A Framework for Measurng and Managng Brand Equty 6 Summer 2008
By Wllam Neal and Ron Strauss For most publcly owned organzatons, the majorty of ther assets cannot be accounted for by current fnancal accountng methods. On average, accountants account for less than 25% of the value that wllng buyers and sellers the market place on publc frms. One only needs to compare a publc frm s book value to ts market captalzaton to understand just how much of the frm s asset value s unaccounted for n ther fnancal statements. For most publc frms, the vast amount of that hdden asset value s due to brand equty. Most people refer to brand value and brand equty as nterchangeable and equal enttes. They re not. In fact, the dfference between brand value and brand equty goes to the core of understandng how to create value n today s world. The Brand Value Concept Several years ago I was helpng a frend look for an automoble to purchase. He was lookng for a smaller SUV wth good relablty and was qute partal to smaller Japanese vehcles. After we looked over several models he focused n on the Honda Passport as just about the best combnaton of sze, comfort, economy, and prce he was lookng for. Hearng hs descrpton, I dd a search of Consumer Reports and found that the Isuzu Rodeo was an dentcal vehcle and t retaled for a lot less. I told my frend to look at the Isuzu, nstead. He dd, but then bought the Passport payng about $4,500 more than he would have for an exact duplcate vehcle wth a dfferent nameplate. Bascally, my frend pad $4,500 for a Honda emblem on a perfectly good Isuzu Rodeo. Why would he do such a thng? The answer goes to the heart of understandng the concepts of brand value and brand equty. The answer les n what my frend perceved to be value. Value s most generally defned as a measure of worth, whch s most often expressed as benefts less costs. Value = Benefts - Costs The benefts part of ths value equaton s where most of the complexty les. A branded product or servce should be vewed as a bundle of tangble and ntangble benefts. When you accept that premse, then we can expand the value equaton to: Brand Value = Tangble Benefts + Intangble Benefts Costs Back to my frend snce there was no dfference between the two vehcles n terms of tangble benefts (wth the possble excepton of mnor dfferences n deprecaton and trade-n value), he placed hgh value on the ntangble aspects of the Honda brand name. In fact, the value that he placed on the Honda nameplate was around $4,500. C. J. Burton/Veer marketng research 7
Executve Summary Ths artcle s an extract from Chapter 7 of the book Value Creaton: The Power of Brand Equty, whch explans brand equty, how t dffers from brand value, and the strategc mplcatons of understandng the true value of brands. The goal of ths artcle s to help researchers develop a better framework for addressng brand equty and better communcate to senor managers the mportance of measurng and closely managng ther most mportant assets ther brands. Not only s ths value equaton essental n understandng brand value and brand equty, but t also provdes the framework for vald and accurate brand value measurement. When we are talkng about tangble benefts, we are addressng the objectve performance benefts delvered by the product or servce to whch the brand name s affxed. These tangble benefts may be delvered by the product or servce tself or by the channel n whch the product or servce s avalable. For example, n the automoble category, the tangble product benefts may nclude vehcle type (e.g., wagon, van, sedan), the horsepower of the engne, handlng characterstcs, safety features, warranty, and so forth. The ntangble benefts mght nclude your trust n the brand name, perceved relablty, stylng, how the mage of the brand name algns wth your self-mage, and so on. The channel (dealershp) may add addtonal performance benefts such as locaton convenence, selecton, on-ste servce and mantenance, readly avalable parts and expendables, loaner cars, a comfortable watng room, and so on. Recognzng these dfferent sources of benefts, we can once agan expand our value equaton to: Brand Value = (Product Benefts + Channel Benefts + Intangble Benefts) Costs Some products, especally n busness-to-busness categores, also have a sgnfcant servce component that s an ntegral part of the product and ts value. Examples of adjunct servce components nclude onlne techncal support, troubleshootng servces, mantenance remnders, and so on. Turnng to our automoble example, the servce attrbutes may nclude a free-mantenance perod, roadsde assstance package, and warranty servce remnders. These servce attrbutes should be vewed as separate components of the value equaton, thus we expand our equaton one more tme. Brand Value = (Product Benefts + Servce Benefts + Channel Benefts + Intangble Benefts) Costs And, of course, f we are talkng about a prmarly servces category, such as bankng servces or real estate servces, ths s the approprate value equaton. In contrast to the tangble benefts we ve just been dscussng, the ntangble benefts of ths relatonshp are less well understood because they are more complex and more dffcult to measure. But understandng ths component of the value equaton s the key to understandng why my frend pad $4,500 more for a Honda Passport, compared to an dentcal Isuzu Rodeo. In realty, the ntangble benefts n the value equaton are all communcated to the customer and the consumer by the brand name. It s the brand promse what the customer/consumer beleves the brand stands for. It has been descrbed as an mpled contract between the producer