Brand equity is a key construct in the management of not only marketing but also business strategy. It helped create and support the explosive idea that emerged in the late 1980s, that brands are assets that drive business performance over time. That idea altered perceptions of what marketing does, who does it and what role it plays in business strategy.
Brand Equity also altered the perception of brand value by demonstrating that a brand is not only a tactical aid to generating short-term sales but also a strategic support to a business strategy that will add long-term value to the organization.
So what is brand equity and brand value and how should they be measured?
Brand equity is a set of assets or liabilities in the form of brand visibility, brand associations and customer loyalty that add or subtract from value of a current or potential product or service driven by the brand. To elaborate:
Brand visibility means that the brand has awareness and credibility with respect to a particular customer need—it is relevant. If a customer is searching for a buying option and the brand does not come to mind, or if there is some reason that the brand is perceived to be unable to deliver adequately, the brand will not be relevant and not be considered.
Brand associations involve anything that created a positive or negative relationship with or feelings toward the brand. It can be based on functional benefits but also a brand personality, organizational values, self-expressive benefits, emotional benefits or social benefits.
Customer’s loyalty provides a flow of business for current and potential products from customers that believe in the value of the brand’s offerings and will not spend time evaluating options with lower prices. The inclusion of loyalty in the conceptualization of brand equity allows marketers to justify giving loyalty priority in the brand building budget.
Short-Run Brand Value
The value of a brand represents its impact on the short-run and long-run flow of profits that it can generate. With respect to short-term profitability, the problem is that programs that are very good at driving short-run products, like price promotions, can damage brands. That tendency can be mitigated by looking at the ways that a brand can help drive short-run financial performance:
- Reduced Marketing Costs
- Trade Leverage
- Attracting New Customers via Awareness & Reassurance
- Time to Respond to Competitive Threats
- Anchor to Which Other Associations Can Be Attached
- Familiarity Which Leads to Liking
- Visibility That Helps Gain Consideration
- Signal of Substance/Commitment
- Helps Communicate Information
- Create Positive Attitude/Feelings
- Basis for Extensions
Long-Run Brand Value
One of the ongoing challenges of brand equity proponents is to demonstrate that there is long-term value in creating brand equity. The basic problems are that brand is only one driver of profits, completive actions intervene, and strategic decisions cannot wait for years. There are, however, some perspectives that can be employed to understand and measure the long-term value of brand equity:
Brand Value Approach #1
One approach is to estimate the brand’s role in a business. The value of a business in a product-market such as the Ford Fiesta in the UK market is estimated based on discounting future earnings. The tangible and intangible assets are identified and the relative role of the brand is subjectively estimated by a group of knowledgeable people, taking into account the business model and any information about the brand in terms of its relative visibility, associations and customer loyalty. The value of the brand is then aggregated over products and markets countries to determine a value for brand. It can range from 10 percent for B2B brands to over 60 percent for brands like Jack Daniel’s or Coca-Cola.
Brand Value Approach #2
A second approach is to observe that, on average, investments in brand equity increase stock return, the ultimate measure of a long-term return on assets. Evidence comes from a series of studies I conducted with Professor Robert Jacobson of the University of Washington, using time series data which included information on accounting-based return-on-investment (ROI) and models that sorted out the direction of causation. The consistent finding was that the impact of increasing brand equity on stock return was nearly as great as that of an ROI change, about 70 percent as much. In contrast, advertising, also tested, had no impact on stock return except that which was captured by brand equity.
Brand Value Approach #3
A third approach is to look at case studies of brands that have created enormous value. Consider, for example, the power of the Apple personality and innovation reputation, BMW’s self-expressive benefits connected to the “ultimate driving machine,” and the ability of Whole Foods Market brand to define an entire subcategory. Or the fact that from 1989 to 1997 two cars were made in the same plant using the same design and materials and marketing under two brand names, Toyota Corolla and Chevrolet (GEO) Prism. The Corolla brand was priced 10% higher, had less depreciation over time, and had sales many times more that the Prizm. And consumers and experts both gave it higher ratings. The same car! Only the brand was different.
Brand Value Approach #4
A fourth approach is to consider the conceptual model surrounding a business strategy. What is the business strategy? What is the strategic role of the brand in supporting that strategy? How critical is it? Is price competition the alternative to creating and leveraging brand equity? What impact will that have on profit streams going forward? Management guru Tom Peters said it well:
In an increasingly crowded marketplace, fools will compete on price. Winners will find a way to create lasting value in the customer’s mind.
Brand equity continues to be a driver of much of marketing, indeed business strategy. For it to work, it needs to be understood conceptually and operationally. And it is important that it be tied to brand value in credible ways.