Branding is the future of a business, and branding dilutes the importance of product pricing. So branding is significantly vital like this and that. Personally it’s a kind of common sense, and most people realize that even though they are not professional marketers and business holders. So this article might give you some hints on how to quantify the outcome of branding from a finance and marketing perspective. Next time, it can be a great discussion to reply to your line managers or clients when they question why there was no outcome from the branding investment.
The article would share my thoughts and experiences on the different purposes and relations between branding and performance marketing. Of course, the content would elaborate on some fundamental concepts of financials, such as CAPEX, and why performance marketing should sit in OPEX.
What is branding and performance marketing respectively?
Branding is the process of injecting a DNA, meaning and identity to a specific organization, company, products or services by creating and shaping a brand in consumers’ minds. Organizations design the branding strategy to help people to quickly identify and experience their brand. The strategy gives them a reason to choose their products over the competition’s, by clarifying what this particular brand is and is not. The clarification is from diverse detail combots, such as logo, channels, pricing, packaging, communication tone, celebrity selection etc.
In marketing and finance, the objective is to acquire new customers, and retain loyal customers by delivering a product that is always aligned with what the brand promises. These promises can fit the customers’ expectations and expected usage experiences.
As shared in the previous regarding pricing, customer purchase decision is not only controlled by the product functional value, but also is affected by the trading value. Branding is an intangible weapon to increase trading value. This impact can reflect on optimizing conversion rate and retention rate.
Performance marketing is a digital marketing strategy that the key objective is the result. It’s the best way for companies that are looking to reach their audience at scale, convert their audience into sales, and measure the ROI.
Sometimes it’s very easy to misunderstand that performance marketing is more focused on low funnels like SEO, SEM, email, social, etc. The truth is performance marketing sits in the income statement from a finance perspective. Financial analyst doesn’t care what the performance strategy is, as long as the ROI between expenses and sales can be met as we planned.
Thus, performance marketing works on any type of elements and any combinations, such as products, search engine, social media, content, website, mobile. And one of the most typical features is optimizable and testable, for the purpose to run the best optimal solution and drive the best result.
Challenges from branding performance measurement
From a gross profit perspective, sponsoring an event, investing in Martech software, or partnering with a celebrity, none of them is easy to measure the ROI compared to the performance marketing result. There are three main challenges to measure your branding investment RO in a fiscal year if you are referring to the performance marketing evaluation module.
Investment number is not small
Generally the branding investment to enter a new market, make noise, build awareness to penetrate, is not a small project. In a way, it requires brands to systemically budget and burn the money. If you try to plug this budget into the income statement in the expenses column. It can very easily distort the picture of a company’s profitability.
It’s neither wrong nor correct. So the measurement approach would not be the same as performance marketing. Senior management, finance and marketing gatekeepers need to sit down and align how to strategize the branding investment, no matter if your business is a startup or a listed company.
One of the most typical visibility points of measuring branding performance is the conversion rate, active rate or retention rate. It’s because the product pricing is the same or higher than competitors, branding effect increases the trading value, dilute the sensitivity of product pricing. Target audience is still willing to buy thanks to that, beyond the functional value.
However, branding investment often has latency symbols instead of instant results like performance-driven advertising. It’s not realistic to measure immediately after having launched the branding campaign. So basically one investment in branding might reflect the effect next quality or even next year. So the evaluation needs considering more than one fiscal year.
Branding investment is not an one-off campaign, as the branding message can be forgotten and new branding messages need continuing conveying the target audience. Basically it would be crossed over a few fiscal years like evaluating an investment by NPV, although it might affect the profitability in a short term reflecting on the financial statements.
What is CAPEX, OPEX?
A capital expenditure or CapEx is the money companies use to purchase, upgrade, or extend the life of an asset. Companies count it as investing in the long-term financial health of the company. So it means the investment of the assets purchased have a useful life of longer than one year. Investors and analysts monitor a company’s capital expenditures very closely because it can indicate whether the executive management is investing in the long-term health of the company.
In branding assets, there are basically two types, which are tangible asset and intangible asset. Below are two lists of samples
- Website, mobile app
- Data, users
- Martech software
- IP and Patent
- Legal entity
CAPEX is tax deductible, but it’s different with OPEX. For example, the Martech solution and software costs US$10,000 and it’s expected to be used for 5 years from a legal perspective. So each year has US$2000 to be deducted, as the depreciation would be US$2000 every year and reported on the income statement.
CAPEX report in Cash flow statement and Balance Sheet
Take a branding website and app investment for example. The cash outflows from capital expenditures are listed on a company’s cash flow statement under the investing activities section. The cash flow statement shows a company’s inflows and outflows of cash in a period.
Money spent on CAPEX purchases, such as branding websites, is not immediately reported on an income statement. Rather, it is treated as an asset on the balance sheet that is deducted over the course of several years as a depreciation expense in the income statement, beginning the year following the date on which the item is purchased.
Operating expenses are the costs a company incurs for running its day-to-day operations. These expenses must be ordinary and customary costs for the industry in which the company operates. Companies report OPEX on their income statements and can deduct OPEX from their taxes for that fiscal year in which the expenses were incurred.
OPEX also consists of research and development (R&D) expenses and the cost of goods sold (COGS). Operating expenses are incurred through normal business operations. The goal of any company is to maximize output relative to OPEX, which is the sales number. In this way, OPEX represents a core measurement of a company’s efficiency over time.
