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Customers or brands - today's burning question

No one can dispute the power of a brand. Brands give us something to trust, reassurance of quality and increasingly, status. There are many definitions of branding, put simply it can be defined as the sum total of your values, as evidenced by how you deliver on those values – through controlled messages - at every point of contact with your stakeholders, especially your customers.

Many companies such as Nordstrom, Barnes & Noble and Starbucks have built their strong brands through constant and consistent delivery, the result of values backed by passion.

I was discussing this customer-brand-issue with Roger Sinclair from BrandMetrics, and I asked him to describe and clarify this current situation. Which he readily agreed to do and which I'm sharing with you today.

Roger says...
A controversy is raging in marketing circles. Two schools of thought are facing up with guns blazing. The origins can be traced - that is of the argument's most recent incarnation; it has been around before - to an article that appeared in the Harvard Business Review in 1996. The authors were North-western University's Robert Blattberg and Harvard's John Deighton.

Their paper introduced the concept of customer equity; an idea they thought was bigger than its brand relation. "Brands," they stated, "don't make wealth, customers do." And "Brands are never more important than the customers they reach." The theory is that marketers should place their emphasis on the customer and not the brand.

They ascribe the timeliness of this new concept to the ability that marketers now have to track customers through interactive methods such as the Internet, frequent user club services and ATMs and other card operated devices. These, they suggest, are causing general marketers increasingly to talk like direct marketers. In the days when mass media dominated, marketers set goals that these indirect tools could achieve. With today's advanced technologies and the ability to make contact with a single customer, the balance has shifted.

That was the opening salvo. What really got the loyalties split was the more recent work by three renowned academics: Roland Rust, Katherine Lemon and Valerie Zeithaml who have proposed a new customer equity model. This purports to provide marketers with the tool that has eluded them for decades: the ability to evaluate competing strategies on the basis of comparative financial return.

Any contribution to our understanding of marketing; what it does; how to implement it and ways in which its results can be measured is invaluable. Both studies take us forward in this sense. But do they successfully push aside the belief in brands and brand equity that has been dominant in marketing thinking since the late 1980s when the Marketing Science Institute nominated brand equity as marketing's most important area for research?

Should marketers change the titles of their brand managers to customer managers? Is it customer equity that is the balance sheet level asset and not the brand?

You would be entitled to think that these studies have broken new ground and in some senses they have. The Internet and modern interactive technologies permit analyses at the customer level that simply were not possible in the past. These researchers make full use of these new technologies.

But at the heart of the Rust et al approach is this proviso: "Connecting the drivers to customer perceptions is essential to quantify the effect of marketing actions at the individual customer level. Therefore it is necessary to have customer ratings (analogous to customer satisfaction ratings) on the brand's perceived performance on each driver."

Doesn't that sound rather like the kind of research that is conducted to establish, what in brand equity terms, is called the Brand Knowledge Structure? They go further to say that the model needs the perceived performance of each brand so that it can be compared on a scale basis with the other brands in the set.

Perhaps the difference is that in this approach the results from each respondent are treated as an individual customer and the financial return is therefore computed on a per customer basis and then aggregated.

Two questions arise:

• If the measurement is based on the customer perceptions of each brand in the set, what are they measuring; the customer or the brand?
• Brand valuation is (or should be) based on the present value of the customer generated income stream? Is that not what they are doing?

Recently introduced accounting standards in the USA (FASB) and in the rest of the world (IASB), support the concept of brands as assets. In future, but only in merger and acquisition conditions, accountants will have to measure the value of the intangibles that comprise the purchase price. Previously lumped together as goodwill and amortised over a twenty year period as an asset, the premium that the buyer agrees to pay over and above the net asset value of the company being bought, must now be broken down and explained.

The standard writers have made it clear that it is likely that trademarks, brands and brand names will meet the criteria for recognition as intangible assets, primarily because a trademark is a legal contract that can be sold separately from other assets in the business.

Nothing in the standards suggests that the present value of customer lifetime values would meet these criteria. Customer lists are mentioned, but these surely only have an intrinsic value. If a customer list is valued in terms of its lifetime value to a company, then this must be the customers' commitment to a brand owned by the company. It is fair to conclude then that at the business end of this discussion, it would be brands that are important to management, investors and accountants.

That should not worry the authors of the two studies mentioned above. The work they have done in developing approaches to valuing the lifetime value of customers is needed because that is the income stream that provides the brand with its value as an asset.

To paraphrase Blattberg and Deighton: brands do not create wealth; customers do that for them.

If you have any questions or discussions on this article or other brand matters, contact Professor Roger Sinclair at: rogers@brandmetrics.org or visit his website: www.brandmetrics.com.  

And remember, a brand is what you, your company and your people live.

Winnifred Knight
Email: mailto:winn@themarketingsite.com
Web: http://www.themarketingsite.com