Bonus content: How do brands create value?
We do not build brands for the good of our health.
Creating a strong and healthy brand is a means to an end and that end must be a stronger and healthier business or organisation.
By and large this reward will be financial, whether growth in sales, increased margins or successful entry into new categories or activities. That’s obvious for most commercial organisations but its also true for other types of brand.
Building a nation or destination brand is done to increase inward investment, build soft power and drive tourism. In other words for all the lovely pictures of tourist attractions there is a hard centre to this activity and that’s about making money, even if much if it is indirect like the taxation revenue from hotels that are full.
It is tempting to be derisory about celebrity brands partly because celebrity fame often appears to be built on insubstantial foundations. But celebrity brands are usually built to offer the person concerned new sources of revenue as the source of their fame dwindles. This is particuarly the case in sport and music where the initial source of fame and brand appeal is frighteningly short lived, while most sustainable wealth is served by levering that brand into other activities. The musician that launches a music label and the sportsperson that licenses their name to a new spirit.
Even a healthy charity brand is at heart about cold hard cash. Since a potent brand that people understand is addressing an important and pressing cause and doing so with effect will broaden their supporter and fundraising base. In recent years we have seen many charities bring together brand and fundraising activities where once they were split, as they recognise the principle reason to build their brand is to build their source of funds.
There are some exceptions of course.
The potency of a political brand is about acquiring and maintaining power. Strong political brands whether invested in a person or a party build strong natural voter bases and periodically sway the undecided and floating voter. They don’t exist for monetary gain but to take the power that will allow them to implement their agenda. Though you could always ask for what reason and whether that is entirely altruistic.
Interestingly the Royal Family also need to manage their brand though not so much to maintain power but to legitimise the power and privilege they already have. There are few brands more carefully managed but also more vulnerable to changes in sentiment than the Royal Family. This is what brought it to crisis point in the wake of the death of the Princess of Wales and more recently in the the experiences of Harry and Meghan and indeed the succession.
However, by and large it is a financial reward that is the prize for a well-constructed, positive and healthy brand. But pining down how brands create value is notoriously difficult or at least is surrounded by general confusion and lack of clarity
On of my favourite Southpark episodes involves a group of gnomes that are stealing all the underpants from the town. When they are questioned by the boys about their behaviour they reply that it’s a three part plan. The first part is to steal underpants and the third part is to make a profit. But they are remarkably sketchy about the second part, how stealing underpants will lead to profit.
And that’s what you see in so many organisations today. There is a general consensus that in some way having a brand and especially a strong one, is a good thing. And perhaps a sense that the business or organisation will be more financially successful if this were the case. But no real idea about how a healthy brand generates commercial value. This often leads brand building to be dismissed ornamental to the business not instrumental. A business lever that can offer huge returns over both the short and critically long term and one that will keep on giving provided your brand stays healthy.
So let’s try and fill in the second stage between brand building and profit because it’s imperative that we understand the way brands build value and can clearly communicate this to the people around us.
Fortunately, there are five principle ways in which strong brands create value. Real monetary value.
A strong and healthy brand will attract more people to buy, join or support you. This is because its desirable in and of itself and certainly in comparison to your competition. Your brand stands out in people’s minds when they think about your category or a particular aspect of their life in which it performs well, and so people are more likely to be drawn to you. Critically this is about creating an innate desirability so that when people move into market they are already predisposed to want to do business with you.
Of course, these days there are many obstacles in the purchase process between entering a category and the final purchase, many ways that a challenger can unseat the preferences someone has for your brand but its still the case that a desirable brand will help you navigate this minefield successfully.
In this respect a healthy brand works in your mind’s search engine coming out on top every time a customer thinks about your category or a particular need they have, something we now call mental availability.
A strong brand drives value in a number of ways. Desirability is translated into a degree of pricing freedom because it makes paying a little more, more justified and also makes people reluctant to substitute your brand if they don’t have to. Stronger brands spend less time and margin on price promotion or discounting to build volume and so sell at full price for more of the time. While price rises are less likely to drive customer defection however much they might not like them.
So, over all healthier brands maintain and justify higher prices and margins because people are prepared to pay more for them.
