How branding really works - A theory

I’m not sure that we have cracked the question of branding. How does it really work?

The brand literature is heavy on the case studies. Exploring and analyzing the NIKEs and Coca-Colas of the world – how they think, strategize and act. This provides valuable insights and inspiration, but we are facing one big problem if we base our understanding of branding solely on what today’s strong brands are doing:

The things successful brands are doing today, may not be the things that brought them success in the first place.

We know that a strong brand is positively related to financial performance. A strong brand leads to growth and profitability. This means that the strong brands of today have more financial resources to use, and misuse. I suspect that today’s strong brands invest in a lot of wasteful management fads, simply because they are in a financial position to do so. Mimicking strong brands’ every move, may then be ineffective or outright misguided.

Which may lead us to conclude that we shouldn’t look at what today’s strong brands are doing right now, but what they did before they were successful.

The problem we then face is that what today’s strong brands did early on in their history, most often than not do not feel very strategic and forward looking.

What we cannot learn from NIKE

Consider the history of the immensely valuable NIKE brand, told by co-founder Phil Knight in the excellent and brutally honest book Shoe Dog.

The iconic NIKE logo – The Swoosh – now valued at USD26 billion was developed in a hurry to meet a production deadline, by then design student Carolyn Davidson, spending no more than 17.5 hours on the project, and being paid USD36. Phil Knight’s first reaction was “I don’t love it, but I think it will grow on me.”

The brand name NIKE – named after the Greek goddess of victory might seem premeditated and well thought-out. It was, in fact, also decided in a hurry to meet a deadline. Phil Knight wanted the brand to be called Dimension Six.

What about one of the best-known marketing slogans of all time – Just Do It? Well, it was inspired by the final words of the double-murderer Gary Gilmore before he was executed in 1977. Just Do It would probably not have survived (pun intended) a careful Due Diligence process.

So, if we are to glean any brand strategy learning from the history of the NIKE brand it would be:

• Don’t bother spending too much time on the logo. Just get someone to draw a doodle that fits onto the product you’re selling.
• The name is just a name. Call it whatever, really.
• Make sure you use a marketing slogan that reference something unpleasant, like disease, scary animals, or mass murderers.

We are left with more questions than answers when looking at NIKE’s history. Was it all down to luck? Did they just happen to stumble upon branding brilliance? How would the brand logo look if there had been more time to develop it? Would the company be as successful if the brand had been called Dimension Six? What had happened if anyone had come with the very reasonable objection that it wasn’t a great idea to reference a double murderer in their marketing?

We should focus our attention elsewhere than today’s strong brands if we are to understand how branding actually works. My personal point of view is that we need to go to the source of brand value, specifically how branding affects the decision-making process of individual consumers. Why does a good sneaker become a great sneaker in the eyes of the consumers when we slap a NIKE logo onto it?

Branding was not invented by Don Draper

We need to build our understanding of branding bottom-up. A first point I would like to make, and contrary to popular belief:

Branding was not invented by the US advertising industry in the Mad Men era of the 1960s.

Brand building has existed as long as humans have traded goods with one another. Smart business people of all ages have used branding to leverage sales.

Diana Twede has shown that amphora used in the Mediterranean trade used markings and distinct bottle shapes to signify the producer, as far back as 1500 BCE. The level of care the producers showed in developing their brand assets indicates that branding was seen as an integral part of their business strategy.

Picture a slick, toga-clad Don Draper on a Neapolitan beach, ca. 1500s BCE.

Some of the amphora were probably as iconic back then as the Coca-Cola bottle is for us today, evidenced by the fact that the amphora of particularly popular producers were copied – even fake branding existed back then.

We are all poker players

The long history of branding indicates that it’s a very human thing to be influenced by branding. Our predisposition towards brands must be caused by something deeply ingrained in us, from way back when. Probably from the time our ancestors roamed the African Savannah.

My hunch is the that it has something to do with the human species’ approach to risk management. Which may seem like a strange thing to say but hear my out.

The psychologist and former professional poker player Annie Duke argues in Thinking in Bets that every decision we make is a bet. That is true for the big choices we make in life, about where to live, which company to work for, who to marry, how many kids to have, but also the more mundane choices we make as consumers. When we choose among different brands of ketchup, we are basically placing a bet that the option we go for will be satisfactory and worth the money we spend. And we risk being wrong.

