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Do you know why measuring Brand ROI (return on investment of a brand) is important? Many businesses don't understand the meaning and importance of ROI, so they aren't getting the most out of their brand marketing efforts.
Brand ROI is a metric that measures the effectiveness of your branding campaigns and decides whether they are worth investing in. It helps you compare different campaigns and promotions, find new audience segments, adjust spending patterns and identify emerging opportunities.
A business must assess the success or failure of its branding efforts or else it risks investing in campaigns that won’t yield any returns at all.
Businesses need to calculate their Brand ROI to make informed decisions about how best to spend their money on branding efforts for maximum returns. Therefore, it is important to understand what Brand ROI is and how to calculate it.
In this article, we will walk through the basics of Brand ROI and explore its significance for businesses.
Brand ROI
The ROI of branding is that a strong brand attracts more customers, at a lower cost per acquisition, who are happy to pay a little more and will buy a little more often.
What is the ROI of Branding?
Branding is essential for the long-term success of any business, and the return on investment (ROI) of branding is substantial. Strong brands attract more customers, who are more loyal, pay more for your products, and buy more frequently, all while costing less to acquire. Numerous studies have shown that branding generates above-average profitable growth for B2C and B2B companies.
While short-term marketing initiatives may provide quick results, it is essential not to ignore long-term branding. Companies that have achieved above-average profitable growth have heavily invested in their brand.
A strong brand is the backbone of cult-like brand loyalty and can deliver more revenue and profit more efficiently, year after year. Additionally, it can create a barrier to entry for future competitors, effectively creating a legal monopoly.
A strong brand is not only your company's most valuable asset, but it can also help you attract, motivate, and retain top talent. The best candidates always want to work for the best employer brands. Investing in branding will help your business in numerous ways and is one of the smartest investments you can make.
To understand the numbers behind branding's ROI, you must consider that branding can improve revenue growth, increase profitability, lower costs, and reduce risk. Branding's ROI can be seen in financial metrics such as market value, stock prices, and return on assets. A strong brand can lead to a higher market value and stock price, increasing shareholder value.
Branding is not a short-term game, but a long-term investment that will benefit your business in multiple ways. A strong brand is essential for attracting and retaining customers, increasing revenue and profitability, lowering costs, and reducing risk. By investing in branding, you are investing in your business's future success.
Benefits of Branding
Branding is a critical aspect of any business, regardless of the industry or the type of customers they serve. A strong brand can be a powerful asset that generates substantial and tangible benefits. Here are some key benefits of branding that businesses can achieve:
1. Increased Reach and Awareness
One of the most significant benefits of having a strong brand is that it can increase your reach and awareness. Customers who are loyal to a brand are more likely to recommend it to others, generating positive word-of-mouth advertising. This increased reach and awareness can lead to a higher number of potential customers and more significant opportunities for conversions.
2. Increased Traffic and Conversions
A strong brand can help increase your website traffic and conversions. Customers are more likely to choose a well-known and trusted brand over an unknown one. If your brand is easily recognizable, customers are more likely to visit your website, and when they do, they are more likely to convert into paying customers.
3. Reinforced Reputation
A strong brand can help reinforce your reputation in the industry. A brand that is associated with quality, innovation, or customer service can help establish your business as a trustworthy and reliable player in the market. As customers recognize your brand for these qualities, your reputation and credibility can improve, which can lead to increased customer loyalty.
4. Attract the Best Employees
Building a strong brand can also help you attract the best employees. A company with a well-known and respected brand can be attractive to potential employees who want to work for a company with a good reputation. A strong brand can also create a sense of pride and loyalty among employees, leading to better retention rates and increased motivation.
5. Gain Brand Advocates
A strong brand can help generate brand advocates - customers who are so loyal to your brand that they actively promote it to others. Brand advocates can be a powerful marketing force that can help you gain new customers and increase your revenue. They can also be an essential source of feedback and insights that can help you improve your products and services.
