A collaboration between BrandZ™
and the University of Oxford Saïd School of Business
New research studies linkage of marketing
activity and superior business performance
Findings will help improve investment
decision-making and marketing ROI
The role played by “brand” in driving business returns and growth is still questioned by CEOs, CFOs and financial and investment analysts around the world. An ongoing collaboration between BrandZ™ and Professor Andrew Stephen at the University of Oxford’s Saïd Business School, as part of the Future of Marketing Initiative (FOMI), is providing powerful evidence of the value of investing in building brands—and the potential for using brand metrics to predict whether a company will over-perform against market expectations.
The project, led by Associate Professor of Marketing Dr. Felipe Thomaz, aims to develop a statistical model that calculates the precise contribution that marketing activities make to what’s known as “abnormal financial returns.” These are the returns that are derived when a company’s stock performs better than the market expected.
Companies need to be able to measure all the assets that drive their business performance, while the ability to explain and predict stock returns is a vital guide for investors’ decision-making. A number of different models have been used historically to describe stock returns, with the Fama French 5 Factor asset pricing model currently considered to be the best and most rigorous.
These financial models account for market factors such as risk, size of market capitalization, profitability and corporate investment. What they don’t do is directly measure the contribution made by marketing activities—largely because the creators have not had an appropriate data set to work with. With the collaboration, the use of the BrandZ™ database by the SBS team has plugged this data gap.
With the world’s largest brand equity database, BrandZ™ provided Dr. Thomaz and his team with performance and perception data on thousands of brands, many global in operation, from 2007 to 2019 across more than 40 countries. From these data, the team selected 872 brands to study, which furnished them with more than 15,300 brand equity observation points.
By combining BrandZ™ data with the financial analysis made possible by models such as Fama French, the researchers have been able to enhance their understanding of exactly what is driving the financial outcomes seen in the marketplace. They have also increased the accuracy and stability of predictions of how well a company could perform in the future.
In addition to more robust investment decisions, the model from the FOMI team has the potential to help companies maximize ROI on their brand and marketing spend through a better understanding the financial consequence of different marketing activities, and a greater focus on those most likely to drive returns.
Determining what matters most
To undertake its analysis, the SBS team initially used the established best-practice econometric models, including Fama French, to calculate the “expected” financial returns for 328 private and listed companies—the owners of the 872 brands studied—over a period of 12 years. The “expected” financial returns were then compared to the actual returns from these businesses. This left any abnormal returns which the model did not predict, but which would be of particular interest to investors.
The team then injected more than 50 marketing metrics from the BrandZ™ database into the analysis, to investigate their impact on exceptional performance where it had been identified. These included:
- Summary brand equity metrics
- Core components of brand equity, and
- Diagnostic measures based on attitudinal statements.
Machine learning was applied to create a sophisticated model, sifting through the possible variables and reducing the set of indices to the 12 measures that mattered most: the brand factors that contribute most often to abnormal business returns. These included: difference, corporate reputation, brand purpose, innovation, brand potential and affinity.
BrandZ™ brought a unique perspective to the modeling that had not previously been explored: consumer opinions and attitudes around the brands owned by the businesses being modelled, and how these perceptions have changed over time. This is significant, because a brand’s strength in the market and ability to grow relies on how it is perceived.
Beating market expectations
Of the 12 measures used in the model, difference, and two aspects of corporate reputation—responsibility and success—were shown to help predict abnormal returns better than other variables examined. Brands that possess these characteristics are more likely to help their owners deliver exceptional returns over the medium- to longer-term.
Difference makes the biggest contribution towards abnormal stock returns, which reinforces analysis from BrandZ™ that has identified difference as a key driver of a strong and valuable brand. Difference is based on perceptions that the brand “sets the trends” and is “different from others” in the category and is also a key driver of the BrandZ™ Premium Index, which measures the willingness of consumers to pay more for a product or service. This brand strength improves corporate margins and can, therefore, have a much bigger influence on company performance than factors that drive volume.
Corporate responsibility combines perceptions of environmental, social, and employee responsibility. Again, this corroborates BrandZ™ analysis which shows that the importance of “responsibility” to consumers—and therefore also its role in driving the strength of a brand—has tripled over the last 10 years. The disruption caused by the Covid-19 pandemic is likely to have accelerated this trend.
Corporate success is the attitude that a company “provides good financial returns to investors.” This indicates that consumers’ perception of the success of a business is a good predictor of its future success, which is likely to stem from risk aversion: choosing a successful company is seen as a safer option.
The complexity, depth and scale of the empirically validated data provided by BrandZ™ has enabled the Oxford Saïd team to explain abnormal market returns with an extremely high level of precision. Adding the BrandZ™ measures into the modelling allowed the team to anticipate exceptional company performance with 99.5 percent accuracy. Without it, the results are at best 75 percent accurate.
The work done to date by Dr. Thomaz and his team has provided some strong evidence about the long-term value consequence of building a strong brand. The outcome has been a framework for a model that will enable analysts and investors seeking abnormal returns to identify which businesses are best positioned to deliver them, through the strength of their brands.
The team is now testing the model it has developed and plans to expand the sample of companies studied beyond the original 328. The work will then be peer-reviewed and published according to standard academic practice.
The learnings will also be used by Kantar to further enhance and strengthen the BrandZ™ methodology, and the solutions we offer. For example, they will be added to the brand equity research Kantar conducts for hundreds of S&P 500 and other clients worldwide. There are also plans to use them to develop a service for investment managers that will allow them to leverage brand equity data from BrandZ™ in the same way they do with financial data made available by the likes of Bloomberg.
A validation of the value of brand equity data
The Saïd Business School project has clearly demonstrated that brand- building activities are a significant contributor to the achievement of abnormal financial returns. What’s more, the likelihood of abnormal stock returns can be accurately predicted by adding consumer brand perception metrics to existing financial return models. In other words, measuring and understanding what consumers think about brands today gives a powerful indicator of a company’s likely performance in the future.
This makes a very strong case for injecting brand marketing measures into market expectation models. They clearly matter a lot. Combining them with data on financial performance minimizes assumptions about what led a company to perform as it did, and results in a better prediction of how it will grow in the future.
The richness of the BrandZ™ data has enabled the research team to identify exactly what matters where in terms of brand components, and also how this has changed over time. The modelling has also highlighted the need to accommodate changing global trends and consumer attitudes, as well as giving a proof point to the role and importance of corporate responsibility.
Further validation of the Saïd Business School model is required; however, the learnings to date are a sound confirmation of the value of measuring brand and marketing to a company: brand-building does change the money equation and helps a business to create a stronger financial core.
trust, responsibility increase in importance
Salience and communication decline
The FMOI modeling has revealed an additional and unexpected variable: time. Equipped with the BrandZ™ data, the team was able to observe shifts in how the contributions made by different brand variables have changed over the last 12 years.
In particular, meaningful, difference, responsibility and trust have all increased in importance since 2016, whereas the role of salience and communication has declined.
The decreased importance of salience has also been illustrated by BrandZ™ analysis, which shows that “being known” is not enough for brands to maintain their value. In fact, many failed businesses in recent years demonstrate a “salience gap”: consumers knew these brands, but not what made them meaningfully different. Together with the declining contribution of communication, this suggests that companies may be over-investing in activities that drive awareness, with diminishing returns.
Consumer attitudes do not stay constant, and marketers must keep pace with them. The brand factors that are most important right now might have shifted again in another five years. Responsibility is likely to remain a priority, having been thrown into sharper focus through the Covid-19 pandemic. But the world is constantly evolving, and consumers’ priorities, values, and behaviors follow suit.