Written by Vivek Jaiswal | Co-founder, Customer Guru
Why is the power of brands declining?
With the advent of the information age, the bargaining power has completely shifted towards the consumer. Potential customers can easily read about and compare experiences of other people with a brand and accordingly make their purchasing decision. Brands have commanded, and some still do, a huge power in luring consumers to buying from them. However, as highlighted in an article published on Harvard Business Review, the equity of brand value in a company’s fair market value is declining.
The above chart was drawn using M&A data of over 6,000 transactions worldwide between 2003 and 2013. It shows the percentage of brand and customer relationship valuation in total enterprise value. The advantage of using M&A data is that it reveals the dollar value of all assets at the time of acquisition. Among other tangible assets, M&A valuations also include non-tangible assets such as brands (trademarks) and customer relationships (goodwill).
The chart clearly shows that the share of brand value in total enterprise value has dropped to almost 50% of where it was in 2003. On the other hand, the share of customer relationship has grown to almost double of where it was in 2003!
There are a few very interesting inferences to draw from this study:
1. Part of the branding budget should be allocated to building better customer relationships
Companies spend millions on advertising and brand building whereas significantly less on customer relationship building. Given the value of building better customer relationship, organisations should reevaluate their branding budget and allocate more to improving customer experience, relationships, and retention.
2. Customer experience is the new branding
Customers have access to information from other consumers that can build or destroy the value of a brand. Experiences define how a brand is perceived by other customers and thus the purchasing decision is more fact-based than brand-image based. It is easy for people to seek and share customer feedback and thus the perception of a brand can no longer be hidden behind advertising campaigns – customer experiences define the new brand image.
Finally, the objective of this post is not to undermine the value of branding, but to highlight the equity of building better customer experiences. We understand that one cannot live without the other.
Would love to hear your feedback and comments below.