The Physics of Brand

Understand the Forces Behind Brands That Matter

Aaron Keller, Renee Marino, Dan Wallace

• Publisher: HOW Books
• Year: 2016
• ISBN:
  9781440342691
• Topic: Design
• Subtopic: Graphic Design

Welcome to a brand-new way of thinking about branding. The Physics of Brand is an exploration of how brands evolve in time and space. Drawing on experience working with companies such as Patagonia, General Mills, Target, and more, this book provides an exciting new systems approach to branding. By focusing on how brands and people actually interrelate, you'll gain a new perspective on brand growth and interaction. Complete with case studies to illustrate these concepts and Thought Experiments to get you thinking conceptually, The Physics of Brand is your new textbook on brand theory.

08
SYSTEMS + VALUE

TO KNOW BEAUTY, YOU NEED TO SEE UGLY; TO KNOW BRANDS, YOU’LL HAVE TO EXPLORE GENERICS. IN THIS CHAPTER, WE’LL SPEND SOME TIME WITH BIG G AND WITH LITTLE G (GENERIC) FOOD COMPANIES WHERE NOURISHMENT COMES UNBRANDED. WE TAKE A PEEK UNDER THE HOOD OF A SOFTWARE TOOL THAT REVEALS THE INNER MECHANICS OF BRANDS MOVING THROUGH TIME AND SPACE. THE INSIGHT: WE SEE HOW BRANDS DELIVER VALUE TO PEOPLE AND BRAND OWNERS. THIS LEADS TO A SWAN DIVE (OR BELLY FLOP, DEPENDING ON YOUR PERSPECTIVE) INTO THE FINANCIAL WORLD OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, INTANGIBLE ASSETS, AND RETURN ON BRANDING INVESTMENT. PUSH THROUGH; THIS IS THE CHAPTER YOU MAY NEED TO READ TWICE. IT’S OKAY. THIS IS ALSO A GOOD TIME TO BEGIN THINKING ABOUT YOUR CFO’S BIRTHDAY PRESENT. IT’S THE LEAST YOU CAN DO TO THANK HER FOR THE ABNORMALLY LARGE BONUS CHECK.

A SELFIE WITH YOUR NEW BESTIE, MS. CFO

FINANCIAL VALUE OF MARKETING

Here comes Linda the CFO, you know the clicking sound of her stilettos, a six-foot-tall force of financial intimidation and suffering. You know why she is coming, and the churning in your gut starts at the first click in the hallway. You’ve put together your branding-budget requests to achieve the growth goals for this next fiscal year and you’re certain she is coming to ink your world in red.

She gets to your door and enters without a hello. The conversation is nothing but a question and tone packed to the gills with bias: “How do you expect me to support your budget request for the next fiscal year’s marketing expenses?” You’ve used every trick in the book over the past ten years and you’re considering recycling the less than adequate line, “You’ve got to spend money to make money, Linda.” But you hesitate. It will certainly sound flippant and snarky. She drops the twenty-page, well-crafted “deck” on your desk with a large red question mark and leaves. It’s Friday, long past beer o’clock.

Your weekend is occupied updating your LinkedIn page and pouring through your tattered marketing textbooks to review those classic advertising diffusion models from grad school. There has to be a better way to show Linda “the chief fear officer” the potential return on the budget you’ve requested. After some sweating, you pull in some geeks who can handle heavy statistical work and coding. But the noise in the data and time lags from past investments contributing to each period’s profits are challenging. You’re unable unpack the benefits with any acceptable degree of statistical confidence. What is wrong with these old advertising diffusion models?

At this point, you’re falling back to saying you just know that marketing investment is good to do and you enlist the CMO to ask the CEO to get the CFO—and all accountants in general—out of marketing. But later on Monday, while napping on your desk, you dream about a new perspective on how brands gain energy. You intuitively know it can’t be the same as it once was; too many things have changed in technology, culture, and our communities. There have to be new models out there in the world, right? Of course, like many wonderful dreams, just as you’re going to download the formulas to a flash drive, the intern walks in and wakes you up.

Well there is a new diffusion model, and this chapter explores it. This means there’s a way to show Linda some numbers capable of making her heart flutter. The first piece to understand is a use of micro-relationship data to give insight into macro-relationships. We’ll start with a case study that goes deep into the wheat fields of South Dakota.

MORE WHEATIES, PLEASE

BIG G AND BRAND VALUE

You have wound your way through brands, brains, social networks, visual language, complex ideas, and likely a few nefarious paper cuts along the way. You’re here patiently waiting for the big gift under the tree, answering the question, “How does this all come together?” You’ve learned about the many moving parts of a systems theory of brand. If you have jumped ahead to land here, welcome aboard, cheater. We hope you enjoy the ride.

