The revenue / equity cycle
When we think about the role of brand relative to business, we should consider the relationship between revenue (making money from the brand) and equity (investing money in the brand). While traditionally we’ve tended to consider these activities as separate and discreet, we should instead consider that they are in fact an inter-related cycle. A cycle in which business performance is dependent on our ability to maintain an appropriate balance between the two.
In 1902, Schlitz brewing became the largest brewer in the US by market share. A crown that would pass back and forth between Schlitz and Anhauser Busch over the next 70 or so years. By 1976, they were in the number 2 position with a soaring stock price and were lauded by Wall Street as the future of the beer industry for the efficiency and profitability of their operation. However, by 1977, they began a precipitous freefall and by 1982 they were sold to Stroh Brewing for a fraction of their previous value. What had gone wrong?
Put simply, they cut costs by messing with the beer. They used cheap artificial ingredients, including high fructose corn syrup and silica gel, and articificially accelerated the brewing process. In 1976 they added an ingredient called ‘Chill-garde’ in an attempt to avoid threatened FDA ingredient labelling legislation. Unfortunately for them this new ingredient reacted with a foam stabilizer they also used, which caused the beer to separate in the bottle or can and give it the disgusting appearance of snot.
After first refusing to accept there was an issue, Schlitz eventually had to secretly recall 10 million bottles and cans of beer. In an attempt to recover lost ground, they invested hugely in the advertising and promotion of the Schlitz brand. It didn’t work. Consumers were turned off by their ‘fake’ beer and with plenty of other choices available chose to vote with their feet.
While this happened many years ago, it reflects the interdependence between revenue and equity. One way of looking at this example is that Schlitz drew down on their brand equity in order to drive revenue from a cheaper to produce product. And once the balance tipped had too far toward value extraction they could no longr refill equity in the brand fast enough, and the business ceased to exist.
Emirates, one of the largest airlines in the world is today's opposite of Schlitz. Globally it's number 4 by passenger miles carried, has been profitable each year for the last 25 years, and has created a brand that consistently ranks as one of the best in the business, being voted “airline of the year” on multiple occasions.
Emirates operates a very young fleet, which it renews frequently. Currently, their average fleet age stands at just 6.3 years (compared to American Airlines at 14.7 years). This is a deliberate approach.
They understand the connection between revenue and equity. By continually operating a young and renewing fleet, Emirates creates a superior experience for passengers. An experience they can charge more for because they are providing the newest planes with the most up to date entertainment systems, the most room, the most comfortable seats etc. And because they can charge more, they make more. And because they make more, they can afford to keep investing in their fleet, their service and their experience, and thus maintain their brand and their price advantage.
They understand that continuing competitive advantage is possible if you can create a virtuous circle whereby equity drives revenue, which in turn creates more equity, and so on.
While these examples represent extremes, most businesses are challenged by this concept. While every business has strong metrics in place to measure revenue performance, few tend to have good metrics in place to measure the value of their re-investment in brand equity. Making it impossible for them to understand the inter-relationship between the two, and removing the possibility of an Emirates style virtuous circle.
As a result, businesses tend to focus too much attention on short-term approaches to opportunistic revenue gain and profitability, without considering the larger equity opportunity. At its worst, creating a precipitous Schlitz-like dive to destruction, but more often creating a slow and painful descent into a commoditizing, price-driven spiral of decline.
And this is huge challenge, because once you are in a downward commoditizing spiral you create the opposite conditions to that experienced by Emirates. By being forced to compete on price, you earn less, so can afford to invest less in your experience, which means you compete even harder on price, which means you earn less, which means…
As an alternative, better not to find yourself in this spiral at all. Insted considering the levers of value that you have to play with, seeking to understand the linkage between equity and revenue within your business, and then invest in smart ways via innovation and customer-focused improvement so that you can generate increased revenue, which can then invested back into the equity, and so on.
And if you don't do this, just know that you can't draw down on equity forever. Eventully you'll face a customer reckoning. And that won't be pretty.