A strong brand that is well understood and liked by people is often in a better place to extend into new products, services and categories than weaker brands. It is able to take that understanding and good will and use it to establish a foothold in or a new category. While there are a number of phenomenally strong brands at the head of the mobile network market in the UK, EE included, both Sky and Tesco have used the affection, affinity and values they have built into their brand in Entertainment and retail respectively to make serious inroads into mobile category.
And Apple provides a masterclass in the subject, pivoting their business multiple times as they take their approach to life and phenomenal customer support from category to category. Today the second largest part of their revenue after iPhone are digital services not hardware.
Of course in a era of technological and data disruption their are many categories with highly successful businesses that have not benefited from fame and reputation created elsewhere. Virgin money does but Monzo and Starling do not.
But moving into new a categories at scale is hard for a start up, they will need to spend time building up their base and their business. A brand established in one part of peoples’ lives, providing that it is sufficiently strong, will have an easier time of finding new growth in an adjacent or new category, than a business with no brand or one that is weak.
A strong brand creates marketing efficiency. If people find you desirable and are predisposed to buy from you. And they are more forgiving when it comes to price or actively expect you to be more expensive then the sales funnel or loop or whatever shape is popular this week, will be far smoother. And this means you will need to invest less along its stages to ensure people find and buy from you.
In 2021 Air B’n’B were able to significantly cut performance marketing spend because their brand was so powerful that this form of marketing made little to no difference. In truth they were ending up paying for sales that would naturally have come to them because of the strength of their brand. A strong and healthy brand created significant efficiencies for Air B’n’B driving down the cost of acquiring every customer.
A strong brand attracts and helps retain talent. Any business is in a fight for talent with its competitors and other sectors. It is imperative to be able to hire the best people and keep them. Keep them without having to pay over the odds and keep them so that their loss doesn’t lead to significant recruitment costs. With employees costs a significant part of the P&L of any service organisation and the dominant cost in a professional services firm, powerful brands have an effect beyond galvanising your people with a clear sense of belonging. They make clear commercial sense outside the world of marketing and sales.
A strong brand builds resilience and protects the business from reputational challenges. In a way it acts a bit like insulation so that the effects of problems, whether of your causing or externally driven are less damaging.
That insulation may be as simple as a bit of forgiveness when someone receives poor service or has an unusually bad experience of your product. I call this the ‘that’s very unlike’ factor, in that a when people have a poor experience they are more likely to think ‘that’s very unlike’ your business as opposed to ‘that’s bloody typical’ of your business.
But it’s also the case that strong brands help businesses bounce back after more profound crises, we saw that with Volkswagen after the diesel emissions scandal, where an almost impregnable brand helped them build back very quickly following that crisis.
To be clear, a strong brand doesn’t allow businesses to do anything they want to, to Teflon coat their reputation. Although some of the platform brands are clearly able to get away with some sharp practices (from zero hours contracts to tax avoidance) because people are willing to look the other way, on the whole a healthy brand will not long survive repeated challenges.
These six factors – volume, value, efficiency, retention and resilience – are the principal reasons that a heathy brand is a business’ best friend. A healthy brand sitting out there in the minds of your customers, your soon to be customers and your customers to come, working its magic and creating a dynamo for growth.
These factors are indisputable. What is and always has been unclear is why this happens. And I think that is because people don’t really understand the way brands work. The way they are constructed, not by companies or marketers but by people. And that they live and only live, in people’s minds. It is by really understanding this rather than simply paying lip service to it, that we can better understand the way brand’s work.
Monopolies of the mind
Let’s face it any business or organisation would secretly prefer to be a monopoly.
It’s not a very attractive word and many of us shrink from the whole idea but a monopoly is a highly desirable state of affairs for any organisation. To be the only providers of a product or service gives you an enormous amount of power. Especially over the five factors that we discussed above.
If you are the only place someone can go for the things that they want or you are the only provider of a product they need, or even the only charity working in a particular field you have an incredible degree of freedom. All the growth that exists and that you generate goes to you. You can’t be undercut on price and in fact you decide the price you would like to charge. You are never in a dog fight to pay through the nose for paid search and can’t be outspent by competitive advertising. And as for your people and reputation, where else are people going to turn? The two alternatives people have is to buy from you or buy something else altogether.
Now tell me that this doesn’t feel a tiny bit attractive from a commercial point of view.
Of course, on the whole real monopolies don’t exist.