Investing in branding can have significant benefits for businesses, both in the short and long term. A strong brand can help increase reach and awareness, traffic, and conversions, reinforce reputation, attract the best employees, and gain brand advocates. By building a strong brand, businesses can accelerate their growth and establish themselves as leaders in their industry.
Brand Value by the Numbers
In 2017, Ocean Tomo released a study that revealed a significant shift in the S&P 500's assets. The study found that intangible assets like intellectual property, trademarks, copyrights, and most importantly, brands, had grown to represent 84% of the S&P 500's value in 2015 from 17% in 1975. This suggests that a company's brand value is a crucial factor in determining its worth and future success.
Jonathan Knowles at Type 2 Consulting conducted a closer analysis of Ocean Tomo's data and found that brands account for 20% of the S&P 500's value. He also segmented his findings by industry, showing that brand value comprises over 20% of the market capitalization of most industries, with the consumer services sector leading at upwards of 40%.
To better understand what brand value entails, Knowles defines it as the percentage of a company's value that reflects the differences in behavior by customers, employees, and other key stakeholders. This behavior is dictated by the positive associations and awareness that the company enjoys, which is determined by the company's brand perception.
Despite the complexity of the metric, brand value serves as a strong proof point for the ROI of branding. Companies that invest in building their brand can benefit from significant long-term success as their brand value attracts more customers and influences the behavior of their stakeholders, leading to higher revenue and profit.
Additionally, a strong brand can act as a barrier to entry for future competitors, creating a legal monopoly that can deliver more shareholder value.
How to measure the ROI of brand building
Measuring the ROI of brand building is critical to understand the impact of branding efforts on your business. McKinsey notes that B2B companies with strong brands generate higher EBIT margins than others. Several methods can be used to measure the effectiveness of your branding efforts:
Surveys
One of the most common methods of measuring brand value is through surveys. Surveys can provide a baseline measurement of your brand's strength before embarking on branding initiatives, and you can conduct the survey again after implementing branding efforts to compare the results.
Search Volumes
Monitoring search volumes of your branded terms over time can also help you assess the effectiveness of your branding efforts. If there is an increase in search volumes, it could be an indication that branding efforts are paying off.
Brand preference
Brand preference is another useful metric to consider. Measuring your target audience's awareness with purchase consideration can help you determine whether your branding efforts are converting into tangible results.
Customer Acquisition
Customer acquisition is another metric to consider, especially if your business generates significant repeat business. Measuring your customer acquisition rate as you increase branding efforts can help assess the incremental value to your business through Customer Lifetime Value calculations.
Net Promoter Score (NPS)
The Net Promoter Score (NPS) can also be useful for measuring the ROI of branding efforts. By determining a baseline NPS and then measuring changes over time, you can get a sense of whether your branding initiatives are having a positive impact.
Loyalty
Measuring loyalty through repeat business rate or customer retention rate can help you assess the effectiveness of your branding initiatives. By keeping track of these metrics, you can get a sense of how well your branding efforts are resonating with customers and the long-term impact on your business.
Branding's Impact on Pricing
Pricing power is a crucial component of the ROI of branding. As Warren Buffet put it, "the single most important decision in evaluating a business is pricing power." This power comes from strong brands, which can raise prices without losing business to competitors.
But where does this pricing power come from? Strong brands, of course. According to a study conducted by Millward Brown, strong brands can capture three times the sales volume of weaker brands (a recent study by MSI found this to be even higher at 26%). This is an incredible feat and speaks to the power that strong brands wield in the market.
In addition to commanding a larger sales volume, strong brands also can charge a premium price. The same Millward Brown study found that strong brands commanded a 13% price premium over weak brands.
The study goes on to define "power" and "premium" as predictors of volume share and price index, respectively.
Power: Power is an estimation of the market share a brand can acquire because of consumers' favoring it over competing brands.
