I think reputation is one of the most important assets that a company controls. Let me explain why.

The two most important factors that determine the success of a product are: (1) the perceived value that the product delivers to customers; and (2) the costs to the producing company for delivering this value.

Imagine a vertical line, anchored by value at the top and cost on the bottom. The difference between value and cost indicates the advantage (or disadvantage) of your product relative to a competing product.

Now consider reputation (brand) in relation to this difference between value and cost. A positive reputation directly and indirectly increases the perceived value of a product. It increases product awareness, signals quality, and instills confidence among buyers. A reputation and brand can even invoke a deep emotional response (e.g., Disney). In addition to these direct effects, a reputation enhances a company’s ability to attract other resources that have an important bearing on customer value. For instance, a reputation affects a company’s success with recruiting talent and forming relationships with key suppliers and partners, which in turn affect product development, manufacturing, distribution, and so forth – i.e., the key elements that ultimately drive customer value.

As an example, consider Google in Search. The Google brand is the world’s most valuable, according to Millward Brown Optimor (2010). As a result of the Google brand, consumers are more likely to use Google Search over Microsoft Bing, even if these products are roughly comparable from a functional perspective. At the same time, Google’s reputation over other technology companies has enabled it to attract some of world’s top engineering and marketing talent. This talent, which underlies its product development efforts, has enabled Google to continue to enhance its products over time, and in turn the company’s reputation.

While a reputation has the potential to affect perceived value, there are often no direct costs with building a reputation because it’s typically a byproduct of delivering and communicating customer value. A reputation can even reduce costs because it may substitute for other expenditures (e.g., marketing, recruiting expenses). If you deliver significant value to customers, you not only enhance your reputation with those customers, but you also have an influence on their network and their network’s network through word-of-mouth marketing. And if you continue to deliver significant value over time, your reputation will be further amplified, having a broader impact on product adoption as well as your company’s other activities, such as the ability to attract new employees. Finally, unlike physical assets, which depreciate and must be replaced at a cost, a reputation can increase in value over time, so long as you continue to provide superior value to new and existing customers.

Returning to the Google Search example. When Google Search first launched in 1997, users of the product quickly realized the superior value it provided relative to competing products, such as AltaVista. Because of this value, many of these initial users not only continued to use Google Search, but spread the word to their family, friends, and colleagues. As the adoption of Google Search increased, and as Google built and enhanced its Search and related products over time, it cultivated the most valuable brand in the world, with an estimated value of $114 billion (Millward Brown Optimor, 2010). Most striking is that Google created this reputation without performing extensive marketing or providing direct customer service to consumers. Google’s reputation is largely a byproduct of the value that its products deliver to customers. Furthermore, Google’s reputation has served as a substitute for other expenses, such as marketing and direct consumer interaction.

In closing, the two most important factors that impact a product’s success in the market are the perceived value that it delivers to customers and the costs to the producing company for delivering this value. A positive reputation has the potential to substantially enhance the perceived value of a product. A company can leverage a superior reputation to attract more customers and/or charge a premium price for its product relative to a competing product. And because a reputation is often a byproduct of creating customer value, there are often no direct costs for developing a reputation. A reputation can even reduce other key costs, such as marketing or recruiting expenditures. Because a reputation increases value, without a commensurate increase in costs, it can substantially improve a company’s margins and profitability.