It’s increasingly easy to be a brand that people talk about in glowing terms, part of a sector that appears to be booming, and yet on a downward slide financially. It’s a sign perhaps of just how much we now focus on (the wrong) numbers at the expense of understanding true value.
Marketers have traditionally put a lot of onus on loyalty because it’s seen as a key conversion marker. People who like your brand, the reasoning goes, will continue to buy more from you, and that in turn will drive up the value of your brand. That equation, I would suggest, hails from a time when there were less options and consumers were more inclined to take sides. But a recent article on the digital music scene highlights that even brands that are widely perceived as successful, such as Spotify, are struggling to make money because they simply cannot meet the costs of their business.
The hunt for visibility
As marketers we have become hooked on popularity. I am constantly told about a product’s social media numbers as a gauge of demand, but I have yet to see the research that definitively links visibility alone, especially through digital channels, with profit. Consumers may know you, they may like you, they may talk about you – but that doesn’t automatically translate to an upsurge in sales. Reach in a digital context is not substance. Conversation is not a synonym for conversion.
There’s a confusion here and it’s distorting where brands put their emphasis. It’s as if we’ve become so wound up with having numbers, and the size of those numbers, that we’ve forgotten what they actually mean. Big numbers are often read as “proof” of success, but the wrong numbers, however impressive, amount to nothing but warm feelings. The hunt for visibility and mentions, particularly through a social media lens, may loom large in the daily to-do list of brand managers but that doesn’t mean it has anything like that significance for consumers. Brands have confused what they have to do with what they want consumers to do. Many still seem to assume that if they make their brands more visible, they automatically make them more valuable. Incorrect. There is no quid pro quo as of right here.
Raising consumers’ expectations
And as more and more brands crowd into markets looking for ways to shine, they incorporate more and more of the features that consumers would once have paid for into their entry-level offerings. That damages their brand and everyone else’s – because it raises consumers’ inherent presumption. Consumers assume greater and freer access to services, and that in turn lifts their reluctance to pay for what they can get without paying. Once again, too many brands confuse a features list with differentiation. They believe that by offering more they are different from those around them.
That’s not the case of course. Because often, they have simply created a ‘unique’ product that can be quickly matched (although whether that matching can take place profitably is moot). True differentiation should create a much higher barrier to entry or parity than that. Indeed, it should spring from a mindset that is fundamentally at odds with the industry’s agreed wisdom. And it should do it, not just to be different for difference’s sake, but to hook into a compelling want or need of the consumer that remains unrecognised, untapped or unfulfilled.
Progress to where?
One of the great mind-set shifts in the digital age has been the belief that brands should fund their way into viability. There’s been a strong tendency to ship first and ask the difficult questions later – and what that’s meant of course is the proliferation of brands that never realistically plotted how they would get to break-even and beyond, but instead depended on a public offering or buy-out to make them work. To do that, they’ve done what I alluded to earlier – put up numbers to make their case that don’t actually reflect whether the brand is truly valued by buyers or not in terms of inclination to part with cash. The fact that so many of the digital music services cannot survive on their own, or are struggling to do so, suggests that they had the wrong lie of the wrong land. This, from Mathew Ingram’s article on the disintegrating profits in the digital music sector – “The only way for anyone to even come close to making it work is to make it part of a much larger company, like Apple or Amazon or Google. That way they can absorb the losses, they have the heft to negotiate with the record industry, and they can find synergies with their other businesses.”
Often brands explain away their inability to turn a profit as a work in progress.
They are becoming more valuable they point out, and therefore the economics of trading profitability are less important. True – to a point. But I think we need to distinguish here between real value – the value that a brand has based on the cash it actually generates – and empty value – the value that a company assigns its own asset based on what ‘feels’ right. In the case of tech brands in particular, those two perceptions can be entirely out of sync. In a recent article, Peter Atwater queries whether Microsoft’s purchase of LinkedIn is an example of goodwill gone crazy. Intangible assets, he suggests, have ballooned out of control, adding trillions of dollars in nominal goodwill value to corporate balance sheets as the Goodwill Boom has taken hold. But there’s a very real risk, he suggests, that, as we have seen in previous financial cycles, what goes up can also crash. “In 2009, we learned the hard way in housing what happens when soaring asset values and soaring debt return to earth.”
At one level, Ingram’s point makes sense as more and more brands become part of large ecosystems. At another, Atwater’s arguments suggest that those driving these brands have confused the visible equation and the value equation and that the valuations that have been assigned to some brands lack tangible substance and will collapse in a heap when the hot air cools.
Success is deceptive
Certainly, there’s a lesson in there for all of us, no matter what the scale of the brands we work with. Don’t necessarily believe what you see. As brands expand and appear more successful there’s an increasing inclination for management teams to focus on the metrics that reinforce their feelings of success rather than those that remind them of the bottom-line realities. Back in the real world, the collapse of Keystone Group in Sydney (with its portfolio of popular eatery brands and its franchise rights to Jamie Oliver’s Italian) is a reminder of what happens when you over-reach without an underpinning, profit-focused strategy. The lesson – popularity hunting generates car crashes at speed. Scale may make some businesses viable, but scaling in sectors with notoriously low real returns (like hospitality) can quickly accelerate failure.
Every brand wants to be a success, to be loved and talked about. The question for owners and managers is – yes, but what’s that actually worth to consumers?
Note: A version of this post has been published elsewhere under the same title.