Take eCommerce marketing as the example, below is a list of operating expenses
- COGS (cost of good sales, generally it includes merchandising, shipping cost, warehouse etc)
- R&D (New product development, product protype cost)
- Partner commission
- Accounting and legal cost
- Property taxes
- Business travel
- Interest paid on debt
- Rent and utilities
- Equipment, software pay to go fees
CAPEX for branding measurement: Invest tax deductible assets to assist sales, or convert into sales over years
One of the most important functions by investing in branding is to reach out to the target audience in scale and make noise to capture attention. Then incremental user base might not contribute to sales reported on the income statement at the moment, for example event sign-ups, free downloads, free usage, etc. However, the user base has already been the asset of the company. So here it involves two key logics leveraging CAPEX for branding campaign measurement
Tax Deductible Asset Investment for Branding
Branding campaigns to make noise and grow the user base are very common strategies. It might not be able to drive sales, but it must have a way to monetise the users in coming years. So first thing first, any business needs to invest in software to store, categorize and manage these users from branding investment. It can be like a SQL database, CRM and even CDP. The investment can be reported in cash flow and balance sheet statements.
I assume the technology and software might be out of date after 5 years. So basically you can break down 5 years to claim the depreciation of this software and deduce the tax every fiscal year. In the end, it helps with the future gross profit although the cash outflow exists this fiscal year.
User acquisition and monetisation
One of the most popular branding campaign measurements is the new user acquisition, which doesn’t contribute to sales. For example, you launch a new App and it’s totally for free to download and use during the campaign period. Of course, it needs a branding campaign to tell why and make noise, reaching out to the target audience in scale.
Compared to low funnel campaigns, customer acquisition cost might be lower although it doesn’t earn profit from sales. If the branding campaign can do it, in a way it proves it’s a successful campaign already. It’s because any business can have ways to monetise the user base and increase the custom lifetime value to cover the cost from the 1st place of branding campaign.
OPEX for branding and performance marketing measurement: Deduce the tax and support sales-driven campaigns
Branding investment also will be reported on the expenses of the income statement. It’s because marketers usually add on the content production, partnership, branding campaign budget to the sales-driven performance marketing plans. Overall calculation can meet the gross profit goal, and branding element plays a role in optimizing the conversion rate and retention rate.
Although the standalone of these expenses can’t produce sales, such as influencer marketing, video content, social seedings, etc. But before vs after is a method to measure the branding campaign performance. However, it is worth noting that these expenses may be offset by the increase in revenue that could potentially result from increased sales activity, due to expanded delivery capability.
What’s more, advertising expenses can deduce the tax in that fiscal year. Rather than paying the tax to the local government, why not use the money on the branding ads? At the end, the branding expenses might offset lots of tax.
The key takeaway to measure the branding is to categorize what branding investment should sit in CAPEX, and the other should be on the OPEX part. Then, budgeting and relevant allocation ensure the final ROI in this fiscal year can be met and also the asset investment can contribute more value than the money you invest at the moment. The logic is like calculating NPV
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Q1: What is the difference between CAPEX and OPEX?
A: CAPEX refers to capital expenditures, which are investments made in assets that will provide long-term value to a business. OPEX, on the other hand, refers to operational expenses, which are the day-to-day costs incurred in running a business.
Q2: Why should I consider CAPEX for my business?
A: CAPEX investments can lead to long-term cost savings, improved efficiency, increased productivity, and enhanced competitiveness. By investing in assets like equipment, technology, or infrastructure, businesses can benefit from reduced operational expenses and improved performance.
Q3: What are some examples of CAPEX investments?
A: Examples of CAPEX investments include purchasing or upgrading equipment, buying or improving real estate or buildings, investing in technology systems or software, and expanding or renovating facilities.
Q4: What are some examples of OPEX expenses?
A: Examples of OPEX expenses include employee salaries and benefits, rent or lease payments, utility bills, office supplies, marketing and advertising costs, maintenance and repairs, and other day-to-day operational costs.
Q5: How can I determine whether to allocate funds to CAPEX or OPEX?
A: The decision to allocate funds to CAPEX or OPEX depends on various factors such as the nature of your business, financial goals, market conditions, and growth plans. It is important to analyze the potential return on investment (ROI), cash flow considerations, and long-term strategic objectives before making a decision.
Q6: Can CAPEX investments be depreciated for tax purposes?
A: Yes, CAPEX investments can typically be depreciated over their useful life for tax purposes. Depreciation allows businesses to spread out the cost of an asset over time and deduct a portion of its value each year, reducing taxable income.
Q7: Are OPEX expenses tax-deductible?
A: Yes, most OPEX expenses are tax-deductible. Expenses that are considered necessary and ordinary for carrying out business operations can be deducted from the business’s taxable income, reducing the overall tax liability.
Q8: What are the advantages of prioritizing CAPEX over OPEX?
A: Prioritizing CAPEX investments can result in long-term cost savings, increased asset value, improved operational efficiency, and enhanced competitive advantage. By investing in assets that provide lasting value, businesses can position themselves for future growth and success.
Q9: Are there any risks associated with CAPEX investments?
A: Yes, there are risks associated with CAPEX investments. These include the potential for over-investing in assets that may become obsolete or underutilized, tying up capital that could be used for other purposes, and the risk of not achieving the expected return on investment.
Q10: Can businesses benefit from a combination of CAPEX and OPEX strategies?
A: Yes, many businesses benefit from a combination of CAPEX and OPEX strategies. While CAPEX investments focus on long-term value creation, OPEX expenses ensure the smooth day-to-day operations of a business. Finding the right balance between the two is crucial for sustainable growth and profitability.