We discussed in Part 1 that starting a brand partnerships business could mean a lot of things – from selling your own advertising and custom content, to partnering with other brands for marketing campaigns/events, to managing branding resources and integrating with external clients. We also focused on the operational finance aspects of incorporating a revenue-generating Brand Partnerships function into your organization. In Part 2, we’ll dig more into Brand Partnership finance by exploring Finance’s role when designing a company’s strategy.
At a high level for the Brand Partnership strategy, evaluation must adopt an ROI mindset. At a lower level, competitive advantages are identified via capitalizing on internal strengths vs. sourcing external efficiencies. As in the last post, we’re going to continue thinking hypothetically about the setup of a new line of business within a company, intending to leverage existing internal resources, where possible, to sell Brand Partnerships to external customers.
Brand Partnership Finance: A Balance of Four Parts
Consider the Brand Partnership business as a combination of four parts in balance:
- Create a concept that external partners want to align with.
- Produce it.
- Distribute it.
- Market it to drive audience.
In our direct experience (with two early adopters of Brand Partnerships, Red Bull and Awesomeness), when possible, every step of the Brand Partnership process was handled internally, allowing for cost efficiency and control. The types of brand engagements ran the gamut – Digital Ads on videos clips, articles, web-series, gaming/eSports; Traditional Ads on broadcast TV, print, out-of-home/billboards; Custom Content in the form of short clips, web-series, TV series, and films; Product Placement/Title Sponsorship; Event Marketing; Influencer Marketing; Traditional PR & Communications.
This theme will carry through the analysis of where Finance can add value: balancing internal vs. external and short- vs. long-term. Helping management understand the cost difference between differing scenarios with real numbers. Making sure that the relative risk in each scenario is considered, especially as it involves making long-term commitments. (Learn more about scenario analysis in: “Scenario Analysis Example: Business Planning During the Pandemic.”) Do you have an existing internal capability that you can leverage at low cost? Or should you favor using an external party to fill short-term needs, avoiding any long-term cost commitments?
The optimum Brand Partnership Finance strategy in practice will define the ideal internal/external mix of those four parts. As the opportunity evolves and matures, you may be able build on internal strengths and to internalize the external capabilities. If the opportunity dissolves, you can build in flexibility to cut ties with external sources easily.
Catch up on the rest of this series:
1. Concept – Expertise & Authenticity
If we take a step back to look at the “why” of Brand Partnerships, the purpose is to better engage the brand’s audience. From a finance perspective, we might tweak that purpose: to maximize the return on marketing. When thinking about a company’s ability to sell Brand Partnerships, we must ask what capabilities – around engaging audiences, among others – does the company have to give it a competitive advantage in the marketplace?
Red Bull, for instance, spent decades building up their internal marketing teams to establish expertise and authenticity in the areas they wanted to focus on – extreme sports and music, in particular – which resulted in engagement and trust with the audience in those communities. So, when Red Bull expanded their Brand Partnerships offerings with external customers, they were able to leverage those internal strengths at minimal incremental cost, thus providing Red Bull with a cost advantage versus other similar marketing options.
The internal resources with expertise and authenticity are also in touch with the area of focus and will have a good sense about what type of content, event or influencer would draw the audience’s attention. This provides a built-in competitive advantage when creating concepts that attract potential Brand Partners. Though a challenge for Finance to quantify, this type of advantage should show up in metrics around percentage of clients won, repeat business and lower costs for developing/acquiring creative content.
2. Production – Good, Fast, Cheap (Pick Two)
A high-functioning internal production capability would need to scale to service a Brand Partnership business. If the company’s core competency is video production or event production, for example, then extending that skill should create a competitive advantage. (Adding incremental Brand Partnership output to your existing output should come at a lower cost than trying to create that same Brand Partnership output from scratch.)
But what does “high-functioning” look like? The saying goes that you can have only two of these three things in any project: Good, Fast and Cheap. And when you’re on the sell side, “Fast” is not typically at your discretion – if a customer has a timeline (e.g., product launch, air date or year-end budget deadline), then the speed of production is on the customer’s terms and not an available lever. That leaves “Good” vs. “Cheap.” Have your company’s teams routinely produced quality projects on-budget? Can they stretch that ratio to keep high quality at a lower cost, to “cheat” the two-out-of-three rule? Can that margin be extended, or better yet expanded, in scaling up as they take on additional Brand Partnership projects?
For Awesomeness, “cheating” the two-out-of-three rule was born out of their existing (i.e., pre-Brand Partnerships) business model. They needed quick turnaround and extremely low budgets to create daily video clips and web-series content for a variety of channels. Over time, they perfected their processes to get the best quality out of their limited resources, learning to produce high-production-value content on smaller budgets. By extending that core competency from their internal needs over to external Brand Partnerships, Awesomeness could expand and offer custom content that impressed potential customers by looking great, creating created on a short timeline, and being cost-efficient.
