Why Brand Investments Are Different

David StewartSeptember 28, 20234 min

In an effort to bring more of the rigor and discipline of financial analysis to marketing decisions, a number of scholars and consulting organizations have attempted to apply financial investment models to the management of multiple products within the firm. After all, firms manage portfolios of products.

At first blush, this seems like a reasonable idea because the concept of a product portfolio seems analogous to a portfolio of financial investments consisting of stocks, bonds, and other financial instruments. The basic idea underlying many financial investment models is simultaneously simple and elegant: investors want to be compensated for the use of their money over time and for the risk they assume when making an investment. Such compensation is easily operationalized through a risk-adjusted rate of return. By analogy, investments in products or marketing activities should provide a rate of return that includes a premium related to the riskiness of the marketing actions. While this makes a great deal of sense conceptually and is consistent with good financial management regardless of the investment vehicle, there are important differences between investing in financial instruments and investing in products and marketing actions. These differences have important implications for thinking about and managing products.

The market for investments may correctly value a bundle of products known as the firm, but this valuation of the whole firm indicates little about the value of individual products. A firm’s market at any point in time is restricted to the customers it can serve with its existing products, and decisions about investments in products and marketing activities are made internally. Markets for products and services are also different from financial markets in terms of the determinants of profits and returns. There are at least five differences, and marketing managers should recognize these differences and their implications when making decisions about the use of marketing resources.

1. Managerial Control. In contrast to an investor in financial instruments, firms exercise considerable control over the risks and returns of their products and services. Many marketing decisions are specifically intended to influence the risk and return of individual products and the portfolio as a whole. Investments can be shifted to more or less risky products or to products with a greater expected return. For any individual product, more or less risky strategies may be adopted, and the firm can even eliminate products or choose to invest in new product offerings. Managers of products can influence risk and return in ways that are not available to investors in financial markets.

2. The Relationship of Risk and Return. Managerial control creates another difference between product investment and financial investment. While there tends to be a general association between risk and return across products, similar to that found in financial markets, it is not hard to find examples where risk and return are independent for a single product, at least over some range of circumstances and time period. For example, investing a fixed percentage of revenue in the marketing of a mature, high market share, and very profitable brand is unlikely to carry large risks, at least over the short term. Investments in marketing can also be increased, decreased, started, or stopped based on market feedback, which provides a means for managing risk.

3. Specific Knowledge. Knowledge about technology, markets, customers, and processes are among the most important intangible assets of a firm. Such knowledge can make product and marketing investments less risky and more profitable than investments that do not have the benefit of such specialized knowledge. Such knowledge may enable managers to judge opportunities for return and the associated risk more quickly and take actions more expeditiously.

4. Economies of Scale and Scope. Unlike investments in financial instruments, there are often economies of scale and scope associated with product portfolios. Economies of scale are reductions in cost associated with increased levels of production or operations. Economies of scope are cost reductions that result from the cost of simultaneously producing multiple products. For example, it is typically less costly for a fast-food chain to produce both hamburgers and French fries than to produce these two products independently. This is because the same space and equipment can be used for both hamburgers and French fries. These economies of scale and scope create interdependencies and change the risk and return of both the individual products and the portfolio as a whole.

5. Temporal Characteristics of Investments and Return. Finally, unlike many capital investments, where there is a one-time upfront investment and an assumed cash flow over time, marketing investments usually take the form of multiple investments over time. There is usually a need for ongoing investment in marketing communications, distribution, service, and other support. These ongoing investments are designed to influence demand, revenue, and cash flow and may also be necessary to respond to competitors’ actions, changes in consumers’ behavior, the dynamics of the market environment, and other factors that may influence demand. These latter types of investment may not result in an increase in revenue but may avoid a loss of revenue that would otherwise occur. Thus, it is important to ask both what might happen in response to a marketing investment and what might happen in the absence of a marketing investment.

Marketing managers would be well-served if they incorporated the unique characteristics of product and marketing investments into their budget planning and requests for resources. It will make their plans and requests more credible and compelling, especially when the audience has a financial orientation.

Contributed to Branding Strategy Insider by Dr. David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.

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