Several years ago, Yahoo! contributor and venture finance educator Susan Schreter set out to uncover the pivotal mistakes and biggest regrets of struggling entrepreneurs and bankrupt business owners across the country- from Silicon Valley to rural America.
Schreter says, “In my research, first-time entrepreneurs don’t have an accurate understanding of what’s “worth” their time and cash. As a result they over-invest in the wrong things that don’t really enhance the value of the business in a way that is appreciated by investors, lenders and business buyers. Just because they may invest $25,000 or $100,000 of their savings in a business, doesn’t mean it is worth that much to anyone else. By the time they learn the fine points of business valuations they are usually out of cash, credit cards or support from family members. It doesn’t have to be.”
The following is an excerpt from Schreter’s comprehensive new book “Start On Purpose” about what makes a brand a valuable asset for any size business:
Why is it that some startup ideas are worth more than other startup ideas? Why is it rational for investors to pay millions to own a piece of a business with no revenues, but pass over a profitable company that has been in business for several generations?
Unfortunately not all revenue-generating businesses have much equity value. It’s the seemingly unfair gotcha that catches too many business owners by surprise just at the time they want to sell their company to retire or pursue another career path. They assumed their companies were valuable because their companies were valuable to them. But that’s not how business buyers, venture capitalists and angel investors size up business value.
“Investment fundamentals” is a common term in the financial community to describe various factors that can increase or decrease the value of a business. The term is used to evaluate publicly-traded stocks as well as privately-held businesses. Fortunately, you don’t need to know all of these fundamentals today.
There are, however, three fundamentals of positive business value that I believe every startup entrepreneur should know before investing a penny in a new business. The first wealth-building fundamental is brand reputation. Here’s what you need to know.
Fundamental #1: A Brand That Stands For Something
From a traditional marketing standpoint, a brand is the backbone of a company’s public reputation. It is not a tag line or a marketing gimmick, but a highly effective tool to help companies differentiate their products or services from competitors.
Marketing professionals often complain to me that their “brand management” work doesn’t get much respect from first-time entrepreneurs because entrepreneurs tend to believe that their company’s value comes from innovative products, not the brand. I agree with this frustration. Entrepreneurs don’t give their brands enough thoughtful attention during the first years in business and they pay dearly for this oversight.
Effective brand management is crucial for young companies because customers who are emotionally engaged with a brand are more likely to forgive mistakes in customer service and product performance. Marketers refer to this forgiveness phenomenon as a brand’s “halo effect.” I call it Teflon. Think about Johnson & Johnson. Despite life-threatening medical product recalls, the public’s emotional affinity for J&J remains mostly unscathed. When consumers “trust” a brand, they continue to buy the brand even when mistakes are made.
Who makes mistakes? Startups! It’s understandable too because they haven’t yet had the time or resources to fully “bake” their products, services and operating systems. Early brand loyalty from customers may help startups hang on to their first customers rather than alienate them when goof-ups are made.
The Value of Brand Management
As a finance person, I like to translate business principals into dollars and cents. A brand can become a startup company’s most valuable financial asset. Yes, brands are financial assets when they deliver tangible cash value to growing companies. Here’s how.
1. Valuable brands sell themselves.
My family is always in the mountains. Like so many other outdoorsy families we’ve had our share of Subaru Outbacks that seem to go the distance in the worst weather. It’s not the most expensive car in our household, but it is the car that delights us most. We are Outback super fans because the brand reflects our let’s go spirit. The little car seems to withstand anything–even the large, old growth spruce tree that fell right across the top of one of our Outbacks. Sure we could have replaced the badly tree-dented car but it was more amusing to keep driving it and retell the story to inquisitive skiers, hikers and campers. When we finally “put down” the beloved car at a little over 225,000 miles, we didn’t research other sport utility cars or wait for special dealer incentives. Our next step was automatic--we just bought another Outback. The same color too.
