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Interbrand's Rankings Are Nonsense
By Jonathan Salem Baskin

The List Of Top Company Names Tells Us Nothing That Matters

Interbrand, perhaps the world's leading branding consultancy, has published its annual ranking of brands. Mainstream newspapers like the Wall Street Journal have already reported on it with dutiful seriousness, and I expect there'll be a special section on the ups and downs of big brand names in a forthcoming issue of BusinessWeek, if past experience holds true.

Too bad the ranking is nonsense.

Brands don't exist. People have recollections and opinions about the names and actions of companies, but brands aren't "things" with an existence independent of what, how, where and when people gain that awareness and, more importantly, what they do with it. The prompts of their behaviors -- most notably trial, purchase, or repurchase -- are what constitute brands, and the efficacy and reliability (and sheer size) of them are what constitute brand value.

It's pretty simple, actually. Businesses that do a better job of doing their business are usually stronger brands, while companies that screw up are weaker ones. In our era of social media engagement it should be possible to see these values in real-time. Brands aren't only not "things" but they change moment to moment, depending on what companies, customers, and critics are doing with (or because of) one another.

There are no brands, but rather the constant acts of branding.

Interbrand sees things very differently. Brands are static constructs, represented in dollars and arrived at through a complex and secretive equation involving analyses of financial performance, the role of brand perceptions in purchase decisions (whatever that means), and some arcane math about reliability of future performance. They're what people think and how they feel about logos and other artificial constructs. Actually, it's all pretty arcane, and it poses as quantitative research when it's really secondary analysis (at best) replete with squishy, sometimes hilarious, and often incomprehensible steps. I deconstructed its process in my first book, Branding Only Works On Cattle, and I've included it as an addendum to this essay for your entertainment.

The punchline is simply that Interbrand's brand value assessments have no value. They don't correlate with a reasonable prediction of future stock price performance, nor so they suggest a higher likelihood of withstanding business challenges. They're fun, throwaway numbers that usually correlate with the amount of money the companies on the list spent on marketing.

I have long argued for a more operationally-focused definition of branding that would arise from business processes, not the imagination of marketers or branding gurus. Instead of trying to find indications and hints of some ethereal definition of brands, why not look at how businesses perform? Why couldn't we define the qualities of brands through measuring outcomes, like:

  • Development: Stronger brands should have an easier time identifying the products its customers want, so they should do it faster and more often.
     
  • Efficiency: Better brands should be able to create things not just faster, but more economically than lesser-known names.
     
  • Marketing: Awareness of a brand should make it cheaper to tell people things, so marketing expenditure should be less over time than brands that aren't as strong.
     
  • Efficacy: Branding should provide an umbrella that makes tactical marketing work better. The viral or direct marketing programs of strong brands should work better than others.
     
  •  Premium: Customers should be willing to pay more for brand benefits beyond functional attributes if the brand is strong, and less if it isn't.
     
  • Sustainability: The average percentage of customers who've endured a product failure, corporate crime, or other negative impact to your brand should be better than those of one lesser-known brand name in the same business category.
     
  • Repeatability: Return business should be larger, more frequent, and more profitable for stronger brands that it is for weaker ones.

  • Employees: The cost of acquiring and keeping employee talent should be less for great brands.
     
  • Risk: Supply chains should be more secure for great brands, which means insurance exposure should be lower and expectations for reliable business performance higher.

Interbrand’s ranking has nothing to say about these indicators of brand value. In fact, it's a joke by comparison. Yet numerous companies shell out millions of dollars each year in search of better brands. This year's ranking is no surprise and represents no change in this idiotic behavior. It measures nothing, but does so gloriously and, for Interbrand, quite profitably.

So much for innovation.

Addendum: Interbrand's Methodology Deconstructed

(The company's description of its methodology appeared in an issue of BusinessWeek I found online when I was writing Branding Only Works On Cattle. Its steps appear in bold italics and then my analysis follows)

The projected profits are discounted to a present value, taking into account the likelihood that those earnings will actually materialize.

This starting point for the analysis is squishy, as the ability to assess the likelihood of any future event is inherently subjective. So the methodology will yield a prediction for the brand's likelihood of contributing to future earnings potential. The ranking is an estimate based on an estimate, two steps re-moved from objective measurement. We've already assigned a qualitative starting value estimate for what will include brand. And the calculating hasn't even started.

The first step is figuring out what percentage of a company’s revenues can be credited to a brand (the brand may be almost the entire company, as with McDonald’s Corp., or just a portion, as it is for Marlboro).

Wait a minute. Isn't this the entire purpose of the assessment? And consider the examples: Wouldn't you have guessed that McDonald's makes money from selling Happy Meals and that, if you could ignore nicotine's influence as a driver of consumption, Marlboro's revenues might conceivably come more from brand than the company? What's the difference between brand and company, anyway? Maybe the details of the methodology will clarify things.

Okay, more confusion. First off, financial houses have no standard analysis tool for assessing the value of brands. Most of them categorize brand as an intangible, and often don't dissect corporate marketing budgets with any distinction between brand versus marketing expense (machinations of above and below the line notwithstanding). When financial people use the word "intangible," it's code for "may or may not have any value." Everything they care about is tangible, and it all gets revealed on a spreadsheet. So Interbrand is taking financial firms' qualitative estimate of future performance, and building on top of it some guesstimate of branding's role? There's no real math here whatsoever.

It then deducts operating costs, taxes, and a charge for the capital employed to arrive at the intangible earnings.

Oops, maybe there is math after all. But what does it mean? The last step yielded earnings, which you get to only after deducting operating expenses and so on, but maybe they were talking about the business instead of the brand in the last step? And what is the expense for intangibles? Are expenditures for brand (exclusively) a cost item, or perhaps somehow considered an investment (brand equity) that's depreciated over time? The usage of capital is a fuzzy thing to estimate, at best.

The company strips out intangibles such as patents and management strength to assess what portion of those earnings can be attributed to the brand.

Stripping out lesser intangibles from the über-intangible of brand is a good thing, I guess, but it seems sort of random. How does Interbrand assign a number to management strength so then it can deduct it? Patents can actually be estimated, if only on the basis of the value of the legal rights themselves (let alone any market development), but how is it done here? Lots of qualitative opinion is getting passed off as quantitative measurement.

Finally, the brand’s strength is assessed to determine the risk profile of those earnings forecasts.

Considerations include market leadership, stability, and global reach (or the ability to cross both geographic and cultural borders). That generates a discount rate, which is applied to brand earnings to get a net present value. BusinessWeek and Interbrand believe this figure comes closest to representing a brand's true economic worth.

Gesundheit! Just revel in all that broad, ill-defined doublespeak: risk profile, considerations, market leadership, stability, global reach, ability to cross cultural borders. All these assessments and rates are qualitative estimates. This isn't math, it is religious scripture, created to reaffirm belief to the flock while ginning up enough obfuscation to dissuade nonbelievers.

Added: 20th September 2010

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