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Healthy Skepticism Library item: 14825

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

 

Publication type: news

Bates AK.
Brand Equity and Shareholder Value: The Big Divide
Eyeforpharma.com 2008 Dec 11
http://social.eyeforpharma.com/story/brand-equity-and-shareholder-value-big-divide


Full text:

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.

 

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See:
When truth is unwelcome: the first reports on smoking and lung cancer.