In the following pages we unpack Aurora, a computer simulation tool that uses math, physics, and finance. But don’t worry; this really isn’t rocket science, though it does have a few equations used in the making of rockets. Most of these equations are already in use by researchers in the areas of marketing, economics, finance, social network theory, and elsewhere. Our contribution is to assemble the geared wheels, pinions, regulator, and springs into an end-to-end system that illustrates a brand moving through time and space.

We think you’ll agree that the elements of our brand system are necessary, and that interesting outcomes emerge from interactions between these elements in the macro system. These elements include the Jacob’s Ladder model and the Space Dimensions model. Both capture the micro-behaviors of people responding to brand owner investments. Memories and brand energy are shared with communities through time. The outputs include macro-behavior at the top rungs of Jacob’s Ladder—sales, profits, and brand value—revealing the return on branding investments.

Half a century ago, a brand owner primarily relied on macro-behavior: Turn the wheel of advertising and wait to see if sales and profits follow. And even then, it was almost impossible to correlate cause with effect, which led advertising pioneer John Wanamaker to supposedly say, “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” The invisible hand was, in fact, invisible. Today, brand owners can trace micro-behavior through click-stream, social media, point of sale, smartphone, and other means.

OUR BRAND SYSTEM SIMULATION IS CURRENTLY USED TO ILLUSTRATE WHY BRANDS ADD VALUE. IT CAN BE CALIBRATED AND TAILORED TO UNDERSTAND A SPECIFIC INDUSTRY, CATEGORY, AND INDIVIDUAL SETS OF BRANDS.

MY, OH MY! YOU’RE A BIG DOUGHBOY

GENERAL MILLS ACQUIRES PILLSBURY

To introduce our brand system model, we will loosely model the branded food industry and try to explain how the market values different players and the different ways that brands in that industry add value. First, we’ll use the example of General Mills from our case study at the end of Chapter 2 (see Why Wheaties Are Made of Gold: General Mills Case Study). In 2000, the Big G Cereal brands’ sales were around 40 percent of General Mills’s $6.7 billion total revenue, sharing space with Gold Medal Flour, Betty Crocker, and other iconic brands. General Mills’s investment in tangible assets such as factories and inventory was about $2.3 billion, but the market valued its assets at around $14 billion (Linda the CFO would call this the market value of investment capital, or MVIC), about six times the book value of its tangible assets. Why the difference? If an appraisal of its factories and inventory had been done, there could have been some appreciation in their values, perhaps explaining a 25 percent to 50 percent increase, because land values had gone up in some places and repairs had kept the equipment going longer.

That leaves about $10 billion of unaccounted-for added value. Well, to be more precise, about $0.5 billion was “accounted for” on General Mills’s balance sheet as intangible assets that had been recognized in the acquisitions of Lloyd’s Barbeque, Small Planet Foods, Yoplait, and others. However, all investments in the Big G brands such as the sponsorship payments to Tiger Woods, radio and TV spots, promotional coupons, etc., had been expensed as they were incurred, so there is no “value” for the Big G brands on General Mills’s balance sheet. Curiously, build a brand inside and you don’t need to account for it; acquire a brand and you’ll need to account for it.

Then along comes the announcement in mid-2000 that General Mills was going to spend around $10 billion to double its sales by buying the milling company on the other side of the Mississippi—the Pillsbury Doughboy. That deal took two years to complete and $1 billion of assets were sold again for antitrust reasons, after which management took on the task of appraising the assets acquired. Tangible asset appraisals came in at a total of $0.7 billion, brand assets at $3.1 billion after some related deferred taxes, and goodwill was $5.2 billion. The total intangible assets (brand and goodwill) were $8.3 billion, over eleven times the value of the tangible assets. This is a “yowza” dollar amount for intangibles.

So a brand that is built organically has no asset value on the owner’s balance sheet, but the market knows the brand has value. Also a brand’s value can be many times the value of the tangible assets that are used to manufacture and deliver the product. It is commonly said that intangible assets are 80 percent or more of today’s U.S. economic assets versus only 20 percent in the heavy industry days of the early 1980s. So Wall Street is in the intangible asset business, essentially. In the case of Pillsbury, a whopping 92 percent of its total value when it was purchased was deemed to come from intangible assets. We’ll get into the issues of what is brand value versus goodwill later on.

GOING WHERE BRANDS DON’T SURVIVE

THE UNDERBRANDED WORLD

Contrast this branded-food business with a commodity-food business that buys, processes, and sells wheat, soybeans, corn, and other food staples. All competitors in this space sell the same products using the same grading system, so there is no discernable difference in quality between competitors; only price and availability matter.

In this nonbranded world, producers will still make sales and profits. Customers will still realize utility from their bag of flour or gallon of corn oil. Since customers concern themselves only with price, keeping track of whose bag they bought last week doesn’t matter. This is a direct application of our earlier thought experiment in which customers have no memory and there are no brands. Archer Daniels Midland (ADM) and Bunge are publicly traded examples of these types of commodity food companies. The stock market values their assets at around 1.0 to 1.5...