Premium: Premium pricing is the estimated value at which consumers are more likely to purchase a branded item compared to similar items in the same category.
Strong brands have the power to command premium pricing. This is a crucial component of the ROI of branding and is what sets strong brands apart from their weaker counterparts. By building a strong brand, companies can reap the benefits of increased pricing power, leading to higher profits and a stronger market position.
The Long-Term Value of Branding
The value of branding extends beyond short-term marketing efforts. Strong brands command a price premium, which is the result of long-term brand-building activities. However, some CEOs fail to recognize the importance of branding's return on investment (ROI), as it accrues over a longer period than marketing-driven sales activation. Brand-building activities result in significantly stronger sales growth over six months or more, compared to the temporary uplifts caused by short-term marketing initiatives.
The impact of short-term activation is immediate, direct, and significant, but it quickly decays after the activation is complete, leading to limited uplift and sales spikes that fade back to baseline levels. On the other hand, branding initiatives are different. The effects on sales are harder to measure in the short term because they are smaller in comparison to marketing initiatives, but they have a cumulative effect on sales growth over time.
Many CEOs have a short-term mindset, leading to over-investment in inefficient activation and under-investment in the cumulative power of branding. A balanced approach leverages both short-term marketing and long-term branding initiatives.
According to a study called "Media in Focus," optimal effectiveness is achieved when 60% of a company's marketing budget is devoted to brand building and around 40% to marketing activation. Investing less than 60% in branding precludes the accumulation of the requisite brand equity for future sales growth.
For CMOs, being able to construct a compelling business case for branding's ROI is more important now than ever. They should be prepared to counter the default focus of CEOs and CFOs on tactical marketing strategy with a convincing case for the long-term return on investment in brand building.
In 2018, a study called "Profit Ability" showed that only 18% of the total impact of branding on sales is measurable by online attribution, further emphasizing the importance of a long-term approach to branding.
How to Sustain a Valuable Brand
Creating a valuable brand is a critical task for a CEO, according to the Edelman Trust Barometer respondents. Trustworthiness, which is the CEO's number one priority, is a function of perception, and branding shapes those perceptions. As a result, CEOs must focus on branding to sustain their company's reputation.
To make branding a top priority, CEOs must take the time to understand what drives their customers' purchasing decisions. A calculated brand strategy influences customer choice and drives long-term business value by leveraging the ROI of branding. Starbucks is an excellent example of how focusing on brand over other factors makes a price premium acceptable.
According to Interbrand, companies that focused on branding over the past five years saw their brand value grow 2.4 times higher than those that didn't. Business owners who wish to increase their investment in branding can increase the strength of their current brand, reposition their brand, or disrupt brand category conventions.
Effective branding creates strong, lasting, and meaningful connections with audiences, capitalizing on the psychology that customers perceive the same type of personality traits in brands that they do in people. Investing in a well-designed and well-managed brand is one of the most effective ways to build preference and loyalty, turning a company from a commodity to an experience.
The best brands are reliable, providing a positive, consistent emotional experience that customers enjoy. Customers are willing to pay more and travel farther to remain loyal to a brand they know and love, resulting in increased ROI for the company.
Finally, strong, well-developed brands are critical in any industry, and they have a considerable impact on the ROI of branding. IBM's reputation is so strong that even if one of its products doesn't live up to expectations, its customers continue to purchase from it.
Grow with Brand ROI
Brand ROI is a critical metric that measures the return on investment of branding efforts. It's a measure of how well your brand is performing and its impact on the overall success of your business. By investing in branding, companies can build brand awareness, create emotional connections with their audiences, and increase customer loyalty.
Although measuring brand ROI can be challenging, the long-term benefits of a strong brand are worth the effort. By focusing on building a strong brand strategy and investing in ongoing brand building, companies can see significant growth in their bottom line over time.
In today's highly competitive marketplace, a well-developed brand is essential to standing out and achieving long-term success.
