Calculating return on investment

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Key Action Points

The revenue elements of branding are:

• increased sales through market penetration
• increased share of customer wallet
• increased referrals
• increased price premium
• reduced cost of supply
• increased productivity
• increased employee retention
• increased income from exploiting intellectual property
• increased asset value

The investment side of a branding program will include:

• the cost of developing the strategy
• the cost of infrastructure changes
• the cost of recruiting new skills/resources
• the cost of market research
• the cost of developing, researching, and protecting trademarks
• the cost of developing a brand identity
• the differential cost of each aspect of the CRM mix

In more detail.....

The revenue elements of branding are:

• increased sales through market penetration (assumptions here are based on what % of customers will be reached, and what % of those will trial and then repurchase the brand in what quantities for how long)
• increased share of customer wallet (assumptions here will be based on levels of loyalty driving more regular purchases of your brand across a wider range of products/services – this can, of course be researched)
• increased referrals (assumptions here are based on how many people a loyal customer will tell about your brand, how many of those will trial, repurchase etc.)
• increased price premium (assumptions can be based around pricing research)
• reduced costs (suppliers will tend to offer best prices to a strong brand in order to be able to quote it as a customer. Assumptions would have to be made as to what that discount might be worth)
• increased productivity (a strong brand will give greater focus to the application of all aspects of resource – financial and human. This is hard to quantify)
• increased employee loyalty/retention (assumptions here will be around increased productivity through application and experience – again hard to quantify, but significant – and reduced recruitment costs – a major issue in certain sectors. Assumptions would have to be made around the impact of successful branding on employee loyalty, and employee loyalty on retention)
• increased income from exploiting intellectual property (assumptions would have to be made on how much income the brand could command through licensing agreements etc.)

• increased asset value. The Interbrand methodology works as follows:
1. segmentation by geography, customer, product and channel (the base unit of the valuation)
2. derive a business value per segment, using 5 year forecasts for income & costs
3. derive a role of brand index, based on performance vs. customer drivers
4. derive a discount rate based on competitive risk

The investment side of a branding programme will include:

• the cost of developing the strategy (count in all those meetings!)
• the cost of infrastructure changes
• the cost of recruiting new skills/resources
• the cost of market research
• the cost of developing, researching, and protecting trademarks
• the cost of developing a brand identity
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• the differential cost of each aspect of the CRM mix (although this may be, of course, a return if you find you can do more with less)

This can then all be built into a 5 year discounted cash flow (DCF) forecast.

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