3. Distribution – Balancing Short- and Long-Term Financial Impact
How you distribute the product to the consumer – be it a content viewer, an event attendee, or an influencer’s follower – has the largest potential impact of these elements. You can attempt to distribute on your own platform (e.g., website/blog/email, app, newspaper/magazine, event space, internal influencers (think ESPN on-air or NYT opinion personalities)), or you can rely on “shared” third-party distribution (e.g., YouTube/Facebook/etc., established broadcasters/publishers, rented event sites, external influencers). The goal is to find the right mix for the short and long term.
Owning your distribution channels has immense upside – you can keep 100% of your revenue while avoiding buying advertising inventory. Many have chased this strategy over the past decade, and most have fallen short of expectations, to put it mildly*. So, before management plunges headlong into an expensive investment in a platform to allow their audience to consume their content directly, Finance must provide context by evaluating – over the short and long term – the total cost per consumer served in both platform strategies.
In the current environment, you hear marketing and management complain more and more frequently that “we can’t reach our audience unless we put content and dollars through Facebook, Google/YouTube, Instagram, etc.” Because of the control exerted by these entrenched powers, no matter how dedicated you are to an owned media strategy, the potential to scale your own platform is capped. That doesn’t mean you need to abandon your owned .com/app/publication strategy. It just means you need to understand the realistic audience reach and scale your investment accordingly. For instance, after several years, Awesomeness moved all video content distribution off their own website and onto their YouTube channel – despite much higher AdSense fees – because the overall cost-benefit pointed to YouTube.
4. Marketing – Add as Needed
Marketing often gets lumped in with Overhead or Operating Costs; sometimes it does at least sit on the P&L next to Production Costs and other Costs Of Goods Sold. For Brand Partnerships, we could argue that Marketing is a direct Cost Of Goods Sold. The ultimate product being sold requires additional Marketing spend to complete (e.g., reach the required number of eyeballs). This type of Marketing is a Variable Cost and needs to be included within the Gross Margin.
Why is this important? For one, it helps those involved understand that this Marketing is a variable cost – the more campaigns you have, the more Marketing spend you’ll need to round out the audience delivery. Too often it’s assumed that Marketing is an add-on, something that can be turned down (or off) when necessary to help the bottom line. That is not true here, since Marketing spend is an essential input to delivering the final product.
Second, if Marketing is hitting somewhere other than Cost of Goods Sold, then the Gross Margin ratio is overstated. If $100 of new Brand Partnership business generally requires an additional $5 of Marketing to deliver the required output, then that 5% margin impact of Marketing needs to be included in the Gross Margin ratio. Then, as we scenario plan for revenue to scale up and down, the corresponding Gross Margin impact will be figured correctly.
In this analysis, Marketing is being treated as an essential cost. Why is that? It’s to increase revenue potential by reducing wasted inventory. For example, let’s say you’re producing 3 custom videos for a Brand Partner and publishing them on your YouTube channel over 3 days with some level of guaranteed audience. Without Marketing as a tool, you can only guarantee audience numbers in line with your minimum daily viewership (let’s say 10% below average) – you might get unlucky and hit slow days for each video. However, with paid media at your disposal, you could guarantee something along the lines of your average viewership – by using paid media to drive viewers when needed. If the initial day produces view metrics below your average, then you can inject some advertising to bump up the numbers for the remaining 2 days, getting your audience numbers back to the guaranteed level for the 3 days overall. This strategy will result in some Marketing spend, on average, but will return a net benefit as long as the Marketing cost is less that the revenue you would miss out on by holding back the non-guaranteed 10% of daily traffic.
Conclusion
In our continued exploration of Brand Partnership Finance, we’ve covered a number of ways that Finance can help identify competitive advantage for a developing Brand Partnerships business, namely:
- Finding cost advantages where 1) internal capabilities can scale efficiently, or 2) external resources may have better risk profiles due to shorter commitments.
- Balancing the 1) favorable-yet-temporary short-term cost and risk profiles against 2) long-term resource commitments to create built-in capability and cost-efficiency for the long run.
These types of advantages can be identified to minimize costs and increase margins, but also for boosting revenue potential.
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* Too many to list, but here examples I am particularly familiar with: Verizon abandoned media distribution entirely; Vevo shut down; Google Play Music merged into YouTube; Fullscreen pulled the plug on its subscription-video service; Sony has had many content distribution ventures, the biggest of which, Vue, has a business model that “remains uncertain.” Go Back