Risk is the keyword.

Risk management is an important trait for human beings. Going back to pre-historic hunter-gatherer societies, the people who survived to reproduce where the ones who had a measured approach to risk. They needed to expose themselves to risk by venturing out on the Savannah to hunt for food, but they still mitigated some of that risk, by hunting together in a group and carefully studying the terrain for any signs of large predators lurking in the bushes.

We can observe the same pattern today. Think of the investor who put considerable money at risk, but that mitigate some of the risk by building a diversified investment portfolio. Or the puzzling habit of thrill-seeking base jumpers to wear a helmet - doesn't that to some extent defeat the purpose of getting that adrenaline rush? Humans expose themselves to risk all the time but also take actions to limit that risk.

I will argue that:

Consumers’ propensity to choose branded products is fundamentally a means to mitigate risk when we make purchases.

Choosing a bottle of Coca-Cola is less risky than a no-name cola.

That do not seem quite right, you might say. I choose Coca-Cola because I want to, because I like the taste of Coca-Cola. It’s not to avoid risk. That doesn't make sense.

We need however to make a distinction between how we reason and justify our own choices after the fact, and what actually goes on in our heads at the moment when we make purchasing decisions. Most of what happens is subconscious, hidden from us.

A tug-o-war in the brain

Kayt Sukel explains in The Art of Risk how our brains are powerful risk calculators. There are three areas of the brain involved in decision making under risk. The basal ganglia, the limbic center and the prefrontal cortex. They all play distinct roles in the decision-making process. The basal ganglia deal with our immediate needs and wants, like a scout that scans our immediate environment. The limbic center is where memories and emotions are stored, like a librarian who are on top of what we have learnt and experienced up to this moment in life. The prefrontal cortex is the command center that – like an executive – tries to make sense of all the information available to arrive at a smart decision.

Picture the following scenario: You are in a sports shop, absentmindedly browsing the aisles, killing time before you are to meet with a friend. The basal ganglia spot a super cool pair of running shoes, and goes into overdrive, firing off neurons everywhere, practically screaming: “Look at those shoes! I want them, now!” The grumpy old prefrontal cortex is skeptical and interjects: “Hey, listen. We don’t need new running shoes. And look at the price tag. They are way too expensive.”

What we have now is a standoff between the basal ganglia and the prefrontal cortex – the gas and breaks, as Sukel calls them. It really can go both ways. Enter the limbic center. “Hey guys, I actually feel good about those shoes. It’s not just a random pair of running shoes you know, it’s NIKEs. NIKEEEEEEEs. Remember how the last NIKE shoes made us feel? We were like the coolest kid on the block.” Convinced by the strong emotions raised by the limbic center, the prefrontal cortex agree to buy the shoes.

Looking at it this way, a brand is basically a bundle of stored information, comprised of memories and emotions, triggered in this case by the NIKE Swoosh. It weighs in on the decision-making process by calibrating the risk calculation of the prefrontal cortex. Without this bundle of information, we would probably have walked away from the bet.

The exact workings of the risk calculation mechanism is mostly hidden from us, at the subconscious level.

Consider a 2004 neuroscience study, where people were put into a FMRI brain scanner and given Coca-Cola to drink. One group were shown the brand logo, the other group was not. The way the brains of the participants reacted were totally different, even though they drank the exact same drink. For the group who knew they were drinking Coca-Cola, the whole taste experience was significantly heightened compared to the control group, by the hidden memories and emotions triggered by the brand logo.

It's really just a trick of the brain, but it means that:

Coca-Cola you know is Coca-Cola tastes better than Coca-Cola you don’t know is Coca-Cola.

Our reasoning selves articulate this simply as "I like the taste of Coca-Cola," but the fact is that we like Coca-Cola because of the added brand memories and emotions that make the whole experience so much better.

The probabilistic nature of branding

Returning to the NIKE running shoe example.

The bundle of information encoded in the limbic center is obviously subjectively held. Whereas my bundle of information regarding the NIKE brand is full of positive memories, your bundle of information might be full of unpleasant emotions and memories. Which means that the NIKE swoosh will not influence your decision-making the same way as it influences mine.

