Brands help enhance the cost of doing business

Published in Philippine Daily Inquirer Business Friday, August 8, 2008

IN DOING BUSINESS, an ongoing debate in boardrooms is to provide resources for the development of brands or remain selling commodity products. While business owners realize the value of having brands in their portfolio, the cost of building brands deters them from acting on this. Moreover, business costs like the increasing cost of raw materials, goods and services; distribution and other operating costs compete for allocation in the working capital. It is no wonder that the business owner is hardly left with adequate funds for branding. Often, a crossroad is reached – whether to go ahead with brand development and enjoy the benefits for and in the long term or have marginal profits in the short-term.

Brands versus commodity

Not all products are brands regardless of these having a great name, label and packaging, substantial advertising spend or just being present in trade. So long as consumers do not see any difference between products or services in a category, no one player is a brand and all are commodities. A commodity has no perceptual difference in the minds of consumers. On the other hand, a brand is perceived to be distinct from other products or services in the same category. Even if a product or service is indeed generic or similar to others in the category, so long as consumers and potential users perceive it as different, a product or service then becomes a brand. Brands are not built overnight. The right target market, a differentiating but relevant message that sell, consistency in communicating the message at all probable contact points with the potential consumer and financial resources to communicate the product’s differentiation is necessary in building brands.

Top 30 of the 2007 World’s Most Valuable Brands

2007 RankBrandCountry of OriginIndustry2007 Brand Value ($m)Change in brand value from previous year
1Coca ColaUSBeverage65.324-3%
2MicrosoftUSComputer software58.7093%
3IBMUSComputer service57.0912%
4General ElectricUSDiversified51.5695%
5NokiaFinlandConsumer electronics33.69612%
7IntelUSComputer hardware30,954-4%
11CitiUSFinancial services23.4439%
12Hewlett PackardUSComputer hardware22.1979%
15American ExpressUSFinancial services20.8276%
16GilletteUSPersonal care20.4154%
17Louis VuittonFranceLuxury20.32115%
18CiscoUSComputer services19.0999%
20GoogleUSInternet services17.83744%
21SamsungKoreaConsumer electronics16.8534%
22Merrill LynchUSFinancial services14.34310%
23HSBCUKFinancial services13.56317%
25SonyJapanConsumer electronics12.90710%
27OracleUSComputer software12.4489%
29NikeUSSporting goods12.00410%

Source: Interbrand, a leading global branding valuation agency

Why building brands can be an attractive investment

There are many tangible benefits of being a brand. These include:

Recall. A time-starved consumer is likely to recall and easily recognize a brand over a commodity product. This becomes a decided advantage when a potential buyer is making a grocery list, is contemplating a purchase, is presented with several options or is making a choice.

Reduce incidence of obsolescence and perishability. A brand that is easily recalled, perceived to be different and relevant to the consumptive behavior of a potential market is more likely to have quick and repeated cycles of sales turnover and trade off-take whether it be consumable or durable products and services .

Boost cash flow. Cash is king. The faster the product or service flies from the shelf or trade into the hands of the customers, the quicker can any business recover from an investment. Collection cycles can range from 60 to 180 days depending on the industry thus, the quicker and repeatedly the consumer picks up the product or service, the sooner comes collection time.

Leverage distribution costs. In the recent years, distribution costs have emerged to become substantively high fighting for allocation in the business owner’s working capital. While presence in trade is important, products or services do not necessarily move just by being available. There is greater need to stimulate consumer demand to ensure that these products or services move from the shelf or trade. Distributors are willing to take a cut in their charges provided principals are able to establish quick turnover. Retail landlords offer the best, prime and preferred space to flagship tenants because these have become cult brands with a strong following thus, ensuring even mall foot traffic.

Leverage with media suppliers. Media suppliers take pride in servicing badge brands. Moreover, they are guaranteed a sustained business thus, are in a better position to negotiate or provide more efficient media buys for their clients.

Global entry. Investing in brand building in the home country is like a showcase in the event that business owners aim to expand into the international market. Foreign distributors study the principal’s way of managing their own brands.

What it takes to do effective branding

Brand-mindset from the top. Brand building is a long-term business activity. Much like allocating for cost of goods, distribution and operating costs, brand-building and sustaining activities need to be budgeted for consistently.

Intuitive thinking. Brand builders have a sixth sense. They know what customers want even before these buyers are able to expressly articulate their desires. This is borne by years of dedicated consumer interaction and study, expertise and strong sensitivity to consumer needs and wants.

Think out of the box. Industry and category players often share the same mindset having to do business in nearly the same way. No wonder, most industry players often have similar brand messages, nearly the same communication materials and often cannibalize market share from within. Indeed, thinking out of the box is better said than done is a truly great challenge.

Have a brave heart. It is no easy decision to invest in brand building when business owners have sustained their operations by selling commodity products. But as competition becomes stiff and consumers are more knowledgeable, demanding and exacting, the reputation of a brand goes a very long way in building a cult following of generations of consumers. Here comes the challenge for many old-time business owners: to evolve or not to shift a product from a mere commodity to a brand and along the way make substantial investments in extending the life of their product leaving a legacy for the next family generation. It is nearly like starting the business all over again. Only a brave heart with great belief in one’s brand and dogged determination can rise to the challenge of brand building and sustaining.

Have a differentiating, relevant message to say. Commodity products can only become brands provided there is perceptual difference in the minds of consumers. Having the right message that consumers find unique yet relevant is a great way to start brand building.

Adequate and sustained working capital for brand building is necessary. Having the appropriate message is one challenge, the other is allocating resources to communicate the message. Here is where most business owners reach a crossroad. Thus, it is best if the business owner has a brand mindset from the beginning. The good news is – there are many good tools these days to help the business owners efficiently manage their resources, media buys and communication tools.

Brand building has often been relegated to the backburner, resorted to only when times are hard or when demand has reached rock bottom. Even then, when a commodity product can be evolved into a brand, business owners hesitate to do so because of the expenses. Yet budgets for building brands are nearly the same as distribution expenses, in some cases even lesser. Commodity products can only evolve into brands when business owners start treating brand building as a line item adequately appropriated for in the annual budget.