Brand and marketing budgets are often the first to go during a recession. That is predictably the case with most businesses, as finance managers would have it, because branding and marketing are commonly perceived to be expenses; expenses that must be trimmed in organisation-wide cost-cutting exercises. This age-old ideological battle between finance and marketing got to Rajendra K. Srivastava, as he was preparing to speak about the benefits of branding and marketing in the Netherlands, one day after the Dow Jones Industrial Average index had plunged by over 900 hundred points overnight. The Provost, Deputy President (Academic Affairs) and professor of marketing at Singapore Management University (SMU) was caught in a bind -- how could he possibly talk about brands as market-based assets1 and marketing as an investment at a time when financial prudence was to be the order of the day?
Speaking at the 2009 Brand Finance Forum Singapore, Srivastava recounted his flurried state of mind the night before he was due to deliver the keynote address at the University of Maastricht. Anticipating that financial worries would likely be on the minds of his audience, Srivastava went onto the internet and scoured for the financial performance of some of the world's most prominent brands in the face of a looming recession. What he had found was that while the S&P 500 was down by 30% during the period September 1 to October 12, BusinessWeek's top ten brands were down by an average of about 26%. So it seemed top branded companies fared about 4% better than the rest of the pack during a downturn. And it was at that moment where he first wondered if there could be such a thing as a brand bonus.
In an attempt to better understand advantages that owners of strong brands may enjoy in the financial market, Srivastava and his colleagues (Wharton's Dave Reibstein and Jonathan Knowles from Type2Consulting) took a second look at the performance of leading brands relative to market averages. Preliminary results demonstrated a positive link between brand and financial performance: One might expect that if you have a strong brand, that there's probably a bit more trust in the company within the marketplace... and there's more perceived safety in a well known company, compared to a company that isn't known.
In addition to enjoying an advantageous position during recessionary times, powerful brands were also found to recover faster. In some industries, it was observed that strong brands were better positioned to seize the market share of weaker, competing brands - companies that may have lost their footing or exited the industry during the downturn.
The brand bias
Some brands have been known to breed consumer biases - which can come in handy especially during economic slumps. Why does Apple receive a lot more attention and (free) buzz whenever they announce a new product, compared to Dell, regardless of whether or not the functional benefits of the Apple product are really all that exciting or even superior to Dell's offerings? This perception bias can make all the difference for companies, said Srivastava, who is self-admittedly biased in favour of BlackBerry, where mobile devices are concerned.
The benefit of having a strong brand is the aspiration and emotional attachment; what you're getting is a positive predisposition that results in competitive advantages to brand owners. You're getting a bias that's in your favour, relative to the competition, and it's this bias that allows you to get more volume, command a higher price premium and attract value. And when the brand-customer relationship is strong, switching costs serve as barriers to competition - barriers that reduce the vulnerability of brands to competitive moves. Srivastava pointed to the example of Microsoft Windows, which at the moment holds the largest market share in its domain. Their strategy: rely on viral-marketing and aggressive pricing to nurture customer experience. Once customers become familiar with the operating system and software products, and they experience productivity, Microsoft can depend on upgrades and customer loyalty to enjoy sustained long-term profits. The strategy can be summarised as try now for free, pay later, but pay forever.
This brand advantage also applies in negotiations with stakeholders. To illustrate the point, Srivastava highlighted a case2 where Footlocker, a massive shoe retailer in the US, had attempted to influence Nike's prices and terms by reducing orders. In response, Nike reduced merchandise shipments radically, which later prompted Footlocker to concede, as a good number of its own customers were going to competitors for Nike shoes. One of the things that your brand can bring to you is the power to negotiate with distribution; because you've already got the end-customer in your pocket, he explained.
While brand presence offers many benefits to businesses, there remains a common perception that branding and marketing are merely expense items with little strategic value - a view that magnifies especially in a downturn as CFOs look to trim budgets. So in trying to challenge conventional management thinking, usually slanted towards accounting conservatism, Srivastava would often ask business leaders: what is the depreciation schedule for your customers? -- A question that astounds because depreciation usually applies to assets and customers are not typically regarded as assets to a company, accounting-wise. Yet, in order to appreciate the value that branding and marketing can bring to a business in acquiring customers, Srivastava believes that there is a need to re-frame the way we think about these activities.
For one, branding should be looked upon more as long term investments as opposed to one-off operational costs. If we look at customer acquisition as an expense, by expensing it (within financial statements), we assume that the depreciation schedule is one year, accounting-wise, Srivastava said. As an example, he added, If you acquire a customer in the business-to-business (B2B) realm, it's not unusual to get a customer retention rate of more than 90%, and on average, your customers might be around for ten years. Yet, for that benefit of having your customers stick around for ten years, we're trying to pay for all of that in one year, or in one quarter. So while it might make sense to expense branding in the accounting world, such a move would not accurately reflect its long-term intention and effect of attracting and keeping customers.
Don't follow the herd
As economic climates look bleak, most organisations would typically cut branding and advertising, and instead, bring on price promotions - the idea is to increase sales volume and sustain production. Logical as it may sound, such behaviours may be counterproductive. To illustrate, Srivastava raised a hypothetical situation: A & B are competitors within an industry, each making 100 units of profits. A slashes its price point and makes 120 units of sale. B loses profits and responds with a price cut as well. So both parties eventually find themselves worse off than before. And the story doesn't end there - there are detrimental effects to price cuts in the long run.
Studies have shown that promotional, discounted prices, when applied frequently, can cause customers to become highly price-sensitive. Srivastava contended that in such cases, brands might not be able to move back into its original price point easily, much less command a premium position in the future. Put yourself in the place of a consumer: you walk into a store and buy a 12-pack cola at ten dollars. You walk in the following week to buy that same 12-pack cola, which now costs six dollars. If this happens at some regular frequency, how often would you be willing to pay the full, regular price?
Business leaders should also bear in mind that frequent application of price promotions might run counter to the strategic intent of branding investments. When companies put in resources to build a brand, they are adding to a long term baseline which conveys, to consumers, attributes relating to quality, aspiration and emotions, not price. As such, recurring price promotions can undermine the positive long term effects of a company's branding investments; investments that were most probably made with the intention to strengthen the company's performance for the long haul.
Companies that invest to build up their brand equity enjoy a more persistent and resilient brand performance, even in the face of economic turbulence. Studies have shown that marketing budget cuts often result in a sales dip; and this dip has been known to prolong even when marketing budgets have been reinstated to its original amount. However, Srivastava cautioned for businesses to thread carefully, The evidence says that brand equity allows you to cut back; and that's the benefit of a strong brand - that you can cut back on marketing in the short term. Long-term cut backs would be at the expense of brand equity.
Srivastava's own response in a downturn, in contrast, would be to over-invest relative to competition and be a little bit contrarian in the market - moves which he recognises as easier said than done, but perhaps not unreasonable, especially when one might expect competitors to fold or cut back. He added that it is important to plan ahead, not just for recessionary times, but also for the uptick because, at the end of the day, it is with long-term thinking and foresight that business leaders can hope to enjoy sustained brand performance - and if you will, a brand bonus.