Whether or not the bundle of information will tip the scales is also obviously dependent on the context. If you were really, really hungry when entering the store, your basal ganglia might not have shouted so loudly about the running shoes in the first place, it being more focused on the immediate need for sustenance. In this situation the positive memories and emotions provided by the limbic center would not be enough to overcome the prefrontal cortex’s rational assertion that you really don’t need those shoes.

The power of the bundle of information to alter the decision-making process will also depend on the category, how many choices we are facing, the type of buying process, and a host of different contextual factors. Which means that having a set of positive brand memories and emotions encoded into your limbic center does not translate into a sure thing for the brand.

As Byron Sharp has shown in How Brands Grow, brand loyalty – meaning consumers always sticking to one brand – is very rear. Most people, most of the time, are brand switchers, using a repertoire of competing brands. It all depends on the context of the decision being made.

However:

Having positive memories and emotions of a certain brand encoded into your limbic center increases the probability that that brand will end up being chosen.

Aggregating it all up

It might be a nerdy way of looking at it, but I imagine the following equation playing out.

This is not meant as an equation where you can plug in real metrics, but rather a simplistic conceptual tool to understand the relationship between different factors in the decision-making process.

• Product is your assessment of the product. It is influenced by what you see, what you can read, the sales pitch of the sales assistant etc. The better the product assessment, the higher the likelihood to buy.
• Brand reflect the influence that your past brand memories and emotions yield on the decision-making process. Positive memories increase the likelihood to buy, negative memories decrease the likelihood to buy.
• Price is the price of the product. The influence of pricing on the decision-making process is a field of study in itself, but let’s for now run with the simplistic assumption that it is negatively related to likelihood to buy. The lower the price, the higher the likelihood to buy.
• Availability trumps everything. In this example, if the size you are looking for isn’t available, the likelihood to buy will effectively be zero.

This equation works at the level of the individual making purchasing decisions. Aggregating across all purchasing-decisions and across all consumers in a particular market, it also helps to explain the financial benefits of having a strong brand.

To see how it plays out, consider a simple market with two competitors. Company A has a stronger brand than Company B.

• The volume growth scenario: With comparable products, price points and availability, the products of Company A will always have a higher likelihood to buy, leading to volume growth that outpaces that of Company B.
• The value growth scenario: With comparable products and availability, Company A may choose to leverage the brand to increases its relative price point. This will lead to higher profit margin per item sold for Company A.
• The capital savings scenario: Company A may also choose to limit the investments it makes in product development and distribution. The higher likelihood to buy associated with the strong brand means that it can afford to put an inferior product on the market and limit its distribution channels.

In conclusion

This has been an attempt at explaining how branding works, from the level of neurons to a company's financial statement. The fundamental assumption is that branding works because it influences the risk calculation that happens in our brains when making purchasing decisions. We mitigate some of the risk involved in making consumer choices by favoring products from brands for which we have positive memories and emotions stored in our limbic center. Our subconscious risk calculator value those products higher than products for which we have no such pre-stored information.

This helps us understand the probabilistic nature of branding. A strong brand does not create undying loyalty from its customers, but it does stack the odds of its products being chosen in its favor. Aggregating across many consumers and many buying occasions this leads to a considerable competitive advantage for the company, explaining why strong brands perform better financially than weaker brands.

One question I haven’t dealt with is how to become a strong brand. That will have to be a question for a later post, but for now let’s just finish off with a simple observation.

 The first building block of a strong brand is a strong product.

Going back to the NIKE case, you could argue that irrespective of the immense value it currently holds, $36 for the design of the NIKE Swoosh was not unfair. When it was printed on the first batch of running shoes the logo had limited intrinsic value. Because it was printed on good running shoes, that people derived positive experiences from, which again generated memories and emotions that were stored in their limbic center, the NIKE Swoosh gradually developed commercial value of its own, as a trigger for those positive feelings.

In this perspective brand management is really about orchestrating positive brand experiences (even among those who haven’t previously experienced the products), and consistently applying a set of brand assets that gradually builds value and can help trigger those positive memories to influence future purchasing decisions.

But more on that later.