Building Your Market Cap through brand as a business decision
By Tom Dougherty
Most businesses have little idea of brand as a powerful business function. There is a direct relationship between brand and market capital. The people who run these companies believe they are in the business of making products and then selling them. Professionally run businesses, on the other hand, are aware of the criticality of the brand function toward increasing competitive preference for their products, and thus increasing market share.
However, very few businesses are aware of the other important function of brand, i.e., the extent to which it contributes to the market capitalization of their business, their Mar Cap. Perhaps they are just so focused on the day-to-day tactical imperatives that they cannot make the effort to break away from habitual activity and develop a strategic perspective of their products in the market. Let us today focus just on businesses that already are aware of the importance of the brand function.
Brand’s Primary Function
No one who really understands business challenges the primary role of the brand function – that of increasing the Top Line (gross revenues) of our business, preferably at the expense of gross revenues going to our competitors (increasing market share).
Some of us are business professionals who regard the brand function also from a Big Picture perspective, i.e., in the context of the ultimate purpose of business management, that of perpetually increasing the market value of our business, i.e., that of perpetually increasing our Mar Cap (market capitalization). This is not only important in and of itself, but because it also raises the question: Do we need to do anything over and above what we already do to enable our brand/s for Top Line growth, in order to maximize our Mar Cap as well?
Let us first look into what’s involved in maximizing a business’ Mar Cap, as this will help us identify what we need to do to ensure that the brand function works not only for our Top Line, but also for our Mar Cap. We have seen that all professionals who run businesses are familiar with the impact of the brand function on our Top Line. We know that brand is the perception in the minds of their prospects and customers that they associate with our products. We know that it is this perception that determines the extent of their competitive preference for our products over those of other products.
Therefore we know that it is precisely this competitive preference, assuming no obvious price disadvantages, that determines their purchase of our products, i.e., which in turn determines our revenues, i.e., the Top Line of our business. Why are our revenues, i.e., our Top Line, important? That’s easy. Our Top Line has a direct influence on our Bottom Line.
Our Bottom Line is the net income of our business —our profit. Our Bottom Line is the profit that is left over after deducting, from our Top Line, all the expenses involved in running the business. Therefore, even if we have a very good Top Line, we may not have a successful business if this Top Line is not significantly greater than our expenses. Indeed, if our Top Line were not great enough to cover our Expenses, we would incur a loss, or a negative Bottom Line.
Brand’s Role In Increasing Mar Cap
Although all professionals are familiar with the tremendous importance of the brand function toward our Top Line, and as such of its related involvement with our Bottom Line, some of us remain largely unaware of the impact of the brand function on our Mar Cap. As we have seen, our Mar Cap is the market value of our business. Therefore, we must not only understand the importance of our Mar Cap but also what this importance is based upon.
Just as the products of businesses compete in the market for purchase by prospects and customers, the stocks of most big businesses also compete in the market for purchase by prospective and existing shareholders. A good Mar Cap gives our stocks competitive preference over other stocks they can buy. However, what are these prospective and existing shareholders trading on? They are trading on the perceived value of our business vis a vis the perceived value of other businesses in the market. These perceptions are formed and held by researchers, and based on relative profit performance of a business over the foreseeable future, beyond the Bottom Line of the immediate reporting quarters.
The Life of a CEO
Just think of it. With what criteria are CEOs most judged? They are not judged primarily by their Top Line performance, i.e., their ability to increase gross revenues or market share. They are not even judged primarily by their Bottom Line performance, i.e., their ability to increase net income from their business.
No. They are judged primarily by their Mar Cap performance, i.e., their ability to increase the value of the stocks held by their shareholders. CEOs are typically hired by Boards of Directors of a business, and shareholders, who hold fiduciary responsibility to make decisions that will keep increasing the value of the stocks held by the shareholders, nominate these Boards of Directors.
So, while the Top Line (total revenues), and the Bottom Line (net income) are both important measures, the Mar Cap (market value) is ultimately much more important, because it is the number that most influences the wealth-generating performance of the CEO vis a vis the shareholders. (Read more about the C Suite and their role in rebranding)
The Brand Relationship and Brand as a business decision
So, what is the relationship between brand function and Mar Cap? Of course, as Top Line influences Mar Cap, albeit through the Bottom Line, the brand function already indirectly influences Mar Cap. However, there is also a separate direct relationship between the brand function and Mar Cap. Here is how it comes about. As we have seen, stock market analysts are the experts that evaluate the Mar Caps of businesses, and influence both institutional and individual stock purchasers’ stock purchasing behavior.
How do these stock analysts arrive at their stock price and Mar Cap projections? The most important single factor toward the assessment of the market value of a business is their perceived probability that the company will be able to sustain strong Bottom Line performance for several quarters and years to come.
The more powerful the analysts research a brand to be, the more sure they can be of its power to attract continuing competitive preference and purchases by prospects and customers well into the future. What all this means is that the robustness of our brand, i.e., the perception of our product in the minds of our prospects and customers, plays not only an important role in determining the next quarter’s Top Line, and consequently, also our Bottom Line, but also in determining our Mar Cap, which determines the performance of our CEO.
Where the Rubber Meets the Road
And here is the crux of the issue. As Mar Cap is based on the assumption of Top Line and Bottom Line growth beyond the immediate quarters, brand has a more lasting function vis a vis our Mar Cap than it has upon our Top Line and our Bottom Line.
If it was not already sound practice to build our brands to be able to get competitive preference for this quarter’s Top Line and this year’s Bottom Line, it is sounder practice in the context of determining our projected Mar Cap. It is precisely because of the important value of the brand function vis a vis building our Mar Cap projections, that we must ensure that our brand is built of lasting and critical motivations in the brand space of our prospects and customers.
This is because only brands that are based on critical and lasting motivations in the minds of our prospects and customers can be expected to last and keep consolidating in that brand space – in order to perform optimally toward our Mar Cap. To sum up… Mar Cap is the most important single measure of the power of a brand.
It is where the conceptual activities relating to brand exert influence upon the performance of the CEO of our business. And if only for this reason, our brand/s must be built to last and to consolidate. This can only be accomplished if we build our brands around the most critical and lasting motivations of our prospects and customers. In other words, if we design our brand to build our Mar Cap, we can be sure it will do a great job for our Top Lines and our Bottom Lines as well.