Value-Based Brand Exploitation Strategy to Grow Firm Value
Marc Fischer, Max Backhaus, and Tobias Hornig, 2018, 18-127
Recent meta-analysis suggests that, on average, improving brand equity by 10% translates to an increase of firm value of 3.3%. Brand-driven value creation arises from growth and/or return relative to capital cost. Thus, firms may seek to leverage brand strength for driving the profit margin - e.g., through extending the price premium and lowering the cost of selling - or it may focus on exploiting brand equity to grow the business - e.g., by expanding into new markets.
Which strategy is better-suited to drive value creation is not evident. Little is known about the mechanisms that underlie brand-driven value creation and how these might differ across firms and industries.
In this report, Marc Fischer, Max Backhaus, and Tobias Hornig undertake an approach based on analysis of financial data to understand the role of customer-based brand equity (CBBE) measures in creating firm value via three drivers: (1) investors’ expectations about the rate of return on new invested capital, (2) the future growth in earnings, and (3) the length of the period during which a firm can earn excess return.
They econometrically estimate the CBBE effects on these value drivers at the firm level in a broad sample of 613 firms covering a period of nine years from 2005 to 2013. Their database includes retailers, durable and non-durable products, as well as services.
They find that while earnings growth and sustainability of excess return are the most influential drivers for most industries and firms, the return on invested capital is more relevant in industries such as media, information technology, and industrial and utilities. They also find substantial across-firm and across-industry variation in both CBBE leverage effects and relative importance of value drivers. Finally, they identify cases where CBBE impact on a value driver is not well aligned with its relevance for value generation, leaving an untapped potential for value creation.
Put into Practice
Marketers should think differently about their brand strategy: a detailed analysis of each firm’s situation is necessary to determine the most effective brand exploitation strategy. It is not sufficient to focus only on raising CBBE by investing into brand building. It is equally if not more important to think about the best brand exploitation strategy, so that brand investments are not wasted but appropriate value in the marketplace.
Marc Fischer is Professor of Marketing and Market Research, University of Cologne, and Professor of Marketing, University of Technology Sydney. Max Backhaus is Associate Researcher, University of Cologne. Tobias Hornig is Project Manager BI, Siemens Industry Software GmbH.
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