This weekend, I was at a dinner with a very eclectic group of people. Some doctors, some lawyers, quite a few finance folks and one marketing guy… I’m sure you guessed who. As you would expect, the discussion bounced from the government shutdown to the new Governor of Illinois; from the upcoming Chicago Mayoral elections to the drama around the liquidation of Sears.
Sears, you say? Who?
Yes, Sears. The company that defined retail. The company that
The discussion wasn’t about what happened to it and why. It wasn’t about Eddie Lampert. It was about the remaining equity value left in Sears today. The discussion about this issue became contentious and confusing. As I realized quickly, the contention was due to the confusion. Confusion caused by one word… equity. Let me explain.
Equity, and Brand Equity in particular, is the attempt marketers have made in recent years, with the best of intentions, to ascribe financial value to the quality of the relationship that customers have with a product or service.
Unfortunately, that attempt also has become a source of a lot of trouble and confusion. Some of that is inevitable: We’ve been trying to put financial value on intangible aspects of the brand relationship, many of which are difficult to measure. But some of it also reflects some basic misunderstandings of the nature of the value we’re trying to describe. If we can remedy the latter, it will help us do a better job defusing the former.
As a marketing guy, I like the idea of brand equity. I support the idea of brand equity. I absolutely believe in the idea of brand equity. At the end of the day, the connection loyal customers have with a brand, however ethereal and emotive it may seem to non-marketers, is valuable, both to the brand and to the business that owns and promotes it. The confusion we all need to cut through comes from the ways in which we have tried to define the “value” of this valuable connection – and the disconnects between those methods and the more concrete and financially resonant meanings of the same concepts as they’re being applied in business today.
FINANCIAL EQUITY VS. BRAND EQUITY
Strictly speaking, equity is not a marketing word. Equity is a word that comes out of the financial side of the organization, and the investment banking organizations it works with, as they try to explain the value of a business’ share price in the context of the stock markets in which people buy and sell ownership interests in the business itself.
But even in this context, the concept can take on various shades of meaning depending on special market situations. For example, The Barron’s Dictionary of Business Terms notes not only a basic definition for Equity, but specific variations that reflect the needs of different financial contexts:
- As an investment: “ownership interest possessed by shareholders in a corporation – stock as opposed to bonds.”
- In accounting: “paid-in capital plus retained earnings.”
- In banking: “the difference between the amount for which a property could be sold and the claims held against it.”
- In real estate: “property value in excess of debt.”
Regardless of the specific application, however, Return on Equity (ROE) is a very precise (if not always clear) concept. Again, quoting from the Barron’s Dictionary, as a financial formula Return on Equity is the:
“amount, expressed as a percentage, earned on a company’s common stock investment for a given period. It is calculated by dividing common stock equity (net worth) at the beginning of the accounting period into NET INCOME for the point in time after preferred stock dividends but before common stock dividends. Return on equity tells common shareholders how effectually their money is being employed.”
The last sentence is the key one: Shareholders are invested in the company that owns and markets the brand, not the brand itself. They measure their own satisfaction not as a function of how customers value the brand experience and find ways to engage with the brand, but by what change that process produces in their portfolios.
The challenge for marketers is to establish common ground between how they value the brand and how the business’s owners value it. Unfortunately, there’s often significant contrast between that kind of precision and the way the world of marketing has tended to use the same terms – Equity and Return on Equity – to describe the value of all the investments made in creating awareness, interest, and desire for a brand. Here’s how the website Investopedia defines Brand Equity:
“The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. Companies can create brand equity for their products by making them memorable, easily recognizable and superior in quality and reliability. Mass marketing campaigns can also help to create brand equity.”
See the difference? No wonder it often seems that marketers and financiers are speaking a different language. We are. The financial definition of Equity focuses on hard data: “amounts” that can be “calculated” for a finite “point in time;” it uses facts and figures such as “net worth,” “net income,” and “dividends.” By comparison, the marketing equivalent is soft enough to be advertised as bathroom tissue: a “recognizable” name that is “memorable” or represents comparatively “superior” quality and reliability – whatever constitutes “quality” and “reliability” in a given marketplace.
As valuable and useful as concepts such as Equity and Return on Equity could be for us as marketeers trying to justify our claim to a share of the company’s resources, the marketing versions in use to date have failed to deliver either clarity or understandable guidance for the simple reason that they don’t describe anything tangible or measurable. And they don’t do that primarily because, until very recently, there has been no practical way to do the crucial math that can transform this nebulous concept into an unambiguous value. Now there is.
As Mr. Lampert proved, these intangibles need to be made concrete or else the financial imperatives will bury the brand and destroy the financial equity with it.
This is how our conversation ended last Friday. With a minute of silence for the destruction of a venerable brand at the altar of ‘equity misunderstanding.’