Companies that can book new business without discounts, coupons or other promotional incentives are valuable companies to own. These companies maximize profits by selling to customers who are already “sold” on the brand. Plus, these companies derive added marketing benefits as satisfied customers evangelize their brand preferences to friends and family members who may in turn buy into the brand.
2. Valuable brands can charge higher prices.
Companies that motivate their customers to pay a premium price for a product or service get extra business valuation bonus points at the time of business sale. The women’s makeup industry illustrates how a brand reputation can influence customer attitudes about product quality and social desirability. Think for a moment about mascara. Women can buy two ounces of Revlon brand mascara for about eight dollars in a drug store or the same amount of Chanel brand mascara in a department store for $30 to $40. The function of both products is essentially the same, yet the overall experience of heightened social status is different for an elite brand like Chanel. Women feel more glamorous, sophisticated and privileged when they use Chanel mascara and are willing to pay more for the extra satisfaction. So it’s not the product but the brand that drives the premium price.
The beverage industry is another product category in which a brand reputation can motivate consumers to pay a premium price. I love Jones Soda’s Zilch brand soda–black cherry and vanilla bean are my favorites. I can think of several reasons not to be loyal to Jones Soda. It costs more than other low calorie sodas and I often have to drive out of my way to buy it. Still, Jones Soda is worth it to me because it’s got a unique, refreshing kick that is different from other brands. Plus, I like the playful way the manufacturer features photos of its customers on its product labels. Jones Soda’s fans embrace the brand’s cool non-conformist, colorful attitude and are happy to pay more for it.
As you develop your company’s brand, remember that customers shop for what they want and love first, and then look at price second. Brands gain financial value when their customers buy into a brand that suits their emotional purpose -- be it status, cause alignment, comfort, reliability, nostalgia, exclusivity or whatever else you dream up to motivate your customers to buy over and over again with pride.
3. Valuable brands can be applied to other product or service categories.
When customers enjoy a compelling, emotionally-satisfying allegiance to a brand, it’s likely that they would favor the same brand in other product or service categories. This aspect of potential future revenue generation is of interest to valuation experts and investors.
Are you a fan of Starbucks Coffee? Even if you are not a caffeine junky, it’s easy to admire Starbucks’ skillful brand management. Today, you can find the Starbucks logo on ice cream, cold drinks, and candy. Recently the company dropped the word “coffee” from its corporate logo to help Starbucks enter into many more food and consumer product categories, which is good news for Starbucks’ shareholders.
Another company that has used brand recognition and loyalty to penetrate multiple highly competitive markets such as mobile phone services, music, airline transportation, vacation travel, consumer money lending, and gaming is British-based Virgin. Virgin’s company literature says, “Once a Virgin company is up and running, several factors help to ensure its on-going success.” The first item on this list is “The global power of the Virgin brand.”
Brands don’t have to have a global following in order to drive revenue growth through product line diversification. A small local house cleaning company with a reputation for service excellence, employee honesty and reliability can enter into other in-home-related services with greater ease than a startup competitor whose brand reputation has not yet been established in the local marketplace.
Thinking about brand management in financial terms such as added revenue generation is nothing new. Steve Jobs said that every aspect of what Apple did in terms of product design, retail delivery, product line choices, and marketing influenced customer perceptions of the Apple brand. He characterized these actions as either “brand deposits” that boost a brand’s power in the marketplace or “brand withdrawals” that diminish a brand’s image and pricing power with customers.
So how can you create a brand with enduring value? Fortunately, you don’t have to be an expert in brand management to create your company’s brand identity. And you don’t have to hire marketing gurus to help you make your first decisions about your brand. What’s important as a startup business owner is to take a few purposeful steps in the right direction, rather than in no direction or every direction.
To learn more about Schreter’s specific action steps to create a brand with lasting financial value check out “Start On Purpose: Everything You Need to Know and Do to Startup With Strength.”