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As a marketing guy, I am a firm believer in the value of brands. Until recently I had a hard time understanding why so few companies in the AV industry (and most others, for that matter) invest in and actively manage brand equity. When I pose the question to marketers and general managers within those companies, their answers range from "our dealers do the selling: we just need to find the right dealers" to "we're not a consumer company" to "what is a brand?" Let's take that last one first. The core of a brand, the equity, is a relationship, a belief system, and a pattern of buying behavior based on that relationship and those beliefs. That pattern can (and should, in my opinion) exist at any level from company employees, to reps, to dealers, to end users, to ultimate consumers. In other words, wherever and whenever buyers and sellers experience a brand, they believe that it promises something they value, expect that the owner of the brand will deliver on that promise, and make a commitment to purchase as a result of those beliefs and expectations. |
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Brand promises something they value and expect that the owner of the brand will deliver on that promise |
Or
they believe the brand promises nothing of value, expect that
the owner of the brand will disappoint them and avoid purchasing
as a result of those beliefs and expectations.
Theoretically
intriguing, but of little practical value, right? Not if you are trying to introduce a new product into the marketplace. Not if you're playing catch-up to a competitor who's come up with a better idea, perhaps even including a patent around which your engineers have to work. Not if you're a candidate for acquisition, contemplating an IPO, or anticipating some other "liquidity event," as the financial markets so charmingly call them. At those times, you will either thank yourself for investing in brand equity, or kick yourself for pinching pennies that could be returning many times their value at the time you declined to spend them. Every company faces the challenge of scarce resources. Business always presents more opportunities than can be exploited with the time and money available. If you're a manufacturer, a builder of stuff rather than a purveyor of nonsense, wouldn't you rather spend the money on new machinery that promises to cut your direct costs, or a new computer system that allows you to track those costs more accurately and in "real time?" |
| Maybe you'd just like to take some cash out of the business and invest it in something safe, such as Treasury bonds. Marketing money seems to go nowhere: you spend it, and then the marketing people tell you that it's too expensive to find out what you bought by tracking the results. There's no question that tangible assets are important to any business: without tools, you don't have a business at all. But tool ownership doesn't make you a success. As a tool-owner, time is not on your side: machinery, computer hardware and software, buildings, even land, depreciate over time. People leave. Even Treasuries go up and down, and can lose you money. Stocks can make or lose you more, or lose more for you. The one business asset that does not inevitably decline in value is - you guessed it - your brand. Tangible assets are finite. That fancy new machine tool or CRM package will never be worth more than the day you acquire it. Brand equity is infinite. There's no inherent limit on the value of your brand. But the declining value curve of operational tools is predictable: it's even subject to legislative decree as far as the tax man is concerned. By contrast, brands are more obviously liquid. They can accumulate or lose value rapidly. Machines and software can be maintained by following a recipe. |
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Brands, on the other hand, require constant injections of thought, emotion and creativity |
Employees for whom work is a necessary interruption in the course
of real life can't maintain brands. They may perform the
activities associated with building and maintaining brand equity,
but the essential ingredients - the heart and soul - will be
missing from the recipe. The cake won't rise, and neither will the
value of your brand. This is rather nerve-wracking to an
entrepreneur who started a business in order to gain control over
his or her life, and equally upsetting to a corporate manager
who's charged with maintaining the value of an enterprise owned by
millions of shareholders. Tangible assets just feel safer, more
reliable. But ask yourself this: if you were forced out of
business tomorrow, if all your tangible assets were put on the
auction block, would you be able to realize the depreciated value
of any one of them? |
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Could you sell your tools for what your balance sheet says they're worth? Unless you've held on to them past the tax man's legislated operating life span, (in which case they are probably costing you in other ways) the answer is "No way." The value of your "real" assets is supported by ongoing business activity, which is maintained by a pattern of buying behavior on the part of your dealers and their customers. What drives those patterns of behavior? Your volatile, intangible, hard-to-measure brand. Despite its critical importance to the health and growth of any business, our accounting systems ignore brand equity. If they're recorded on the balance sheet at all (which is rare), brands appear as "goodwill" or "trademarks." There are no accounting standards for "brand equity" as there are for other typical financial reporting lines such as "selling expense" or "advertising." But note that advertising is recorded on the P&L as a periodic expense that is non-recoverable. Capital equipment purchases, on the other hand, go on the balance sheet as long term assets and liabilities that are amortized and depreciated over time. Advertising, which is recorded as a short term expense, is one of many promotional activities that can contribute to the long term equity in your brand (if it's "good" advertising). The value that properly planned and executed promotional activities create is lost to our accounting systems. |
The value of your "real" asset is supported by ongoing business activity, which is maintained by a pattern of buying behavior on the part of your dealers and their customers. |
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Double entry bookkeeping was invented in Italy around the time Columbus discovered America |
Instead, it's assigned to tangible assets that would never be worth their book value in the absence of ongoing business activity, supported by brand equity. That is one of many reasons why the bottom line is not your best guide to long term success. Double entry bookkeeping was invented in Italy around the time Columbus discovered America, and has changed very little since Frater Luca Bartolomes Pacioli, a Franciscan friar, published his Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion) on November 10, 1494. (Pacioli credits an earlier manuscript by Benedetto Cotrugli, Delia Mercatura et del Mercante Perfetto [Of Trading and the Perfect Trader] with the first exposition of the double-entry "Method of Venice.") Pacioli's system apparently worked quite well for the merchants of Renaissance Italy, but it was not designed to handle information economics, human capital, environmental issues and other aspects of modern business. |
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If you run your business solely by the numbers, you're making decisions
on incomplete, inadequate and inherently biased information. Of
course, there's no way to get complete, adequate and unbiased
information in time for it to be of the slightest use. But it's
important to recognize the filters that are operating. Invisible
filters drive poor decisions: visible ones can be taken into
account, allowing you to make the available information as useful
as it can be. As I pointed out earlier, branding is one of those
decisions that are most adversely affected by currently accepted
accounting standards. Brands don't exist to a CPA, unless and
until the entire business is bought and sold. Then brand equity
may make a guest appearance on the balance sheet under the alias
"goodwill." The activity, or inactivity, that contributed to the
growth or erosion of that goodwill is pretty much invisible to
financial accounting, or to management accounting systems based on
financial reporting. |
Brands don't exist to a CPA, unless and until the entire business is bought and sold. Then brand equity may make a guest appearance on the balance sheet under the alias "goodwill." |
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© 2002 Christian Doering. All rights reserved. |
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