The Real Value of a Brand

One of the first books I reading on marketing was Positioning by Al Ries & Jack Trout. Al now writes a regular column for AdAge.com:

The Difference Between Building a Business and Building a Brand

Don't Confuse the Latter With Celebrity Index

by Al Ries

Published: January 05, 2009

Are you building a business? Or are you building a brand? Silly questions, you might be thinking. Naturally, you are trying to do both.

But that might be a mistake.

What's good for the business is not necessarily good for the brand. And vice versa.

What's a brand anyway? It's a word that stands for something in the mind of prospects. That definition, by the way, is at odds with conventional thinking.

Most managers equate a brand with its celebrity index. The more famous the brand, the more powerful it is. "Making our brand name well-known" seems to be the conventional approach to brand building.

Chevrolet is one of the world's best-known automobile brands, but how valuable is the Chevrolet brand? Not very.

Chevrolet doesn't make Interbrand's list of the 100 most-valuable global brands. Chevrolet, like many other exceptionally well-known names, isn't worth much because it doesn't stand for anything.

It's not just Chevrolet. The U.S. automobile industry markets 14 vehicle brands: Buick, Cadillac, Chevrolet, Chrysler, Dodge, Ford, GMC, Hummer, Jeep, Lincoln, Mercury, Pontiac, Saab and Saturn.

I would guess that every one of these brands (with the exception of GMC) is exceptionally well-known with a recognition score in excess of 90%.

Except for a house or an apartment, an automobile is the most expensive product a person might buy in his or her lifetime. In addition, an automobile has enormous street visibility. These factors combine to give automotive brands a huge advantage in the battle for the consumer's mind.

It's not surprising that 11 automobile brands made Interbrand's most valuable list. But just one of those 11 brands was an American brand. (Ford at No. 49.) The other 10 were European and Asian brands. Why? The European and Asian brands stood for something.

• Toyota (No. 6): Reliable
• Mercedes-Benz (No. 11): Prestige
• BMW (No. 13): Driving
• Honda (No. 20): Reliable (second to Toyota)
• Volkswagen (No. 53): Practical
• Audi (No. 67): Advanced technologies
• Hyundai (No. 72): Cheap
• Porsche (No. 75): Sports cars
• Lexus (No. 90): Luxury
• Ferrari (No. 93): Expensive sports cars

Keep in mind, these are global brands. Volkswagen is not doing particularly well in the U.S. market, but it's No. 1 in Germany. Also, Audi suffers in the U.S. market because of its unfortunate name, but that's not a disadvantage in many countries where English is not the spoken language.

How do you build a brand? Almost every successful brand in the world started as a narrowly focused brand that stood for a single idea. Then the business builders took over. First objective: Expand the business.

Dell Computer started as a narrowly focused business-to-business company selling personal computers direct. Dell got off the ground by owning the word "direct."

Michael Dell wrote a book that outlined his company's rise from obscurity to fame. The title? "Direct From Dell."

In the first quarter of 2001, Dell became the world leader in personal computers. (And not just in sales, but in profits, too. In the 1990s, for example, Dell had the best stock market performance in Standard & Poor's index of 500 leading American companies.)

What did Dell do next? It forgot about building the brand and started building the business. First Dell moved into consumer personal computers, undermining its position as the "business" PC specialist. ("Dude, you're getting a Dell.")

Then Dell moved into consumer electronics, undermining its position as the "personal-computer" specialist.

Then Dell moved into retail distribution, undermining its "direct" distribution position.

In 2003, Dell Computer Corp. dropped "computer" from its name and became Dell Inc. (That's always a bad sign.)

Did all these business-building moves work? Sure. Sales steadily increased from $31.9 billion in 2000 to $61.1 billion in 2007.

While Dell sales went up, the Dell brand went down. Dell, formerly the world leader in personal computers, is now second to Hewlett-Packard. (In 2007, HP had 18.2% of the market and Dell had 14.3%.)

Dell's net profit margin, a good indicator of a brand's value, also went down. From 6.8% in 2000 to 4.8% in 2007.

Where Dell went wrong, in my opinion, was that it forgot what built the brand and instead focused its efforts on building its business. Yet that's not the conventional wisdom.

"Where Dell Went Wrong" was the title of a Feb. 19, 2007, article in BusinessWeek. "In a too-common mistake, it clung narrowly to its founding strategy instead of developing future sources of growth."

Scott Thurm, writing in The Wall Street Journal, said essentially the same thing: "Dell couldn't diversify its business, making it vulnerable once Hewlett-Packard matched its expertise."

That's the way it is in corporate America today. Everybody is looking for ways to build their businesses by expanding into other categories. Their real strategies should be to build their brands by dominating their categories. And often the best way to do that is by contracting their brands so they stand for something.

What's the most reliable measure of the power of a brand? It's not making the Interbrand list. The most reliable measure is market share. Powerful brands dominate their markets.

In the U.S., Tabasco has 90% of the hot-pepper-sauce market. Campbell's has 82% of the canned-soup market. TurboTax has 79% of the income-tax software market. Starbucks has 73% of the high-end coffeehouse market. The iPod has 70% of the MP3-player market. Taco Bell has 70% of the Mexican fast-food market. Google has 68% of the search market.

When your brand dominates a market, it is in an exceptionally strong position. In a mature market, a dominant brand is highly unlikely to ever lose its position. (Think Kleenex, Gatorade, McDonald's, Budweiser and many other dominant brands.)

Even more important, dominant brands usually generate exceptionally high profit margins. Compare Intel, the dominant microprocessor brand, with Advanced Micro Devices, the No. 2 brand.

In the last 10 years, Intel has had sales of $319.6 billion and net profits of $62.2 billion. Intel's net profit margin was an astounding 19.5%.

In the last 10 years, Advanced Micro Devices had sales of $42.7 billion and net profits of ... well, they didn't make any money. They lost $4.1 billion.

You see the same relationships on Interbrand's list of the 100 most-valuable global brands. No.1 brands are worth far more than No.2 brands.

• Coca-Cola is worth $66.7 billion. Pepsi-Cola, $13.2 billion.
• Nokia is worth $35.9 billion. Motorola, $3.7 billion.
• Nike is worth $12.7 billion. Adidas, $5.1 billion.

The personal computer was the most important new product of the 20th century and it's likely to remain that way for decades to come. Someday some brand will be the Coca-Cola or Nokia or Nike of personal computers with a market share of 40% or so. That company is unlikely to be either Hewlett-Packard or Dell.

You can't dominate a category if you expand your brand into many other categories. (That's why IBM is no longer the dominant PC brand.)

You can only dominate a category by keeping your brand focused.

Building a business or building a brand? That's the most important question in marketing.

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In addition to his monthly AdAge.com column, Al and his daughter and partner Laura Ries host a weekly video report at www.RiesReport.com.

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