Customers trump brand value

At a recent Customer Experience workshop at Oracle Brisbane, there was a brief discussion on the reduced value of the brand and the increasing importance of customer engagement in business evaluation.

With the birth of e-commerce, marketing experts have disagreed about the future role of brands. Some have predicted that digital technologies will hasten the demise of brands because customers will have ready access to information they need to make purchase decisions, and “brand” will therefore become less relevant.

Others have predicted an increasing importance of brand as a simple way to evaluate choices in an era of information overkill (I tend to agree with this if brand purpose is clearly aligned across the customer journey). Regardless of the whether e-commerce created the impetus in the decreasing value of brands – what is clear is that the value of a strong customer experience strategy is more important to sustain a business.

To give the branding debate more perspective, Harvard Business Review  looked at the value of brands and customer relationships as revealed by M&A data covering over 6,000 mergers and acquisitions worldwide between 2003 and 2013. The advantages of M&A for examining valuation trends is that M&As reveal the dollar valuations of all assets at the time of the acquisition. Upon acquiring a business, companies have to value the different assets they acquired for their accounts and balance sheet in accordance with accounting and reporting standards. These valuations include – among other assets – brands (trademarks) and customer relationships.

The below graph referred to by Harvard Business Review, based on data from the MARKABLES database, represents brand and customer relationship valuations as a percent of total enterprise value. The percentages come from fair value assessments done by purchase price allocation experts according to established accounting standards.

As the graph demonstrates, brand valuations declined by nearly half (falling from 18% to 10%) while customer relationship values doubled (climbing from 9% to 18%) over a decade. All other categories of intangibles remained stable. These numbers reveal a dramatic shift in the strategic approach to marketing over the last 10 years. Acquirers have decisively moved from investing into businesses with strong brands to businesses with strong customer relationships.

Where in the past, M&A strategies concentrated on brands and on growing brands through better brand management, they are  now prioritising acquiring firms with strong customer relationships – with all the loyalty benefits that loyal customer offer such as repurchase, referral, trial, usage and forgiveness.

This trend is said to be reinforced by digital technologies. These allow more direct interactions with customers, bypassing expensive middlemen and reducing the cost of sales and marketing; they allow firms to optimise customer lifecycle management based on detailed data and analysis of customers’ needs; they improve efficiency and quality across the value chain as a result of continuous customer feedback; and, finally, they facilitate the realisation of merging two brands into one, or rebranding. As a result, the price of direct engagement with customers relative to traditional branding and media campaigns has dropped while the effectiveness of such marketing efforts has grown.

There is a parallel development on the demand (customer) side. Digitalisation makes information, including information about brands, easily accessible. For example, a customer shopping for a new car can now instantly examine and compare the specifications and performance of different car models. Thus, purchasing decisions have become more fact based, and less brand-image based. Customers still value strong brands, but what constitutes a strong brand is now more dependent on customers’ direct experience with an offering, and with their relationship with the firm that produces it.

That suggests that marketing resources now directed at brand building should be more fully integrated with those designed to reinforce relationships by delivering a superior customer experience.  The value of “brand” or “brand image” as an entity distinct from the offering itself, is said to diminish. However, marketers should be careful not to take this too far and underinvest in classic branding. With brand messages becoming more and more personalised and diverse, brand equity needs to stay strong to perform its role. Strong brand communications are and will remain important especially in attracting new customers , engaging employees and delivering value.

Hopefully,  the Harvard Business Review analysis might provide a reality check  for some of our advisory boards and C-suite executives who are still determined to put the sustainability of their business on the line as they continue to structure strategy around product or brand instead of their customer strategies.

So what to do next? Management teams need to start evaluating their customer experience maturity throughout the organisation.  Advisory and boards need to restructure and start thinking about the customer experience across silo groups and use the collective to create solutions to reduce customer pain points and identify the key moments of truth.  With increasing consumer demand, the advent of new technologies and increased competition for most industries – this is not a time for “business as usual”.

The winners in this business race are going to be those who are focused on customer insights, customer led design and who are energised by talking with their customers again.