Friday, September 7, 2012

Brand Is the Key to Scaling

The startup world loves to talk about the ability of a company to "scale." "Scale" doesn't have a precise definition, but it roughly means growing the business really big, with increasing, non-linear returns on headcount and equity capital. There are many levers for scaling - product, marketing, customer service, partnerships, etc - but they all boil down to one thing, regardless of product or industry: brand.

Your brand is not your logo; it's the share of mind of whomever your customers happen to be. It's the unfair advantage you have going into the purchasing decision, or the usage/consumption decision in the case of an ad-supported or freemium product. It doesn't matter whether your customers are the general public (Nike), Hispanics (Univision), PR professionals (PR Newswire), or hot entrepreneurs (Andreesen Horowitz); rational, educated, feature- and ROI-based decisions are a fantasy of theoretical economists. Brands are the cognitive load reducers we use to cut through an otherwise unbearable number of options.

Without a brand you are starting from scratch on every sale and every interaction. You may win some deals and make some sales, but your customer acquisition costs will be prohibitive.  Alternatively, the stronger your brand, the easier your sales efforts will go, whether you are selling to prospective customers, partners, investors, or employees [1]. Your conversion rates will be higher. Your word of mouth and virality will be higher. You go into your meetings with people already positively disposed to working with you.

This explains why companies are willing to spend so much on branding per dollar of sales at the beginning of their life than after they are operating at scale; that early spend is literally an investment whose return comes from the lower costs required to generate future sales [2]. Companies that fail to establish their brand never manage to lower those costs, and typically go out of business. Even if they are the first in their category, they are quickly surpassed by competitors who do establish a brand.

There are many ways to build a brand. Traditional marketing is one, but it's hardly the only. Brands are built on product (the preferred means of digital media entrepreneurs), thought leadership (more common in B2B), and customer service (often used in traditional, higher touch industries). Brand can be built on the brand of your partners or clients - this is common for investor and client services brands, including venture capital and investment banking [3]. Most brands are initially built on one of these areas, and eventually come to rely on more as the company evolves and outgrows their early markets [4].

There are alternatives to branding, but they are the exceptions that prove the rule. In the brick-and-mortar world, prime locations can substitute for brand, at least partially.  For certain other businesses, aggressive - some might say shady - lead gen and direct response campaigns might work. The first strategy requires excellent execution to manage real estate and financing costs against sales, and by definition the number of companies who can take advantage of it is limited by the finite number of such locations. The latter tends to run into problems in the ratio of customer acquisition costs and value as the market gets saturated. Zynga and Groupon are prime examples.


[1] The assumption in this post is that you have a positive brand. If you've managed to establish a strongly negative brand you probably have something bigger going on.

[2] Unfortunately for both AOL and Groupon, this investment is considered too ephemeral to rely on for official financials.

[4]  Allen & Company comes to mind; they don't even have a website or a logo, yet everyone who matters in the media and entertainment financing world knows them.

[4] E.g. Google, a company who famously shunned advertising for years, running its first television ad during the 2010 Super Bowl

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