Sure, depending on your market there are still some state monopolies but the clue is in the name, the state controls and runs them for the benefit of the nation, so this option is rarely open to a profit making business.
You could definitely argue that patents and copyright aim to offer some of the advantages of monopoly for a finite period as a reward for innovation and invention. After all only JK Rowling can write Harry Potter novels and only Pfizer can sell Viagra. Not only do they alone have access to that brand but replicating the product is very difficult for competitors, they certainly can’t make a straight copy.
And without a doubt the biggest tech companies like Google and Amazon have built scale monopolies where the price of entry is so high that competition is stifled at birth or promptly acquired. Uber’s strategy in any city has been to undercut the competition to force it out of business and then enjoy the benefits of the near monopoly that it has created.
For most of us though, selling sausages, broadband, food delivery, washing powder, legal advice or clothing a monopoly is only something we can dream about. And that’s where brands come in.
If a brand exists inside someone’s mind then a strong and healthy brand is able to create a monopoly in those people’s minds that doesn’t exist in the real world.
This is what unlocks the commercial power of brands, their ability to build monopolies of the mind.
While anyone can sell or provide the types of products or services that you do. Only you can do this using your particular brand. And if your brand, that wonderful set of associations that people carry about with them, creates sufficient desire your ability to supply people with that brand becomes incredibly powerful.
Again Apple is a perhaps the greatest example of this. While it has some patent protection and some significant scale advantages it is not a real monopoly, no where near. It’s real advantage is the monopoly it has in so many peoples’ minds.
Anyone can and many do sell high quality laptops, tablets, smart speakers, headphones,TV streaming and in particular, smart phones. And in some cases you can quite clearly buy a better product for a cheaper price from a different manufacturer. But if you want an iPhone you can only get that from Apple.
Apple has a monopoly over the iPhone. And that’s commercially powerful because they have made that brand so desirable in people’s minds that they will go a long way before substituting it for another make.
Using Apple as an example in a book about brands is a horrible cliche. But they reason it comes up so often is that it’s the best example of a brand that is so potent it has freed Apple Inc from many of the commercial constraints those with less powerful brands have to endure and build the only $3 trillion business the world has ever seen. Much of that is down to the monopoly it has created in peoples’ minds.
In a category that couldn’t be more different Rapha has a powerful monopoly of the mind in cycling.
In their success as a business and the obsessive devotion of its customers we see a powerful monopoly at work. Anyone can sell cycle wear but only Rapha can sell Rapha. And that means a powerful sense of desire from cyclists, particularly road cyclists. And a huge price premium in order to satisfy that desire. Indeed Rapha operates one of the few loyalty programmes, the Rapha Cycling Club, in which members pay more rather than less because it gives them access to exclusive merchandise unavailable to others.
So, yes healthy brands drive share, value, growth, efficiencies and resilience for a business but they do so because they establish a monopoly over supply of something highly desirable.
And that’s your job too. In whatever category you operate in, ensure your ability to provide people with your make or model, your sign or symbol, so powerful that it creates an effective monopoly. That won’t be the case for every customer in the market of course. There will always people that don’t care or don’t see the point, for whom your monopoly means nothing. Hopefully they are people that you were not interested in serving in the first place or more likely they will simply buy into you from time to time.
But if enough people care enough to desire what you make or offer more than your competition and if enough people will pay a little more, or sometimes a lot more, well then you will find your brand starts to drive your business forward.
And you will find that your brand becomes instrumental to your business and not ornamental for it.
3 Replies to “Bonus content: How do brands create value?”
Thanks for this Richard.
But why are we so stuck in this Keynesian interpretation of value creation.
Commerce can – and must – embrace the infinite game: beyond just growth in sales, increased margins or successful entry into new categories or activities.
What about the social and public value brands can – and again must – play in inflecting on our species’ interaction with the world around it?
Surely it’s time to shift the focus of brands to regenerative advocacy and action, both social and environmental?
Never have brands and art been needed to create a human renaissance in social and ecological interaction.
We have to break this adland’s myopic, reductive, destructive interpretation of the value of brands, and the proliferation of crappy, unimaginative, cynical greenwash.
And I promise you, it will pay those brands brave enough to lead the way.
Silence speaks volumes Richard!
Generally yes Pete, but in this case it speaks of being on holiday in the Lake District. And indeed your comment requires a little thought in order to form a reply.