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3: The High-Emotion Index: Stock Market Gains from Emotion

Products that deliver emotional value to customer generate additional revenue by attracting more customers, retaining them for longer, and getting more share-of-wallet. And so, it follows that emotional value should translate into improved financial performance - the assumption being that firms hat successfully provide product emotions will generate more revenue and profit than those that do not.

In this chapter, the author intends to provide evidence for this hypothesis, and suggest metrics that can be used to consider the fiscal value of pursuing high-emotion strategies.

The Index

The author's study considered the stock price as the ultimate measure of performance, overall, for any publicly owned firm, so the author took into account the stock gains experienced by firms over a three-year period (2005-2007)

A few industry lists of "top brands" were considered (Businessweek and Interbrand), limiting its study to consumer product companies, which resulted in a list of 40 whose brands were considered strong. To refine the study further, the author conducted an informal survey of 109 people who were asked to rate companies that they believe to "provide emotion" on a scale of 0 to 13 - the average came out to 8.2, and the author's reference to a high or low score indicates a brand is on one or the other side of that median.

The results demonstrated that higher-emotion stocks outperformed lower-emotion stocks, and that they had more than double the return of the stock market indices. Meanwhile, low-performing stocks underperformed the market indices on average of 20%

The great disparity between scores has the author a bit concerned - they seem too good to be true. He went back further, and did a ten-year comparison, to find that the results were consistent. Even omitting outliers such as Apple and Google, whose performance has been so phenomenal it might skew the comparison, the disparity was still significant.

He details a few other persnickety analyses, designed to randomize the start and end dates, compile different portfolios of stocks in the various categories, etc., each of which reinforces the same conclusions.

Future Performance through an Economic Downturn

The author continues the same analysis into 2008, which he maintains to be the year that "things changed" and the world economy took a nosedive. The traditional view, that emotions are frivolous and disposable, would create an assumption that when times got tough, customers will abandon needless things and seek to tighten up their expenses by changing to more bare-bones products.

The numbers do not bear this out. Comparing the high-emotion index against the various market composites shows the former outperforming the latter by 84% to 86% in 2008-2009 - in the throes of the worst economic downturn since the Great Depression. It's admitted that the high-emotion firms sill lost value, but by far less than the indices.

He also concedes that the low-emotion index firms also did quite well because of one company that performed very well: Wal-Mart. This is not surprising because the retailer's focus on cost and efficiency speaks to the emotions (sooths the panic) of customers in troubled times.

Eliminating the influence of Wal-Mart from the low index, in the same way he eliminated Apple and Google from the high, the result is not too bad: the low-emotion index still performed no worse, yet no better, than the standard indices. And so, while there is a reward for being a high-emotion firm, there is no evidence that there is punishment for being low-emotion.

The Bottom Line

Investment decisions are made based on cost-benefit analysis, on a very granular level. Because emotion is intangible and the payoff does not immediately or directly follow, it's hard to justify the expense of addressing customer experience. In the opening, the author asked why more firms, seeing the success of brands customers love, invest in making their own brands beloved - and the answer lies here: they cannot see the forest for the trees, or correlate the benefit that comes from customer experience to the expense of delivering it on a penny-by-penny basis.

That is, people understand the value of customer devotion in a vague and general way, because that is the only way it can be measured - its aggregate effect on purchase frequency, market share, customer acquisition, customer retention, customer enthusiasm, share-of-wallet, and all of this happens well in arrears of having undertaken expenses to earn it.

The author suggests that emotion-based development must be a strategy, seen as a long-term investment for growth, and cannot be measured by the month, quarter, or year. Its payoff is after five years, ten years, or more, and only by taking the long view can its value be appreciated. Moreover, only the firms that can appreciate that potential will likely pursue it and benefit from its pursuit.