How Brands Are Born
The Soul Product: Self-Actualization in tangible form
By now, most of us will be wholly familiar with Buffett’s obsession with brands. Given their supernatural pricing power, it’s little surprise that many value investors gravitate towards strong brands to invest in.
However, for the longest while I wasn’t able to put my finger on what made brands special. Brands lead to pricing power, yes — but why? What was their secret sauce? I had analyzed countless branded businesses over the course of my career — yet the exact rules of what made brands special escaped me.
For instance, when we say that Apple has a strong brand, which cross-section of its branding are we referring to? Is it their name? Is it what the name implies, its attributes? The Apple brand stands for human design in consumer tech — but why does that give its business pricing power? Wouldn’t the flagship phones and laptops of Google, Microsoft or even Huawei today qualify that same description? If so, why don’t they share the same pricing power?
This exercise gets even more confusing when you bring in other brands. What about McDonald’s, what are its attributes? Starbucks? Porsche? Fastenal? Delta? Microsoft? Facebook? Chipotle? Heinz? Disney? Alibaba? Paypal? Intel? These are all household brands, yet they stand for radically different things.
So what is the common thread by which we describe them in equal measure, as brands? What is their shared element, their spark, which gives strong brands their pricing power or competitive edge? More importantly, what does the roadmap for building a successful new brand from scratch look like?
Attempting to understand what makes brands tick has been an exercise in frustration for me for the longest time. In the first place, what even is a brand? Is it equivalent to a flag? Okay, so how does a flag give a business pricing power? The CEO of LVMH, whose business depends entirely on branding, once described brands as the attributes of their business. Other platitudes include star brands “speaking to the ages” or being “timeless, modern, fast growing, and highly profitable”. That’s cool, but it doesn’t really help investors understand what makes a strong brand.
When attempting to understand what makes something tick, we usually start by understanding what their rules are. For instance, the margin bottleneck of an e-commerce business is its logistics backend, since that’s where increasing operating leverage delivers the greatest impact. A semiconductor foundry may be operationally complex, but its business model boils down to CAPEX and successful execution. Efficiency in tech companies is often expressed as revenue per employee, given how their cost base revolves around remuneration. Bank returns are always constrained by ROIC, while E&P returns are typically a function of unit costs. By understanding the rules of the game, one can figure out where the bottlenecks lie and plan four steps ahead.
However, trying to dissect the Rules behind Brands has often lead to headaches for me — a feeling which I’m sure many are familiar with. As the aforementioned Apple example demonstrated, their ethereal nature makes it difficult to put your finger on what their success factors are — specifically what gives them pricing power.
It’s About The Consumer, Stupid
Naturally, one would start looking for the success factors of something within the thing itself. For instance, I might determine that the attributes of the Apple brand were what helped develop its loyal fanbase, which subsequently developed into pricing power. Thus, I’d take design cues from Apple products and transplant them to say, McDonald’s — for instance, by showing care in packaging design. However, doing so clearly doesn’t yield the same pricing power — which implies that business attributes aren’t what makes good brands.
As time went on, it occurred to me that the source of a brand’s power actually lies outside the business — in the minds of consumers. As Don Draper would say, you buy a Coke before you’ve even set foot in a store. That’s because Coca-Cola has developed such an entrenched position in the psyche of our collective consciousness that we don’t think twice about alternatives when we want a cool, refreshing soda. It’s also why soda ads always have this sound:
This implies that brands are not something which lie with the business — such as an “attribute”, “identity” or even a “reputation”. Rather, it’s a “mental asset” which lies outside the business — with the consumer. I would even go so far as to say that the brand asset is wholly separate and unrelated to the business.
Think about how ads of large businesses position themselves. Do they revolve around their products? No, they revolve around the consumer — the product is simply something that fits into the centricity of their lives. Brand-building speaks of value not from the role of the consumer, but from the perspective of the individual. Take a look at some of the ads below to see what I mean:
This has some interesting implications. If a brand is owned by the consumer rather than the business — and the brand-building exercise is centered around the consumer, rather than the business — then it stands to reason that the brand asset is actually part of the consumer, not part of the business.
Think of how Coca-Cola ads rarely talk about the cost per can, or even how great their trademark syrup tastes — they’re all about time spent with family and friends, or joy amidst festive seasons. Red Bull ads aren’t about giving you 24/7 energy to power through the day; they’re about life’s meaning found in extreme sports. Mercedes ads aren’t about superior German engineering, they’re about quiet luxury. What do any of them have anything to do with the product?
This doesn’t mean that brands do not communicate their business attributes — they merely do so only when it pertains to the consumer. Apple’s early ads distinguished themselves by not talking about megahertz & gigaflops like their competitors did — they were all about how Macs fit into your daily routine. Consider this: if brands were about their businesses, why would celebrity appearances help in brand-building? It’s not like anyone believes Ryan Gosling’s endorsement makes the beer taste better — but he does matter to the consumer.
