In today’s uncertain economic environment, meeting the demands of consumers, customers and Wall Street analysts is no easy task. Senior executives must contend with the slow economy, reduced consumer spending power, and significant cost increases across the P&L (higher ingredient and packaging costs, higher transportation costs and higher plant operating costs to name a few).

To grow profit in this environment, consumer packaged-goods companies face a stark choice: volume-driven earnings growth or cost cutting. Too often, companies choose the latter.

In uncertain times, companies tend to view brand-building activity and spending as an expense versus an investment, and in so doing, they justify cutting these “expenses” as a sure fire way to hit the quarterly numbers. Viewed in this context, profitable growth via brand loyalty-building is a high-risk endeavor with an uncertain payback, beyond the direct control of operating managers.

There is a better way. Best-in-class companies view brand loyalty-building activities as a high-odds means to consistent, volume-driven earnings growth in good economic times and bad. They focus relentlessly on the growth levers over which they have direct control, including two critical levers that build brand loyalty: 1) Positioning effectiveness; and 2) advertising / consumer / trade spending effectiveness.

Improving Positioning Effectiveness

Great companies begin with the fundamentals, and there is nothing more fundamental for purveyors of branded products than positioning. Perhaps only the Bible has been written about more often than the art of positioning! So, rather than a treatise on the topic overall, let’s focus on what is different about positioning in top companies versus others.

For the top companies, positioning is a function first and foremost of the competitive frame in which their brands compete. Broadly defined, the competitive frame is that array of products, often from diverse categories, that consumers use as direct substitutes in a given situation.

It is critical to define the competitive frame much more broadly than traditional category definitions, and to be explicit about the competitors from which the brand will source volume. Only in this fashion can you be assured that your brand will focus on delivering the benefits that really matter. To illustrate, we highlight a choice that a food company might face in determining a winning positioning for a cheese-flavored cracker brand (see chart).

What this example illustrates is the criticality of the choice of the competitive frame for this product. This choice determines the size of the market in which the brand competes, the types of benefits that will be needed to win in this market, the target, the pricing and the customer strategy.

Of course, knowing where your brand competes from a consumer perspective is no easy task. A precise understanding of consumer usage beyond traditionally defined categories is critical. If the organization only looked at its competition as the brands on the monthly market share report (i.e., other cheese-flavored cracker brands), it would have missed an enormous opportunity.

Best-in-class companies get the knowledge they need via a rigorously defined market map that combines usage and purchase information with needs and attitudes to identify the broadest competitive frame possible. Once created, this map becomes the foundation for all other loyalty-building strategies, including improving marketing and sales-spending effectiveness.

Improving Spending Effectiveness

Once an effective, differentiating positioning is created, top companies turn their attention to improving spending effectiveness. Some companies use blunt instruments such as share-of-voice to determine spending level. The folly of this approach is apparent given our discussion of the cheese-flavored cracker brand above.

If the company in our example had used the “cheese-flavored cracker market” as the relevant frame-of-reference, they would have found that little to no spending is required to win. However, by knowing the brand is part of much larger competitive set that includes big, salty snack brands, they not only understand the true size of the potential opportunity, they also know the level of spending necessary to compete.

But top companies also know the optimal spending of each element of the marketing mix (advertising, consumer promotion and trade promotion). That’s because the analytical framework that was used to create the market map can be combined with a brand’s P&L to determine the total spending level and mix that maximizes brand profitability.

For example, the cheese-flavored cracker brand has a huge competitive frame, which is composed of millions of usage occasions that include all flavored salty snack occasions — not just cheese-flavored cracker occasions. This is an enormous pool of potential occasions from which to source volume.

By understanding the precise flow of volume that has occurred historically between cheese-flavored snacks and flavored salty snacks due to different types of spending (advertising, consumer and trade), our cracker company is able to predict accurately the mix of spending that will grow volume from available usage occasions until marginal profit becomes negative.

This level of precision provides operating managers with a high degree of confidence in — and control over — their decisions about both spending level and mix. No longer are these critical decisions based on simplistic benchmark ratios like share-of-voice, or historical percentage of gross revenue. Instead, managers can make decisions based on the ability of each type of marketing expenditure to maximize profit growth and build brand loyalty.

This is particularly helpful when evaluating the tradeoff between advertising and trade spending. With the advent of retail scanner data 25 years ago, the impact of trade promotion on short-term sales became eminently measurable, resulting in a mass migration from equity-building activities to trade promotion tactics.

The result is that most companies are overspent on trade promotion, and substantially underspent on advertising. But because they do not have a fact-based and uniform way to understand the impact of trade versus advertising spending, they often feel powerless to make significant changes.

The market map analytical framework can help here, as well. Best-in-class companies are able to identify precisely the mix of promotional and advertising spending that maximizes total marginal profitability for their brands.

If underspent on advertising, they can choose to increase equity and loyalty-building spending with incremental funds, given the confidence they have in the volume this spending will deliver. Or, as is more often the case, they can choose to fund equity-building activities by shifting spending away from trade promotions.

Since they know the point at which trade spending becomes unprofitable, they know precisely how much trade money they have available to be repurposed toward advertising. And they can begin repurposing that trade spending with confidence — without risking significant losses in volume. That is because the market map is created via analysis of millions of individual occasions. It can be used to pinpoint exactly the types of trade promotion activities that create brand switching, versus those that simply reward loyal users.

With this knowledge, managers can maximize the trade tactics that create switching and minimize all others, enabling much greater trade promotion effectiveness with fewer dollars in spending. The inherent risks of reducing trade promotion spending are mitigated and managed. For top companies, moving a brand to optimal advertising spending can be done with great speed and a high degree of confidence.

This level of operating control is contingent upon the knowledge provided by the market map. Without it, our cracker company could not have known that volume flows between crackers and salty snacks; nor would it have had a way to calculate how much of that volume flow is profitably driven by advertising versus consumer versus trade spending.

This loyalty-building approach does not come easily. It requires a new expectation for growth from mature businesses and demands a new level of accountability from marketing and sales management. Perhaps most significant, it requires a commitment to the arduous work of long-term brand-loyalty building, quarter after quarter, year after year.

In short, brand loyalty-building is a strategic and organizational paradigm shift for many companies. Not surprisingly, success is highly correlated with direct sponsorship from top operating managers, quite often including the CEO, CMO and other senior executives.

But for those companies that have ventured down the loyalty-building path, the rewards have been significant: more consistent, volume-driven earnings growth; sustainable competitive advantage in any economic environment; a greater level of management confidence; and, not least important, a higher degree of employee satisfaction, as line managers take firm control of their own destiny.