantify brand equity through a layered approach. A typical measurement hierarchy starts with brand familiarity, which is a necessary foundation but is of little value without positive associations. Perceptions of product and service quality represent the next layer. Perceived quality is made up of a range of attributes that are relevant to buyers, and has a direct impact on buyer behaviour. The third layer consists of image attributes which are similar to personality traits. These are obviously crucial in establishing brand preference for consumer brands and attributes such as ‘trustworthy’ and ‘innovative’ can be relevant to industrial brands. Brand affinity, or preference, is the peak measure of brand equity. Affinity flows from the preceding brand attributes and directly influences buyer choice and willingness to pay a premium.
Many features of product and service quality are difficult to benchmark objectively. This does not stop buyers and consumers from forming views about the relative quality, performance and trustworthiness of brands and corporations. Below is a simple illustration of how effective marketing can embed perceptions of innovation and superior quality in the minds of consumers, thereby driving demand beyond the life of the initial technology.
Brand equity management is not a new concept. Academics such as David Aaker and Kevin Lane Keller have been writing about it for decades, and leading brand owners regularly conduct quantitative research to track their brand equity relative to competitors. Yet many innovative organisations fail to make the connection between technology and brand equity.
Some inventions speak for themselves, but others must be integrated into a coherent marketing strategy to become embedded in consumer perceptions. In large organisations this requires communication between the R&D and marketing functions. There are a multitude of ways to emphasise differentiation resulting from innovative products and services. In addition to traditional marketing communications, these include content marketing, ingredient branding and brand extensions. When integrated into a consistent and coherent brand strategy, even modest achievements can enhance brand equity and drive cash flow.
Tech-centric brand differentiation is not purely the domain of fast-moving consumer goods. Industrial and government buyers often have systematic procurement processes. However, decision makers are still influenced by their perceptions of corporate reputation, technical capabilities, reliability and risk. This is embodied in the truism “nobody ever got fired for buying IBM”. Even in the upstream oil industry, I have assessed the impact of perceived technical ability on success in tender processes.
Brand-centric organisations do not rely on management intuition to gauge and manage brand equity. Quantitative market research is used to track brand equity and to understand the relationship between changes in brand equity and buyer behaviour. Quantitative research and scenario valuations provide guidance to the value uplift that can be gained from changes in particular dimensions of brand equity.
- Is there alignment between your R&D and brand strategy?
- Does your company quantify and track brand equity and value?
- When calculating the return on innovation, do you include incremental brand value?
- Are all elements of your brand identity protected by intellectual property in the relevant jurisdictions and product categories?
If you have any further questions or require expert advice, please don't hesitate to contact us.
Author: Tim Heberden