The ROI of Brand Investment

1. With recession looming, expect more scrutiny on marketing budgets
2. Whilst there are clear methods to defend direct response and digital budgets, the longer term brand-building budget is harder to justify
3. This article provides four methods to calculate and defend the ROI of brand investment

With recession looming, the CFO is likely to probe marketing budgets and the CMO can be ready to respond to this inquiry by building a strong case in the language of the CFO: hard numbers.

Depending on the appetite and proximity of the CFO to the nuances of marketing, the first step might be to recap that marketing has two speeds.

For immediate effect and impact to quarterly financials, direct response will be understood quickly, but brand building will be a more subjective and abstract notion to explain.

 In accounting terms, a brand is equivalent to a long-term asset and as such, it has ‘economic benefit beyond the current financial period’. If accounting standards permitted, a brand would be considered as a capital budget with an associated long-term depreciation life, e.g. 10 years.

 In this context, it is equivalent to building a factory – some up-front investment is required, but that investment will pay back dividends over many years.

Unfortunately, the CFO’s accounting standard framework does not allow brands to be formally recognised as an asset, as explained in my previous article, but there is a gold-standard formal framework, created by the International Organization for Standardization (ISO) as ISO 10668.

This article outlines four options to valuing a brand. From this value, the CMO can defend – or even increase – the annual budget by likening it to a depreciation or maintenance schedule for this important business asset.

1: ISO 10668: The gold standard in brand valuation

This standard was developed with the full support of the Australian Marketing Institute in 2011 after a four-year consultation process. It recognises that brand valuation is complex but important, yet one that accounting standards don’t cover.

The standard details three valuation approaches:

1. Income Approach: The current value of the income that the brand will generate.  Within the approach, various methods are listed to derive the income that the brand earns, mostly requiring behavioural or survey data to establish the premium that the brand commands.
2. Market Approach: Uses comparisons of similar brands where values have been published.
3. Cost Approach: Simply the cost of the brand to date.

The standard lists various applications of a solid brand value, notably: budget setting, resource allocation, risk management and accountability.

In organisations that are not aligning on brand importance, the credibility of the ISO makes it easier for marketers to gain the support of the CEO and CFO.

2: Interbrand 20% proxy

Interbrand is recognised as the global leader in brand valuations and provides an annual report of its valuations. If we compare these values to the current market capitalisation of the brands, we start to see an average 20% ratio that we can use to provide a quick value for the CFO.

So, in rough terms, a we can calculate a company’s brand value as 20% of its total valuation and use this value to justify a maintenance and enhancement budget because at this valuation it is likely the largest asset on the balance sheet (noting that accounting standards do not allow the brand to exist on the balance sheet as explained in my previous article)

I encourage use of this simple calculation using brands with similar characteristics to yours.

 3: Brand health benchmarking

This method requires a brand tracking survey to determine comparative brand health of the business metrics in various markets. 

Once the brand health is determined by market, a simple correlation to sales per market can be used to determine whether stronger brand health in a market reflects stronger sales.

For example, if prompted awareness in NSW is 20% against 10% in Queensland, but revenue per capita in NSW is double, we can infer that the stronger brand health is highly correlated, driving the revenue and giving an indication that increasing brand health in Queensland will result in double revenue.

Note that this method is assumptive in stating brand health is the only factor driving the revenue. I’d recommend you use this method lightly, as an interesting piece of quick research to defend budget cuts or negotiate investment in a market.

4: No brand investment erosion theory

This method requires a hypothesis that if brand marketing was turned off indefinitely, sales would erode by X% over Y years.

The resulting calculation gives a value of brand investment, so the spend defends the erosion, much like maintaining a home prevents leaks and disrepair.

Given a hypothesis is in play, the CMO should seek to test and validate the hypothesis by:

A: turning off brand ads in a market for 6 or 12 months if practical within the business context to establish the sales decline in that period.

B: conversely, turning up brand ads in a market 6 or 12 months to establish the inverse of theory, where uplift confirms that brand investment drives longer term revenues

Ehrenberg Bass provided research in this area in 2018: When Brands Stop Advertising concluding that:

• When brands stop advertising for a year or more, sales often decline year-on-year following the stop (on average, sales fell 16% after one year, and 25% after two years).
• The rate of decline is fastest for brands that are already declining before the advertising stop.
• Brand size matters. Small brands typically suffer greater declines than bigger brands.
• In accounting terms the asset depreciates to negligible value over 10 years, meaning that an annual maintenance budget should be 1/10th of the brand's value. 

Conclusion:

Valuing a brand in financial terms is complex and subjective but too often overlooked as a means of supporting the CMO - not only in budget setting, but also in the acknowledgement that the brand is likely one of the most valuable assets in the business.

The quickest method to start the conversation is with the Interbrand proxy of 20%.  This in itself is likely to trump most of the other business asset values in the business by some margin, thereby immediately elevating the brand asset, the CMO’s importance and budget setting process.