Brand Equity

DEFINING AND MEASURING BRAND EQUITY

“Brand Equity” is the subject of seminars, of advertising agency presentations and of negotiation by acquirers of companies. There is even a coalition devoted to the fostering and preservation of brand equity.

For all the attention, we haven’t found an operable definition of brand equity. It isn’t enough to set an objective of building or increasing brand equity. To be of strategic value, brand equity must be measurable, and most importantly, we must know how to affect it by our actions.

Brand equity does not exist in nature, to be assayed like gold ore in rock. It’s measurement depends on how you define it.

Brand equity is a concept. It does not exist in nature in the manner that the specific gravity of elements exists as a physical entity. It cannot be assayed like the gold content in a piece of ore. Those who argue that brand equity cannot be measured miss the essential point. Its measurement depends on how it is defined. That definition must have pragmatic value to a marketer of consumer products or services. It should help improve marketing effectiveness and efficiency by providing a yardstick with which to evaluate these things. Also, the definition should reflect the role of the brand in the dynamics of consumer choice in a competitive environment.

To its buyers, a brand is a promise

The concept of brand equity is based on the idea that a brand has a value greater than the sum of its tangible assets. Brand equity is by definition an intangible asset.

A brand is a symbol carrying with it certain associations and images. In customer terms, a brand represents a promise. Its value to consumers is that it reduces risk, saves time and provides reassurance. Predictable results are the promise of a brand.

As long as a product or service meets a customer’s expectations with no unexpected negative results, a buyer is likely to continue to buy the brand. It is the customer-oriented definition of a brand that is at the heart of the concept of brand equity.

Typically, “brand equity” represents a large proportion of the value of consumer product or service companies when compared to industrial manufacturers or commodity producers.

It has been estimated that over 50% of the worth of the Coca Cola Company is in its trademark. The value of brands has been acknowledged by the financial community and was reflected in the prices paid for Kraft and General Foods by Philip Morris, for Nabisco by KKR, and for Pillsbury by GrandMet.

The price paid by Seagrams for the marketing rights to Absolut Vodka bears witness to the value of brand equity, since in its basic form, vodka is nothing more than alcohol and water.

To financiers, brand equity = retained earnings. To marketers, brand equity = retained customers

There are two general approaches to the concept: a financial approach which is largely concerned with assessing value for the purposes of setting a price for a firm; and a marketing approach, in which brand equity is viewed as a strategic variable to be built and enhanced by advertising, promotion and public relations activities.

To a marketer, creating and maintaining brand equity can provide for increased profitability, reduced vulnerability to competition, the ability to charge premium prices, and a platform for introducing new to market products carrying the brand name.

There is general agreement among marketing theorists that brand equity is a composite of a brand’s image, its awareness level, and its level of consumer preference. However, there is no generally agreed-upon definition nor is there an accepted method for calculating the value of brand equity.In the financial community, equity = retained earnings. In the marketing community, a more relevant definition would be: equity = retained customers.

Inherent in the concept of brand equity is the idea of enduring value. Equity implies having value over time that is transferable from one owner to another.

From this perspective, a new brand cannot have equity until it has produced a predictable stream of revenue and profit.

Old, established brands with large cores of loyal customers have substantial equity. Brands that command premium prices have enhanced equity.

In essence, an assumption is made that past behavior is prologue; a person who has purchased a brand with a given frequency and regularity over a given period of time can be considered likely to continue such behavior in the future.

The essential ingredient in brand equity, therefore, is customer loyalty. A brand’s “consumer franchise” is nothing other than the customers who choose it over alternative brands. Their number and frequency of purchase determine its value.

Studies have demonstrated that a brand’s profitability will vary as a function of its depth of repeat purchase. There are two underlying reasons for this: reduced marketing costs and increased price elasticity of demand for the brand.

Reduced marketing costs derive from the fact that brands with loyal franchises have a greater proportion of customer-driven (as opposed to marketer-driven) purchases.

It’s logical to assume that loyal customers require less external stimulation (i.e. advertising and promotion) to make the next purchase of the brand than do less loyal customers. Such customers are likely to be less receptive to competitive promotions, reducing a marketer’s need for retaliatory offers.

The trade also recognizes the value of a strong “pull” brand and demands lower allowances to feature the brand. Increased price elasticity derives from the perceptions of customers either that the brand is superior in some way to competitive alternatives or that by purchasing another brand they will incur an unacceptable risk.

Customers who perceive a brand in this way are willing to pay a premium relative to competitive alternatives. The extent of the premium depends on the nature of the perceived difference and its importance to the buyers. Analysis of brands in highly competitive categories reveals two factors contribute to a brand’s ability to sustain premium pricing: its perceived degree of difference from competitors and the perceived risk in buying “wrong.”

A brand’s equity is comprised of its loyalty rate and its relative price

The proposed definition of brand equity is the aggregate value of the purchases of customers who buy the brand repetitively. Its magnitude is a function of their frequency of purchase, the extent of repetition and the relative price they pay for the brand.

Relative price reflects the perceived value of a brand. A high relative price (over 1.00) indicates that a brand’s buyers value it more than the others in the category. Conversely, a low relative price reflects weak brand “pull”. By using relative price in the calculation of brand equity, we introduce the element of perceived value for the money.

This approach to equity will “credit” brands that are capable of commanding premium prices among minority sized segments.

