It’s often said that branding projects are an investment. If that’s the case, what return should you aim for? We believe, as a rule of thumb, for every dollar you invest in branding you should aim to see 10 come back within a year. Setting aside our belief, what does the data suggest?
That brand building delivers outsized value is clear from a macro perspective. Around 85 percent value in the S&P index derives from intangible assets (intellectual property). According to Jonathan Knowles (co-author of a number of HBR articles) on average, brand value alone accounts for a full 20 percent of this.
Credit: Type 2 Consulting analysis of the economic significance of industries and concentration of brand value
Notoriously difficult to calculate
Company and brand valuations are influenced by many factors – not least of which include erratic investor behaviour. The big picture reveals the immense value of branding. A strong brand helps to create customer preference and can persuade customers to pay more. Stronger brand = higher pricing = higher profits. But the closer we look, the more difficult it becomes to quantify brand ROI in individual cases. The internet is full of decks that try – the metrics for brand performance are many, varied and often biased.
“why are we proposing to spend money on this brand project?”
So how can you as a leader know what the right amount is to invest in each branding initiative?
The key question to ask is, “why are we proposing to spend money on this brand project?”
You don’t buy a machine just because you have space for it. It must serve a business objective. Branding projects must too.
The business objectives we often advance for our clients through brand building projects include:
Marketing budgets inform branding budgets
The 10X objective appears to be a useful yardstick to calculate a brand building budget based on these two points:
* 85% of value in S&P 500 companies is intangible, and 20% of that is attributed to the brand, 20% by 85% = 17%
Let’s look at some hypothetical examples and see how that might play out:
Example 1 – Listed company
Their objective is to change investor perceptions to positively influence their stock price by 2%, equating to an increase of $100 million in market cap. The brand building budget allocated would be a-tenth of the target return, at $10 million.
Example 2 – Mid-size business
They have two goals. First, attract and retain top talent which is worth around $1 million over a year in terms of recruitment and training costs. Second, help achieve a sales target delivering a $9 million profit. With a total target return of $10 million, they invest a-tenth of their target return at $1 million in brand building.
Investing $1 million for a $10 million return looks like a bargain – but of course, brand building is only one of many factors that influence the success of a business. This risk is acknowledged by taking a financially prudent approach, such as capping the investment at a-tenth of your targeted return.
The metrics available for brand building ROI are mostly US-centric. When it comes to branding budgets, we often hear that “Asia is different” as a justification for economising on brand building.
Yes the cultural considerations are different, but all around us is the evidence of businesses dominating our preferences and markets through the power of branding. That power is available to any organisation willing to invest carefully in proven techniques.