Dominique Hanssens


Investors reward brand equity, customer satisfaction and other intermediate metrics

Marketing activity represents at least ten percent of the U.S. economy according to Dominique Hanssens, Bud Knapp Professor of Marketing at UCLA Anderson. This is well over a trillion dollars a year. Hanssens believes there is evidence that this marketing activity can impact firm value -- and that this is not fully appreciated by the investment community. Hanssens and co-author Shuba Srinivasan survey recent research on this topic in a paper called, "Marketing and Firm Value," to be published in the June 2009 issue of the Journal of Marketing Research. The article will be accompanied by commentaries by leading faculty in accounting, finance and marketing, including UCLA Finance Professor Mark Garmaise.

The paper includes suggested methodologies. "If anybody is interested in doing research in this area, we want them to know how to do it," says Hanssens. "You have to be very familiar with financial models that our colleagues in finance and accounting have developed. Secondly, we wanted to summarize what has been found to date and where there are some major opportunities for future research."

"There is a lot of evidence linking marketing and product performance," he continues. "The question now is at a higher level in the financial hierarchy. What impact does marketing activity have on firm value?"

Hanssens raised this question while serving as Executive Director of the Marketing Science Institute (MSI) in Cambridge, Mass. from 2005 to 2007. During that time, MSI issued a call for papers on the topic and funded a number of studies, some of which were recently presented at a conference in Atlanta. Hanssens is also editing a special issue of the Journal of Marketing in which the best papers on this topic will appear.

Hanssens believes that the marketing profession is being challenged to communicate its financial and firm value effects to investors and analysts. "Investors allocate resources in firms that offer future cash flow potential," he says. "It is important that they recognize how marketing assets and marketing actions are related to these future cash flows."

One example he poses is when a firm launches a new product and its cash flow dips due to the substantial expenses associated with the launch. "Does the investor community punish that brand with a lower stock price?" he asks. "Or do they reward innovation with a higher stock price? There's a perception that short-term cash flow is all investors care about -- but this is not the case, as recent research indicates."

One challenge, notes Hanssens, is that many results of marketing activity are intangible. "For example, you try to create a strong brand," he says. "What does that mean? It might mean that you are perceived as a high-quality service provider, or perhaps as an innovator in the industy. Does that intangible perception, which we call the brand, contribute to the value of the firm?"

It turns out there is good evidence for this, according to Hanssens. "There are firms that track brand equity using survey research," he says. "They take large samples of customers and ask them whether they've heard of a certain company. If so, what do they think about it? How innovative is it? How prestigious is it? And so forth. These dimensions of brand equity have been related to stock performance."

Hanssens says studies have shown that brand equity can be positively impacted by well-placed advertising in which the message connects to the brand. "Nike, for example, does that very well," he says. "Consistently reminding customers what the company stands for."

Brand equity can also be damaged by marketing activity. Investors actually don't like it when a firm engages in aggressive sales promotion, he says. "If you are a named brand in any industry and you engage in frequent discounting, you water down the value of the brand. Short term sales revenue may be fine -- but future profitability can suffer if you become increasingly dependent on these sales promotions. Investors pick that up, as we were able to discover in the data."

Hanssens refers to brand equity, customer satisfaction, R&D, product quality and other intangibles as "intermediate metrics" that can be measured and shown to create shareholder value. Sales revenue and earnings, on the other hand, are direct and recognized metrics resulting from marketing activity.

"If two companies have the same revenues and cash flows," he says, "but one is a stronger brand than the other, then all else equal, the stronger brand should get a higher valuation. That's the theory and we're finding support for that in the data."

The same is true for customer satisfaction. "Customer satisfaction sounds intangible," he says, "but there are metrics for how satisfied customers are with their suppliers. The research shows that these measures can be leading indicators of future financial performance."

Customer satisfaction can be used as a variable in financial models to better understand what drives it and how it impacts a firm's performance and value. Hanssens addresses the use of such models at length in the paper. "The methodological part of this study is very important," he says. "There are many factors impacting firm value and stock prices that have little or nothing to do with marketing -- and you have to control for those."

Hanssens believes that better communication among marketers, CEOs, scholars, securities analysts and investors would lead to more realistic valuations and stock prices. One important aspect of this is the variety of messages that CEOs send to investors.

"CEOs do a number of things to promote their firms to investors," he says. "They advertise, issue statements and give interviews. This is not always objective information -- it's persuasive information. So when analysts publish a report on a firm, are they influenced by these actions, and how does that ultimately affect investors?"

Hanssens considers this an inviting area for future research. "It's looking at the whole marketing communications issue," he says. "For example, instead of advertising directed at consumers, it's advertising directed at investors. And we know relatively little about its impact."

He believes that improved CEO communication may bring Wall Street somewhat closer together with Main Street. "It's important for the investor community to be cognizant and intelligent about what is going on in the product market," he says. "Success in the product market will be reflected by success in the investment market.

"Let's say that a firm puts in place some policies that increase customer satisfaction," he says. "We would like the investor community to recognize the future financial potential of such actions, so there is a positive feedback loop to top management. This creates an economic system in which the interests of investors and consumers connect rather than compete with each other.

"Overall, investors do appreciate a firm's marketing activity and product performance to some extent -- but not fully," says Hanssens. "This is good for researchers and practitioners alike because it shows that there is room for improvement."