Relative price is expressed as the ratio of the average retail selling price of the brand to the category average. For example, for the Canadian whiskey category, a leading brand’s relative price based on 1992 averages is 1.0; while that of a leading “super-premium” brand is 1.75. In the Gin category, a major import’s relative price is 1.26, a leading domestic brand’s is .64 and another popular import’s is 1.23.

Loyalty rate is defined as the percent of category purchases of the brand by people who buy the brand. For example, if Cognac brand “A” buyers report that 65% of their cognac purchases are of brand “A”, its loyalty rate would be .65. If people who buy scotch brand “C” report that in the course of the past year, 40% of their scotch purchases were of brand “C”, its loyalty rate would be .40.

Taking these two dimensions--loyalty rate and relative price--we propose the equation: EQ = L x Prel where EQ = Brand Equity, L = loyalty rate and Prel =relative price.
By giving equal weight to each of the variables, the formula allows for the use of the equation as a barometer of marketing effectiveness, in that increases in loyalty rate or relative price can be produced by improvements in marketing effectiveness or efficiency.

DETERMINING LOYALTY RATES

Loyalty rate represents the extent to which a brand’s buyers purchase it repetitively. It can be derived by calculating the “share of category requirements” each brand meets using data from a survey or diary panel. It is a behavioral measure, not an attitudinal or image dimension.

In this hypothetical example, we have four brands of scotch whiskey. Survey respondents are asked to report how many bottles of whiskey were purchased in the prior twelve month period. The 75 people who bought brand “B” report buying a total of 225 bottles of scotch, 90 of which were “B”. This represents a “loyalty rate” of .4, or 40% of “B” buyers’ scotch purchases. In this example, 125 people who bought “A” report buying 375 bottles of scotch, 225 of which were “A”. “A’s” “loyalty rate” based on these numbers would be .6, or 60 % of its buyers scotch purchases.

HYPOTHETICAL BRAND EQUITIES

In this first hypothetical example, we take four liqueur brands. Two brands--A and B-have relatively large volume, high loyalty rates; one is premium priced and the other is priced at the category average. A third brand--C--has a much smaller volume base, a high loyalty rate and is is priced very far above other brands. The equity calculations reveal that Brand C has the highest equity rate (1.40), making it a more valuable brand than A, which has 2.5 times more volume.

A second hypothetical case presents six brands of blended whiskey. In this case, the market leader in volume (D) has much less equity than A or C, which are “popular priced”. B, owing to its high loyalty rate and very premium pricing, has the most brand equity in the category. F, in this case a “price” brand” has the lowest equity, as its disloyal users are driven to buy at the lowest price they can find in the category.

These hypothetical examples illustrate several principles that are inherent in our proposed definition of brand equity. First it is apparent that market leaders are not necessarily leaders in brand equity. A small volume brand with loyal customers can have more equity than a larger rival with many sporadic buyers.

Second this approach reflects the value of premium pricing. Brands whose users are willing to pay a premium are inherently more valuable than “price” brands whose customers are loyal only when they cannot find a cheaper alternative. Such brands as Absolut, Grey Poupon, L’Oreal, Starbucks, Godiva, Florsheim and Michelin are examples of the rewards of this strategy.

Obviously in the best of cases a volume leader that commands premium prices is the ideal. Such brands as Coca Cola, Budweiser, BandAids, Kelloggs Corn Flakes, McDonald’s, Campbell Soup and Hewlett Packard, demonstrate that market leadership and equity leadership can coexist.

INCREASING BRAND EQUITY

We believe this approach to defining and measuring brand equity helps to focus marketing strategy and make it easier to choose among alternatives. If, for example, a major goal is to increase brand equity, the marketing strategies and tactics to be used must either increase brand loyalty or pave the way for a price increase while not losing a significant number of customers.

Experience shows that brand loyalty can be strengthened in one of several ways: increasing continuity of purchase via such techniques as “frequent flier” or “frequent buyer” programs, “members clubs”, “continuity promotions” that reward cumulative purchases; affinity programs, that create identification between the users of a brand and some recognizable organization, cause, lifestyle or movement. Marlboro uses such programs prominently in its brand promotions; brand differentiation, that creates real or perceived differences between the brand and its competitors; presence marketing, that increases the visibility of the brand as well as its salience, so that customers have less opportunity to even consider alternative brands when they are in the marketplace for the product. Anheuser-Busch has used this strategy effectively to keep its Budweiser brand at the top of the category for years.

Increasing price can be an effective strategy if a large enough number of the brand’s customers believe it will deliver value at the higher price. We’ve known cases where increasing price has actually help to build business. In one case, the managers of a small little known spirits brand raised its price as a way of committing “brand suicide”. They were amazed and delighted to see the brand’s sales increase shortly thereafter. Thus emboldened, they raised the price again and saw sales continue to rise. Today this brand is reported to be the biggest profit contributor to the company’s stable and research shows its user base to be very loyal.

Grey Poupon was successfully positioned atop the seemingly mundane mustard category by a combination of premium pricing and adroit advertising. Its equity is likely to be much greater (on a per case basis) than its larger selling rivals.

Trading up can be an effective way to increase price while protecting a brand’s original user base. This is accomplished by introducing a justifiably more expensive line extension while continuing to offer the “parent” product at the same price. The key word is “justifiably”, so that the new entry does not denigrate the quality of the parent.

In sum, we believe that a brand is a promise made to its customers and to its owners. Promises kept yield loyal customers and will produce a steady stream of profits for years to come. Brand equity is at its root the aggregate value of the future purchases of its customers. And that is what brand marketing must maintain and grow.