Brand = Accumulated Customer Happiness

How brand actually works for startups and why all marketing is performance marketing

The value of a brand mostly comes down to how old things are. Two things in particular:

The first is how old an industry is.

Every industry starts out as tech. A new technology comes along, and companies compete to use that technology to make something better or cheaper or more convenient. And you can’t use marketing to prove it, you have to just actually be better. Steve Jobs made this point in an old interview:

“Customers don’t form their opinions on quality from marketing. They form their opinions from their own experiences with the products or services.”

However over time, tech gets optimized into its winning permutations and is commoditized. At one point, there was actually a more durable handbag or a more pure beer. But today they’re all the same underneath the logo, and people buy Louis Vuitton and Bud Light not because they work better, but because of what those particular brands say about them when they use it. As functional differentiators fall away, brand is the only thing left.

The second is how old the company itself is.

Or, more precisely, the number of opportunities that a company has had to score points with customers.

Companies in old commoditized industries are trying to score signaling points: land the right messaging, choose the right sponsor, tap into the right zeitgeist. If they do this skillfully and for long enough, they build a brand that reliably puts an image in a customer’s mind, making them feel cooler or smarter or more virtuous than people who buy something else. And they literally become willing to pay extra for that feeling.

Companies in new industries are trying to score happiness points. Each time they deliver on customer expectations of quality or price or convenience, they increase the happiness balance. As they start to build a positive balance, customers become more likely to retain and tell their friends, which are wonderful things for a business.

But this doesn’t create a capital B “Brand” for a very long time. Only after a company reliably delivers on expectations for 10, 20 or 50 years will customers pay extra for the confidence that they will deliver again this time. Before that, customers will choose whichever product delivers the most happiness per dollar.

The further up and to the right a company is on the grid created by these dimensions, the greater share brand is of the total value of the company.

It takes decades for companies to move up, and centuries for industries to move right. So you have to just play the game on the field. Let’s look at four clusters of companies:

Old industries, old companies. These are the most valuable brands in the world: Coke, Nike, Gucci. They can be exceptionally profitable (LVMH gross margins are 68%), but they are also exceptionally rare. They are playing a totally different game. The kind of game where Nike almost never talks about their actual products, and where it makes sense for Louis Vuitton to literally light handbags on fire instead of discounting them.

Old industries, young companies. These are new companies trying to compete in old signaling-driven industries like alcohol or apparel or beauty. It’s very hard to compete with the old brands from scratch, because it takes a lot of time and money to score enough signaling points. One reason many D2C brands fail is that they don’t have product differentiation OR brand differentiation, and as a result they have to fight a zero sum customer acquisition battle that eats all of their margin. This is why the most successful D2C brands are often led by celebrities with built-in brands.

New industries, old companies. These are companies like Lego and Disney and BMW which aren’t in commoditized industries, but which have accumulated so much customer happiness over so many years that they have a real brand which allows them to sell at a premium to otherwise similar products. It’s a great gig if you can get it, but it’s hard to think of any company that belongs here that isn’t at least 40-50 years old.

New industries, new companies. This leaves almost all of tech and probably the company you are building.

Your entire focus should be on accumulating customer happiness as fast as you can. Of course that means building an incredible product. But marketing also plays a critical role, and is particularly effective when you consider two implications of the kind of game you are playing.

First, brand identity is the vessel for reinforcing accumulated customer happiness. The core message you communicate about your brand is the promise that you must deliver on again and again as you accumulate happiness. The design of the brand itself - the name, the logo, the colors - is the mechanism for helping your customers remember their happiness and talk about it with their friends. At this stage it is mostly about not messing it up. Don’t make your name hard to spell or pronounce. Don’t deliver a message that is out of tune with the kinds of lives your customers live. And most of all, try not to change any of this much, so it has time to really gel in your customers minds.

Second, all of your marketing is effectively performance marketing. Companies in commoditized industries are actually creating value with marketing by scoring signaling points that impart a halo on their customers. But the primary way marketing helps your company is by getting more people into the product so you have more opportunities to score happiness points.

This doesn’t mean you can’t use brand channels. TV commercials and billboards and influencer campaigns are great, as long as you’re able to demonstrate that they are paying back your investment, even if the math is rough and the payback period is long. However, many tech companies run flashy brand campaigns without considering payback at all, because it’s fun and ego-boosting and because people who sell ads are incentivized to tell you it’s a good idea. But unless you are a very specific kind of company, it’s not.

Why can Disney and Lego run “brand” campaigns, even though they are in non-commoditized industries? For one, their value prop is relevant to such a high percentage of the population that many things that look like brand campaigns are actually functioning as performance campaigns.

But importantly they are still not creating value with their marketing. They are actually defending the value they’ve already created by accumulating happiness. They are building back up a core message which has eroded, or recovering from a bad PR incident, or making sure that their brand value transmits to a new generation. This becomes a good guide for when brand campaigns start to make sense: when do you have something valuable enough that it needs defending? It usually takes quite a while to get to that stage.

Consider where your company is on the grid above, and how brand really works for you. I think you will find that while many treat brand as an “input” - something you can focus on intentionally building - it’s not. Brand is the output of making your customers happy.

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Thank you to Mike Duboe for his thoughtful feedback on this essay.