Nor are brands simply about storytelling or invoking emotion per se. You’ve probably seen an ad that just goes for shock value and found it cheap. Good brand messaging comes from a very practical place — the only difference is that it revolves around the consumer, not the business. Emotion is merely the symptom of superior branding rather than their source, because the consumer is ultimately an emotional creature.
The long and short of this is to say that the element of good brands are NOT ABOUT THE BUSINESS. Good brands revolve wholly and exclusively around the consumer, with the products simply being a part of their lives. Understanding this makes all the difference in product positioning, especially given the prevailing misconception that businesses own their brands. Nothing could be further from the truth — the customer owns your brand.
The Rules for Brand-Building
Let’s test this theory by appling my rules for branding to this newsletter, Value Investing for Sophisticated Investors. Then we’ll contrast two approaches to brand-building — one where it revolves around the product, and one where it revolves around the consumer; and compare their different degrees of pricing power.
Those of you who have known this newsletter for the past 4 years will be familiar with all my past articles about value investing. These basically amount to the product of this newsletter — they unpack its investment principles according to Buffett and Graham, and demonstrate its relevance and application to modern-day stock markets.
However, someone who doesn’t actually care about value investing will probably find such a product boring. More than not recognizing you as a target customer, this newsletter has no relevance to you as an individual. It doesn’t recognize Harry who secretly yearns to be a musician; Sally who wants a better life for her kids than her mom gave her; Beatrice who wants to feel pretty; or John who wants to gain respect from his peers. How does value investing fit into any of their individual lives whatsoever?
Proper brand-building approaches product positioning by revolving it around the consumer, rather than the business. If I had to make an ad for this newsletter, this is how I would go about it. To Harry, value investing is the soul of stock markets, the harmony around which stock markets dance around. To Sally, value investing delivers a reliable way to generate safe 15% risk-free returns, which she can use to secure her kids’ higher education once they’re all grown up. To Beatrice, value investing represents beauty — if you can’t impress people with your looks, dazzle them with your intelligence instead. To John, value investing is the path to a prestigious job in high finance, where he can one day become a billionaire like Buffett.
Notice how by revolving the presentation of value investing around the individual, we’ve managed to tap into the potential of greater pricing power with a general audience? Good brand messaging isn’t just about using cheap tricks to tug at heartstrings — it’s about responding to the inalienable fact that we are all human, and not just human but individuals unique from each other.
Philosophically speaking, brand-building is fundamentally about self-actualization — the highest layer of Maslow’s hierarchy of needs. In a society which reduces us to faceless organization and roles, we’ve forgotten along the way that we are in fact human. Humans who do not simply represent surgical roles & responsibilities amidst a greater society, but who can individually live, love, laugh. Human.
More than that, good brand messaging celebrates the individual. You’re not just the product manager, soccer mom — or god forbid, the consumer. You’re Harry, Sally, Beatrice or John. Product value isn’t measured in terms of dollars and cents; it’s determined by how much it helps the human being self-actualize as an individual. In the weirdest way, good corporate brand positioning reminds us of our soul.
Notice how none of this description involves the business whatsoever? This is to say that the inherent value of brands are the furthest thing possible from business — they actually revolve around the human individual. Hence, good product positioning isn’t about communicating consumption; it’s about how the product fits into that part of that particular individual’s life. Not only is your business not the main character of your brand, it should barely register at all. Brands should be all about them.
Source of Pricing Power
By unpacking the Brand asset in this way, it becomes easy to see where brands get their pricing power from. The rare element of Brands, the spark which they all share regardless of corporation, is that they represent the human individual. They do not simply recognize the consumer role — they recognize Harry, Sally, Beatrice and John.
In this way, good brands become far more than just their products. They embody the human spark within the individuals themselves, and represent their ability to self-actualize. In this way, brands command far more value than simply the merits of their products — they represent the facets of the human spirit, noble characteristics like tenacity, generosity, intelligence and love. And because of that, good brands can command superior pricing power. They’re basically a wholly separate product.
The tagline of McDonald’s isn’t “reliable burgers for a great price”, but “I’m Lovin’ It” — they remind us not of their burgers’ great taste, but of how much we enjoy ourselves while we’re there. The Body Shop isn’t able to charge ripoff pricing because they have better-quality skincare products; it’s because they represent environmental sustainability and saving baby turtles. This definition of brands also explains why the Fast and Furious franchise is the 14th biggest in movie history — it’s not about fast cars, it’s about family.
Brands are not about their businesses — they’re more akin to a real human being helping customers to self-actualize as individuals. Likewise, products are not just something to tinker with — they’re a way to help Make Harry Great Again. And if your product can genuinely help Harry do that, boy is it worth more than the sum of its parts.
This settles the question of why strong Brands possess superior pricing power — and why legendary value investors the likes of Buffett and Ackman gravitate towards such businesses. The shared element of all brands, their spark or secret sauce, is that they self-actualize the human individual. That’s the Anatomy of a Brand.
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