We love to deal with great companies and we try to avoid the others. We buy products and services from good ones and are happy to have their shares. Our love is being converted to their revenues and market valuation.
So what builds companies' market valuation?
We believe there are four basic factors:
- The first one is an ability of a company to generate revenue. When companies start earnings, nimble investors quickly calculate how big the market is, how fast the company can grow so, in other words, how big the deal is. Company shows a positive business-model and promises to grow big. And this makes it expensive—we believe it will earn a lot of money.
- Then the audience. This works in two directions: convince customers of the quality of its products and services (people wouldn't buy trash) and attract investors to help the company scale. The flywheel spins. People see other people buying, the company reports it’s revenue growth, investors are excited and put more money in scaling, stocks go up, company value soars. Once again, people see other people buying and investing and this belief multiplies the company’s market valuation by incentivising new customers and investors. Also a company with a bigger audience can influence the market by sharing its messages more broadly.
- The third factor is brand. This means brand recognition, exposure, and ability to associate with a needed economical behaviour. If people remember the company every time they want or need something, a brand will cost a lot of money. There are a bunch of brand indexes like The World's Most Valuable Brands by Forbes or FutureBrand index. So in general we understand that brand is an important part of the modern companies evaluation model. The more often we remember the name and logo of the company with good feelings, the more it costs.
- This idyllic picture can be ruined by two things: competitors and new attractive things. So the fourth pillar of the company evaluation is its ability to innovate. To be faster and better than competitors, and to retain customers even if something very attractive happened on the market. And of course, all super-expensive companies produce something people really need and want.
Until recently, it used to be something like that. But new winds begin to blow. We began to divide the companies into good and bad ones.
Why is this happening?
In order to produce cheaper and earn more, companies apply dishonest methods: lower-quality materials, less reliable technologies and solutions, worse conditions for workers, illegal sourcing and disposal, harmful additions for increasing foods consumer qualities, behavioural techniques to attract and retain users contrary to their will. This works until this becomes known by a critical amount of people (and sometimes one man is enough, remember Robert Bilott and DuPont?) who care about health, nature, other people and future generations. That’s why the production process is so secret in most companies (also because of competitors).
Many people stop wearing natural fur and leather when they see how they were being produced, stop eating harmful foods, and buy things from unscrupulous manufacturers. When churn becomes massive, the capitalizations of related companies are shaking and their future turns to a big question. Some things were stopped completely like ethyl gas or old poisonous teflon production processes. Many other things like meat, sugar, alcohol, fossil fuels energy, plastic packing and trash, we deal with as we learn about their negative effects.
So how impact comes into play?
When customers see the full picture, they add a consequences variable to an equation of price and benefits. Do I want to add a higher lung cancer chance to my image of a tough smoking guy? Or a health-damaging addiction to my short-term relaxation? Or kids’ deaths who mine cobalt to my new smartphone? The question here is largely the right information in the moment of making our purchase decision.
So let's get back to the companies’ valuations. What if we find out that our favorite product or service (also bought by millions of other people, very popular) causes strong negative effects? And what if those effects last for years and decades? And what if we are affected? Would we buy or stop ourselves and call all the people we love to stop too?
With no doubt, the more such massive rejections will occur, the more companies will have to innovate like mad to reinvent their products and services in a responsible way, or stop existing very soon.
All four factors of companies evaluation together wouldn’t overcome the fact that product or services harms people and nature in irreversible ways. If people find it out, they will turn away from such companies.
But there is one very promising thing in all this story of unveiling the past mistakes.
There are definitely many companies with strong positive impacts. Until recently it was difficult to measure and communicate such effects. A lot had to happen to make it possible, understandable and simple enough. Take a look at how Nest proposes a smart home thermostat: you buy a device and energy and money savings pay for it. Or how Tesla markets its cars with sustainability numbers. And they are the only early birds of a coming impact shift. Tesla just became the most valuable carmaker in the world and unlike any other carmaker it claims it’s mission in terms of impact.
Is now the right time to act? And what to do then?
So for thousands of companies around the world today is a great time like never before to reimagine themselves around their impact. Many of you are investing enormous efforts into your products and services to make them really people and nature friendly. But the market has taught buyers to look at the price and the main function of the product in the first place, without thinking much about how it was produced, how it will be used, and what consequences this will have. But many people already think differently, and we search for products with positive impacts, and we lack this information. So the sooner companies understand this and begin to tell how they not only solve our problems, but also affect people and nature, the faster responsible customers will redirect their purchases for those benefits.