Startup general interest

Customer (product) value trumps brand value – M&A data

By April 15, 2015 No Comments


This chart (which I saw on Broadstuff and was originally published in the Harvard Business Review) is from audited company accounts following mergers and acquisitions:

…we looked at the value of brands and customer relationships as revealed by M&A data covering over 6,000 mergers and acquisitions worldwide between 2003 and 2013. The beauty of M&A for examining valuation trends is that M&As reveal the dollar valuations of all assets at the time of the acquisition. Upon acquiring a business, companies have to value the different assets they acquired for their accounts and balance sheet in accordance with accounting and reporting standards. These valuations include – among other assets – brands (trademarks) and customer relationships.

I read this as affirmation of a trend that we’ve talked about a lot here on The Equity Kicker – the rising importance of product quality (defined to include all customer touchpoints, including customer service) and the corresponding decline in the importance of brand. It’s pretty stark – brand value as a percentage of enterprise value fell by nearly half in the ten years from 2003 to 2013. This chart shows the beneficiary as customer value rather than product value, but product quality drives customer value in two ways:

  • lower customer acquisition costs – great product drives word of mouth marketing (which is why companies now obsess over NPS)
  • higher repeat purchase rates – customers remember great product experiences and want to repeat them

Social media has been the big driver of word of mouth marketing and it’s no coincidence that this chart starts around the time Facebook was founded in 2004.

Jeff Dachis made a similar point on Techcrunch today in a post about the problems with traditional marketing software when he says we are now:

in a world where pre-purchase consideration is no longer driven by reach and frequency, but by excellent consumer experiences, advocacy and amplification across every touchpoint seamlessly