The economic importance of brands – seven reasons why brands (still) really matter
In 2004, we wrote an article regarding the economic importance of brands. Back then “Brand” had become one of the most overused and misleading terms in economic discussions.
Clearly, the last thirteen years have seen dramatic changes in the world of brands and branding. Megatrends in digital, mobile and social media and big data have fundamentally impacted products and services. Technology has often moved faster than companies can adapt and choice has exploded. Many industries have been disrupted and new brands are being forged faster and faster.
The way brands influence our lives may not have changed but their scope and influence has grown significantly. Nevertheless, scepticism or misunderstanding remains or has grown even stronger and a number of myths persist that lead to incorrect perceptions of the economic importance of brands.
Critics argue that we could happily live without brands as they provoke unnecessary demand and encourage high price premiums. Supposedly, the quality of the product or service should speak for itself.
On the contrary, we believe that brands are essential to consumers and add value to companies and the marketplace overall. We therefore decided to review the original seven reasons why brands matter to our economy.
Reason 1: Brand and reputation protect the consumer
Let’s remember that brands are used by consumers, guiding and protecting them, not exploiting them. Initially they were considered separate from the consumer, a visual badge which guaranteed a certain level of quality. Now they are understood to rest with the consumer.
Strong evocative brands today not only raise a particular level of expectation but often elicit a higher emotional, purpose-driven connection as companies seek to strengthen relationships not just with consumers but with everyone associated with their business.
In other words, branding (expression) and reputation (impression) increasingly intersect. This makes brands more responsive and vulnerable to criticism and bad news travels fast, amplified by social media. Thereby, brands encourage a type of ‘market democracy’ for citizens – allowing consumers to vote daily with their wallet.
And, as Phil Riggins of Leidar explains: “To allow disconnects between brand and reputation threatens not only reputation but also sales, employer attractiveness, community and government support.” Further, the need to stay relevant in people’s lives creates a constant cycle of higher quality innovation as companies try to stay ahead of the competition.
Given this, it is the brand that is at risk and not the consumer. Strong brands protect the consumer because, in striving to sustain them, companies must provide innovative, relevant products and services in the right way at competitive prices, in addition to a guarantee of quality.
Reason 2: Strong brands drive share performance and can be measured
Strong stock market performance benefits a range of constituents from the companies themselves to individual shareholders, employees, institutional investors, savings companies, pension funds and pensioners.
According to Brand Finance, a business valuation and strategy consultancy that has been tracking the values of the world’s top branded companies for more than ten years, an investment strategy based on the most brand-focused companies (those where brand value makes up a high proportion of total enterprise value) would have led to a return almost double that of the average for the entire S&P 500.
While not the only guarantee of share performance, a strong brand will help to minimise investment risk, safeguarding investment portfolios. Less risk brings about a greater market confidence and increased support from financial audiences which in turn stimulate and encourage further investment.
Strongly branded companies are usually more resistant to economic stress, providing a higher level of predictability of demand and more reliable, stable forecasting. More certainty of revenue and profit allows greater confidence in predicting economic returns.
Given this, brands are increasingly treated as any other asset, measured and held accountable for a certain level of return and importantly, producing demonstrable results for shareholders. Since 2010, this has been supported by a global brand valuation standard (ISO 10668), which comprises a number of acceptable valuation approaches and methods.
Reason 3: Brands provide more choice and ensure a competitive economy
In regulated markets and planned economies brands are irrelevant if there is only one supplier to choose from. One supplier alone will be less incentivised to develop and commercialise new ideas if consumers cannot switch.
In liberalised markets, brands provide the means of competition by allowing those in the market to distinguish one competitor from another and helping them assess – quickly and efficiently – one offer against another.
Moreover, brands encourage and support competition on the basis of values other than price, such as quality, innovation or reputation. Indeed, competition may focus on all four and be the stronger for it.
As a result, most industries in liberalised economies offer ever more choice, better value and even better performance compared to 2004. Brands are essential in deregulated markets – efforts to liberalise markets would fail without brands.
Reason 4: Brands help the economy adapt quicker and grow faster
Markets are in a constant flux of adaptation, often accelerated through technological change. Brands help markets adapt more quickly as they allow a more dynamic response between buyers and sellers. New and innovative products normally get adopted by ‘pioneers’ and ‘opinion leaders’ first, while their benefits usually need more explanation to reassure the mass market.
So, brands not only simplify choice but can play an ‘educational’ role as well, as they help to overcome uncertainty of purchase. Often, brands get people interested and excited in new products and services, often leading to disruption in ’crusted’ markets.
Overall, brands contribute significantly to the process of adaptation and growth, which is crucial to a competitive economy. Branded products that fail to deliver on what buyers want will disappear quickly, making space for new and more effective alternatives.
Reason 5: Brands accelerate growth across geographic and cultural borders
Brands help businesses cross geographic and cultural borders. Global brands are an enormous asset to their home country. This will become particularly relevant post Brexit when we aim to increase significantly trade with non-EU countries.
Brands aid exports of British products and services to foreign markets, supporting our trade surplus. They underpin jobs and provide stability for the British economy. Failure to create successful international brands creates a burden on the home economy, representing a lost opportunity.
Brands are vital in achieving success abroad and are a significant source of international competitiveness. They can help transcend cultural borders as they speak an ‘international language’. On the other hand, strong domestic brands are helpful as they may provide an effective, consumer-centric response to foreign competition. At a local level, strong brands will draw employees and business partners to communities, stimulating the economy across local regions.
Reports by the World Intellectual Property Organisation (WIPO) indicate that developing economies appear to be over-investing in branding compared to developed economies to increase their competitiveness. Taking China for example: according to the latest Brand Z report in 2017, thirteen of the global Top 100 brands are based in China, up from only one twelve years ago. While some of the Chinese brands may not be truly globalized, they are certainly growing in value and will change the global competitive landscape.
Reason 6: Strong brands benefit all stakeholders
The role of brand has become more central to not only FMCG and retail companies but to a much wider range of business-to-business service providers and beyond. They also help define the cause of ‘not for profits’, charities, governments and tourism.
A clear brand strategy provides these entities with a foundation from which to communicate purpose and vision to all stakeholders: consumers, prospects, supporters, shareholders, legislators, business partners, regulators, employees and even competitors. The role of brand goes far beyond visual identities and is able drive business performance through many facets.
From an internal perspective, the last few years have seen a far stronger role for brands. They can help attract and maintain top talent and loyal employees.
Further, as Nader Tavassoli, Professor of Marketing at London Business School, explains: “Executives value being associated with strong brands and, therefore, accept substantially lower pay at firms that own strong brands.” Other research indicates that employees who work for companies with strong brands enjoy a higher level of job satisfaction.
Reason 7: Brands ensure businesses are accountable for their actions
Brands ultimately provoke a higher level of exposure and engagement that may benefit sales but which also make a business more visible and vulnerable. Social media and other driving forces have urged businesses to become far more transparent as they seek to sustain their brand equity.
Brands help to ensure businesses are accountable for their actions. Well-known branded companies are scrutinised by consumers and journalists alike to judge whether they are following the letter of the law and the expectations of society, be it accounting standards, environmental protection or ethics.
The last few years have seen dramatic changes in brand building but the importance of brands for our economy has actually increased. To drive a successful knowledge-driven, innovation-led economy, particularly post Brexit, brands are essential and represent vital weapons in the state armoury of our trading nation.
More so, they are a necessity for any liberal economy in which companies compete and consumers have the power to choose. Brands are integral to an effective, vibrant economy and their economic importance should never be taken for granted.