Brand building to increase profit in scale-up companies

How can brand increase your multiple at exit? By improving your profitability.

As a brand consultant I deal with scale-up organisations that are growing via acquisition.

Naturally, a major focus for these businesses – both for management and investors – is getting to exit or the next round of investment. Increased profitability is high on the priority list and is bound to affect final valuations. This article is about Investing in brand to bring about that profitability.

By way of proof that brand-building can do this, two gurus - Les Binet, Head of Effectiveness at adam&eve DDB and Peter Field, Marketing Consultant - created a seminal piece of research as part of the wider Marketing Effectiveness programme at the Institute of Practitioners (IPA).

Their report – The Long and the Short of It: Balancing Short and Long-Term Marketing Strategies -grasped the nettle of the tensions between marketing campaigns that defined success in the short-term and those that defined success in the long-term. In the sense that brand building and sales activation would lead you to quite different conclusions.

One of the report's authors, Peter Field, said, ‘There is now a broad understanding, in the business world at large, that a purely short-term focus can have a damaging effect on the long-term creation of value.’

This was not to say that one was right, and one was wrong. His own conclusion was that, realistically, we need to do both, but that doing just one or the other will lead you down very different paths.

In scale-up companies the tendency is towards short-termism because funding windows are narrow and cash is seen as king. But the money that powers the company’s growth – usually via acquisitions – comes from investors not sales. Those same investors want to see growth in market share, but growth in profitability is also key when it comes to an exit. 

Binet and Field’s report mined the IPA’s (Institute of Practitioners in Advertising’s) databank. Their comprehensive study took into account 996 marketing campaigns from 700 brands in 83 categories and compared the effects of strategies over both short and long-term timescales for effect.

“Long-term results cannot be achieved by piling short-term results on short-term results.”

Peter Drucker, Post-Capitalist Society, 1993.

It is a truism that there are no long-term effects without short-term effects. And it is also true that the reverse does not apply. But while they found that short-term campaigns are efficient they do not drive long-term profit or revenue growth.

The natural obsession in marketing and sales is for volume (making the numbers) and while this may not be detrimental in terms of price elasticity it does nothing to help maintain margin. If you think about how short-term campaigns work with time limited offers and promotions and bundling etc then you can see that it cannot help any aim to maintain or grow margin.

What Field and Binet found was that it was the multiplier of both volume and pricing that drove profitability and growth. This was exhibited by brand campaigns that had run for two, three or even four years. Such campaigns are by nature lengthy, which may account for why reporting long-term growth in profitability is one of the most overlooked metrics.

Brand-building is a long-term commitment for which the measurability may not be evident for several years. But, what they went on to demonstrate was that price elasticity could be driven in the direction desired by investing in it.

So, what to do?

Thinking fast and slow

Most fast-growth companies cannot wait around for brand campaigns to deliver. So, in a typically pragmatic way, the report authors’ response was to suggest campaigns that did both.

‘Ideally, a campaign will be designed at the outset around an idea that can elastically accommodate brand and activation ideas eg in the form of a brand response campaign.’ Peter Field

This chart shows the comparison of campaigns by objective. On the left, pure brand, on the right pure response. But in the middle a combination of both. Campaigns that try to build brand for the long-term while at the same time aiming to build sales in the short-term. As you can see, the effects of such combined campaigns on sales volumes are not much below those of the pure response campaigns on the right. But the true value – in terms of profitability - will come later.

Targeting, narrow or wide?

In today’s digital world the tendency is to direct all guns within very narrow parameters, highly focusing the targeting on prospects deemed to be already engaged in some way.

Big data is all about analysing existing customers and then going looking for prospects that look like them, more of the same in other words. It inherently focuses on the people where there is the most data. But the authors’ findings show that bigger paybacks are to be had by going wide with your targeting, looking for the prospects that have little or no engagement and warming them to the brand over the long-term.

Source: L Binet, P Field, The Long and the Short of It, IPA, 2013

While the quicker volumes are to be had closer to the funnel, the growth will come from the wider engagement over time.

The chart above shows that promotions to existing customers, effectively loyalty campaigns, had little value in directing price elasticity. Whereas targeting the whole market and generating a broad engagement with the brand increased profit through wide brand acceptance, a broad sense of popularity and herd mentality. By going wide, you create a climate in which people are prepared to pay more for your product or service.

Obviously how wide you go needs to be considered. In a B2B setting then you should look at it in terms of your addressable market and also markets that you may address later via an acquisition say.

Show some emotion

Emotional effects - those using empathy – build over time versus rational effects. ‘Emotional campaigns, and in particular those that are highly creative and that generate powerful fame or buzz effects, produce considerably more powerful long-term business effects than rational persuasion campaigns.’ – Peter Field.

Reading that you may be thinking... that’s all very well and good but only in B2C, not for us in B2B. But I would argue that while the recommender is selecting prospective suppliers you can still appeal to their emotional side. Customers who get their choice of supplier right may find that it positively affects their career. Getting it wrong and they could get fired.

Customers may not display a need for hand-holding but they always have concerns. They don’t want to get dumped after the sale, they want an ongoing and supportive relationship that will result in mutual success. Showing your nice side takes you up a notch in their esteem, helping you to rise above the competition. And again, this is long-term, as are the benefits.

See the chart above. It shows how profit climbs in emotive campaigns versus purely rational campaigns. If you are only using short term-campaigns (<6mths) then you may never experience this disparity. But emotional campaigns continue to grow, way after rational campaigns have plateaued. Again this was all evidenced by their comprehensive research.

The evidence in the chart above is compelling to my mind. Heart ruling over head in all the beneficial areas that you desire. But the focus of this article is on the maintenance and growth of profitability, which is why price sensitivity has been highlighted. If your pricing holds up then you can increase margin with other levers like productivity or cost control. But brand loyalty and brand desirability means that you can increase price over time.

‘Rational campaigns produce more powerful short-term sales effects and so are very seductive to organisations focused primarily on short-term results. They will not deliver maximum long-term success, however.’ – Peter Field

‘The most successful rounded approach is to develop highly creative campaigns supported by powerful activation to drive short-term sales while the brand effect gains momentum. In general, emotional metrics are more likely to predict long-term success, whilst rational metrics are more likely to predict short-term success.’ – Peter Field

Conclusions

For scale-up businesses there are several takeaways.

• Invest in wide engagement, ie within the parameters of your addressable market and perhaps tangential markets where an acquisition could fit.
• Build brand through all touchpoints and campaigns.
• Educate internally to employees and externally - to customers and investors - what your brand is all about. Who knows where a customer’s journey may start?
• Transition acquisitions gently into the mother brand without losing the brand equity you have purchased.
• Measure brand engagement and use it to push back on incomers, copy-cats and competitors.
• Pitch your share of voice above your share of market targets to create dynamic tension.

Nic Ricketts is a Director at brand agency 1st Objective

With thanks to Janet Hull OBE, IPA Director of Marketing Strategy, https://www.dhirubhai.net/in/jehull/