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Deutsche Bank says TV advertising doesn't work for mature brands. They're wrong, says Andy Farr, and here's why...

Deutsche Bank says: TV advertising doesn't grow established brands:

"Established brands have a harder time driving growth through increases in TV advertising. Incremental media spending levels drive growth in a very small number (12%) of established brands. For mature brands, introducing new items and increasing distribution are more important than increasing marketing."
Commercial Noise - why TV advertising doesn't work for mature brands.

If opportunities exist to create new channels of distribution, or introduce genuinely innovative new products, companies should seize those opportunities. However, companies need to be realistic about their objectives. Where brands are in competition, the opportunities to achieve significant step changes in market share will be infrequent. The launching of a stream of sub-standard range extensions will often be counter-productive.

So what is the justification for supporting an established brand when there is no news to deliver? To answer that question we need to consider the role of the brand. In purely financial terms the brand's role is to supply a continued profitable revenue stream into the future. The reason why brands are able to do this is because in the mind of the consumer the brand is much more than its functional attributes. Consumers don't buy a cold, black, sweet, fizzy drink that contains caffeine, they buy Coca-Cola. They are prepared to pay more for Coca-Cola partly because they trust its quality, but more because the experience of drinking Coke is more than justthe taste. And they are prepared to try brands from within the Coca-Cola franchise because there is a halo of trust and values that extends from the parent brand.

How can we put a value on this brand strength? The most widely accepted approach within the financial community is an approach called Discounted Cash Flow (DCF). The principle behind DCF is that there is a balance between risk and return. The value of an asset (in this case a brand) is a multiple of the profits it is expected to generate in the future and the certainty with which we believe they will accrue.

Future profits X Certainty equals Value A high-risk venture carries greater uncertainty and hence the value of the projected profits would be discounted by more than a safer alternative. There are many unexpected macro-economic and sector factors that can mean that the forecast profits fail to be delivered, however there is no doubt that the strength of the brand is also a key factor. Strong brands are less risky than their competitors. The chart below demonstrates this point very clearly. It shows the results from nearly 400 brands grouped into 20 bands based on a key consumer equity metric termed VoltageTM are much less likely to lose market share next year than weak ones.

Chart - Strong brands are less likely to decline When this measure of relative risk is factored into an assessment of the brand's financial value, the increased security of revenue alone means that a strong brand is worth more than double a weak brand. This difference can be thought of as the accumulated value of the brand's past brand building. And by brand building we mean a combination of the consistent delivery of a great product or service experience and clear and distinctive communications activity. It is this combination that will have created the montage of positive associations that constitutes the brand in the consumer's mind.

So what happens if you cut communications investment? If you stopped advertising today people would not instantly forget about your brand. However, when brands do under invest relative to their competitors, there is a very real, and quantifiable increased risk of decline. Because brands are the cause of the profitable revenue stream, ensuring that they remain strong and healthy should be one of the prime concerns of the organisation. The brand's current strength has been created by the skills of the marketing teams who have developed, nurtured and invested in the brand, often over many generations. It can not be assumed that this brand strength will be maintained without continued investment.

It is useful to make an analogy with financial services and compound interest. If we invest in a savings account, we gain interest on our investment. If we continue to invest then next year we will receive interest on this year's and past years' investment. So as our capital grows, so does our interest. However, as soon as we start to take money out of the savings account, our interest will diminish. Taking this the one step further, if we invest money wisely, then the longterm payback will be considerable. However, if we put the money in poorly-performing accounts, our long-term return on investment will diminish. By the same token, failure to invest in the brand may appear profitable in the short term, but only because we are eroding our capital, eroding the brand's equity and hence sacrificing the future earning stream.

The implications of this are two-fold. First, sufficient investment in R&D needs to be in place. This is R&D that focuses both on technical innovation, but also on understanding the changing needs of the consumer. Allied to this is the need to maintain brand strength. Consumers are more willing to buy brands they are familiar with and that they trust. Hence, the consistent use of communications that focus on the brand's proposition have a key role in underpinning the long-term sustainability of the profit stream from the brand.

Andy Farr
Millward Brown Optimor,
Warwick, UK

Evidence that TV Advertising Works

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