The Big Marketing Reveal
Figuring out which companies are best positioned for long-term growth challenges us to dig deeper into “intangibles”—qualities that are hard to measure, but reveal a great deal about a company’s potential. In my most recent interview for the Q Factor, I chose to dig into an intangible that’s literally all around us, but sometimes hard to see: marketing and brand strength. We’re inundated with ads from an early age, and can probably still whistle commercial jingles from our childhoods, but we don’t get many opportunities to see how, or why, businesses invest and adjust their marketing strategies. After all, spending on marketing tends to look like an expense on an income statement, and it’s basically invisible on a balance sheet—but research suggests it boosts a company’s value over time.
Seeking insight into how to measure brand strength and its impacts, I’ve gotten to know some extraordinary experts over the years—including this episode’s guest, Professor Dominique Hanssens of UCLA Anderson School of Management. We met through his frequent co-author, Professor Ramesh Rao at the University of Texas at Austin. In addition to being world-renowned scholars, they are also my friends—you’ll hear me call this episode’s guest “Mike.”
Mike and I started out with the basics: “Brand” is more than a trademark or a copyright on a piece of paper; it is a set of associations that a customer makes with a product, from judgments on its price, value, prestige, and more. Companies can do a lot to build a brand over time, starting with making a quality product and being responsive to customer demands. And a company’s marketing undoubtedly shapes perceptions of its brand.
I wanted to learn from Mike how companies use marketing to enhance their brands and catch the attention of market participants. This practice has evolved over the decades, which I know firsthand from growing my investment management company in the early 90’s with advertisements in the local newspaper and direct mail. In our data-driven era, Mike has found that businesses often know more quickly than we used to if marketing strategies are working. We have better ways today to see if ads are reaching customers, and an effective new ad campaign will usually have an impact on sales right away. And when it’s a quality product being marketed, there’s a virtuous cycle: sales increase, the company uses those profits to invest in itself and improve, and customers are kept for life.
But figuring out which companies are doing this most successfully—and who is best positioned to do it in the future—is another story. As it turns out, Mike and Ramesh have cracked some innovative and unexpected ways to measure the value of brand strength. They’ve found that companies with stronger brands tend to keep less cash on hand, reflecting their leaders’ confidence that the business can weather any storm. Their income streams are more resilient during bad times. Cash on hand has an opportunity cost—when business leaders feel they have to keep it in the bank, it’s not being used to make investments that might bring greater returns. So keeping less cash on hand, made possible by a stronger brand, is often associated with greater growth over time.
But when you’re focused, like I am, on small companies with big potential, you may not have the benefit of a particularly impressive balance sheet at this stage in their growth. So I asked Mike how we can judge how successfully young businesses are making these investments that may take years to pay off. He referred me to a series of intermediate metrics, such as Google searches, which suggest growing interest in a business. And we can start to assess “customer lifetime value” with early data on how often people are coming back to purchase products and services—the building blocks of brand strength. The conventional wisdom held by people like my dad, who owned a men’s clothing store in Queens in the 70s and 80s, that keeping a client is better than finding a new one, has been confirmed by research over and over again.
Mike and I also discussed how marketing to consumers isn’t the only wise investment a company can make to boost its brand: Focusing on the company’s own employees can strengthen culture and build retention and loyalty. In a service-sector economy, happy and successful employees drive value for a business, especially when they serve in consumer-facing roles. Our people are often our product and our most valuable asset. Mike knows this firsthand, as he’s seen students enthusiastically accept job offers from exciting, mission-driven companies over more money from a lesser-known business. The pride and dignity that comes with being part of those teams—being associated with those brands—can sometimes be worth more to a talented worker than more money in the bank.
The importance of investing in employees and treating them with dignity is a recurring theme in my research and investments. It’s a conversation I’ve had with Frances Frei and Rawi Abdelal, both of the Harvard Business School, friends and longtime advisors to me and my business, Quent Capital. It’s one that informs my passion for the Job Quality Index, a tool to help investors make sure their dollars are supporting the best corporate citizens, and for making sure the next generation of workers is ready for the jobs of the future. And, as Mike’s research has found, treating workers well isn’t just the moral thing to do, but can build the brand strength that drives company performance over the long-term.
Listen to our full conversation: Dominique Hanssens: The Science of Marketing