Emory Marketing Institute


The Secrets to Superior Persistence in Brand Performance
by Sundar Bharadwaj

We can all agree the brands with superior persistence maintain relatively high market shares that endure over the long-run. Superior persistence in brand performance, however, remains an elusive goal for most brand managers.

What are the underlying factors that influence superior persistence? Are these factors innate in the market and the competitive set where the brand competes, or are there specific elements that management can influence to improve the chances at capturing superior persistence?

At the Zyman Institute of Brand Science, we've made progress in answering these questions. And the good news is: there is room for managing the marketing mix to optimize brand performance for superior persistence.

Brand Impact: Digging Deeper

To what degree do brands contribute to firm performance?

Do brands contribute more or less in comparison to the performance contribution attributed to industry structure and competitive strategy?

The results may not be quite what you expect. Brands, and other intangibles such as innovation competencies of a firm, lead to sustainable competitive advantages that can significantly drive a firm's performance.

But the big surprise for many is that performance gains attributed to the brand are actually far greater than performance gains based on industry structure or resource allocation.

Brands that are sustained superior performers are those that maintain a higher than average market share over an extended time span. These brands are said to be superior persistent performers because their performance endures. For these brands their performance neither erodes to an earlier performance level nor reverts to the category average. Somehow they stay above the crowd.

Traditional neoclassical economics suggests that brand performance is influenced by competitive behavior and that in the long-run firms cannot sustain abnormal performance as participants are forced into equilibrium by perfect competition.

With perfect competition opportunities for earning profits based on favorable conditions rapidly evaporate as new entrants flood the market, increase the output supply, and drive the price down to average cost. Thus, the Michael Porter "School of Strategy" views the industry structure and the competitive environment as the primary force in influencing firm performance.

Lucky for brand managers the economists are not always completely right. We have ample evidence suggesting that brand performance can be sustained over time.

Several firms such as Coca-Cola, Kellogg, Gillette, Campbell and Microsoft have consistently not only maintained higher performance than their immediate competitors, but have also performed above market average.

What is Tobin's Q?

Tobin's q is a forward looking indicator. The Q Ratio, or q, is the value of capital relative to its replacement cost. Q reflects the financial claimants' expectations about future value of the cash flow that will accrue to the firm's assets.

James Tobin, a Nobel Prize winning economist, developed the metric to help predict investment decisions. Firms that exhibit high Q ratios essentially are reflecting their valuation based on high investments in intangible assets.

Tobin's Q is similar to the market-to-book ratio, however Tobin's Q uses replacement costs of tangible assets instead of book value of assets. The use of replacement costs avoids accounting complications associated with the market-to-book ratio.

You might think this performance is only exhibited for differentiated products, however even in the case of a commodity product like salt we see over an extended period of time both a price premium and market share advantage being held by the industry leader, Morton Salt.

Morton Salt, established in 1848, has been the industry leader for quite a long time.

That flies in the face of economist's logic.

And so, what drives performance? We find that brand equity is the primary factor driving firm performance. When using Return on Sales (ROS) as the performance metric, brand equity contributes to nearly half of the elicited value. When using Tobin's Q as a metric the value attributed to the contribution of brand equity is over 60% (see sidebar: What is Tobin's Q?).

Knowing how brands influence firms' performance makes the superior persistence of brand performance a prominent issue. To determine which factors support brand persistence I teamed up with C.B Bhattacharya of Boston University and ZIBS' Doug Bowman at Emory. Utilizing data covering 78 packaged goods product categories over a seven year period, we began to look for persistence drivers.

For evaluating sustained persistent brands we explored two areas:

1) what are the attributes of the market category that lead to superior persistence?

2) what are the attributes of brands that lead to superior persistence?

Do some categories show greater persistence than others? If we knew the answer to this it can guide our choice of where to compete in the future.

Are there brand strategies that lead to superior persistence? If we knew the answer to this we could shape our brand strategies to enhance our brand's performance.

Our research findings on superior persistence were intriguing and not always completely intuitive at first glance.

Research Highlights

Perfect competition is not an attractive method of meeting the market since profits are driven out of the market. Consequently, most brand managers are tasked with making markets imperfect.

Our findings demonstrate there are various methods of managing brands that reinforce imperfect markets. These results can be used both by manufacturer's brand managers and retail management to make informed decisions.


Surprise for Senior Management? The Factors Driving Company Performance

Brand managers can use these findings to make market selection, and marketing mix decisions.

As a highlight of the research let's look at our price promotions findings.

We found that deeper price promotions can lead to superior persistent performance. What is the rationale for this? Pricing with fewer deep discounts, in contrast with many small discounts, has advantages. Deep discounts are effective in stimulating product trials, and of course you need trials to convert non-users into customers. Deep discounts can also be used strategically as a defensive mechanism to inhibit customers from trying competitive offers. When a competitor launches a new product a deep discount can entice customers to load up on your product, effectively taking them off the market until their supply is depleted. Deep discounts can also be given as rewards to loyal customers.

Retailers can also use our research findings to make product assortment choice decisions and improve private label strategies.

Let's take a look at a finding effecting retailers. A seemingly counter intuitive finding is the nature of private label competition. It seems like common sense that private labels would do better in more basic commodity categories. However, our results show that private labels actually do better in categories with greater differentiation. In these categories private labels form a second tier of product offerings. Will this insight change private label planning? It should.

It is a relief to know superior persistence in brand performance is something that managers can strive for by proactively managing their brands. We have illustrated how brands are a critical contributor to a firm's financial performance.


Standing Out Over the Crowd: Superior Brand Persistence

Our results show that brands are the singlemost important driver of a firm's performance. The impact of branding on firm performance outweighs both the impact of the competitive environment and resource allocation.

And the good news is that pursuing the goal of superior persistence in brand performance is no longer a wild goose chase. Management can influence brand performance through selective category participation. And once they select the category in which to compete managers now have insight into how to better manage brands for optimal performance.

For Further Information: Contact Sundar

You didn't think we'd give it all away here did you? For further information on brand equity's impact on firm performance, or on superior persistent brand performance contact Sundar Bharadwaj. He can be contacted at sundar@zibs.com.

Sundar Bharadwaj is a Director of Academic Programs of the Zyman Institute of Brand Science, and Professor of Marketing at Emory University’s Goizueta Business School. Contact him at sundar@zibs.com.

This article was edited by Greg Thomas, the Director of Programs for the Zyman Institute of Brand Science. Greg is passionate about driving innovation in the practice of brand management. He has worked for Fortune 500 companies, consulted to a wide array of clients, and holds an MBA from the University of Texas.


Register

SIGN UP for our newsletter and receive a complimentary copy of The Executive Guide to Branding


Sign Up>>

Download

For a limited time, download a copy of Rethinking Marketing:

hb

 

 


 

Copyright © 2006-2009 Emory Marketing Institute. All Rights Reserved
site design & management: christiansarkar.com

Privacy Policy: we will not sell, rent or share your information outside Emory Marketing Institute