and user. The value of that set of ntangble benefts s the brand s equty. Brand equty encompasses a gestalt of ntrnsc values, or benefts, that complement the tangble benefts delvered by a partcular product or servce. These ntrnsc equtes may nclude such thngs as the mage mparted to the purchaser, trust n the producer, long-term reputaton for relablty, customer support, socal responsblty, prevous experences wth the brand, and so forth. In ths model, brand equty s a subset of total brand value. Thus, our value equaton now becomes: Brand Value = (Product Benefts + Servce Benefts + Channel Benefts + Brand Equty) Costs In the marketplace, ths concept of brand equty allows Honda to charge a prce premum over Isuzu because the Honda name conveys more value to most consumers than does the Isuzu brand name. That prce dfferental allows Honda to renforce ther brand equty through mproved product qualty, hgher levels of customer servce, nvestments n socally responsble programs, and more effectve promoton. It also gves Honda prcng power the power to trade off margn aganst share. Even at a $4,500 prce premum, Honda Passport outsold the Isuzu Rodeo by a rato of more than 3-to-1 n the U.S. market n the md 1990s. Of nterest to the marketng research communty s that ths model provdes a drect method for measurng both total brand value and brand equty. Those who have studed brand equty wll recognze that ths model s at consderable varance wth most of the earler defntons and descrptons of brand equty, wth the notable excepton of the varous publcatons by V. (Seenu) Srnvasan and colleagues. Elements of Brand Equty Our research has shown that there are two major components to brand equty. The frst component s a set of belefs about how the branded product or servce wll perform how well the brand wll fulfll ts promse. We call these the perceved performance attrbutes, or trust attrbutes. For example, n automobles, these trust attrbutes mght nclude the followng: reputaton for relablty economy safety 8 Summer 2008
performance customer support These are dstnct from, and dstnctly dfferent than, the objectve, tangble attrbutes lke warranty, gas mleage, number and types of arbags, brakng dstance, horsepower, and so forth. The trust attrbutes deal wth consumer belefs and values (defned as belefs, prncples, and deals), not necessarly product performance facts. The second set of components n brand equty s the brand mage attrbutes. These are the attrbutes that determne whether the brand s mage, or publc persona, algns wth the purchaser s personal mage and are also related to ther values. Stckng wth our automoble example, these mage attrbutes may nclude: prestgous luxurous utltaran sporty fun to drve flashy It s not always easy to separate these two classes of brand equty attrbutes. For example, safety s typcally a trust attrbute. But a brand mage of safety may also renforce what the buyer wants to say to others about hmself I purchased ths brand because I m concerned about my safety and the safety of my passengers. One of my values s safety. Economy s another confounded attrbute. The buyer may perceve that the vehcle s economcal to operate and mantan, but the buyer may also desre to communcate to hs frends and the publc at large, that he s a frugal person. Exhbt 1 The brand value equaton W Prce Prce Product?/ servce benefts w Purchase prce w Operatng costs w Mantanance costs w Attrbute 1 w Attrbute 2 w Attrbute 3 etc. Brand value Channel benefts The best way to keep them separate s to thnk of the trust attrbutes as dealng drectly wth perceved performance of the product or servce and the mage attrbutes as dealng wth the desres of the purchaser or user to express and renforce hs self-mage. Both trust attrbute sets and mage attrbute sets are based on the consumer s values, for good or ll, ether conscously or subconscously. Let s dscuss the last element of the value equaton, cost. In some product categores, especally n b-to-b and n consumer durables, cost may also have several elements ntal purchase prce, operatng costs, and mantenance costs. These should be ncluded n the value equaton f they apply to your product or servce category. One specal case of prce n hgh-tcket tems s fnancng. The mportance and mpact of the ntal prce of a product may be moderated by statng the prce n terms of a down payment and monthly payments over a specfc perod of tme. Thus, nstead of sayng the ntal prce of our Honda Passport was $25,000, we may say $25,000 or a $999 down payment and $464 per month for fve years. Or t could be stated as a lease rate of $329 per month for 36 months. If your brand s operatng n a category where prce s a major factor, these optons for statng prce must be ncluded. We can graphcally summarze the brand value equaton n Exhbt 1. Ths set of weghts and utltes may be vewed as the ndvdual purchaser s value equaton. It provdes a preference structure for gudng the customer n makng a choce between a competng set of offerngs. That s, gven a set of competng brands n a category and ther performance levels and prce, f we know a purchaser s value equaton, we can predct wth hgh relablty whch of those brands they are lkely to purchase. Marketng researchers wll recognze that there are several approaches for dervng these weghts and utltes. In our book we offer our own approach that uses a two-stage trade-off experment. Once the utlty for a brand s equty s derved, that s further decomposed nto t s component parts usng a rdge regresson, a kruskal regresson procedure, or some other key drver model that overcomes the problems wth ntercorrelatons wthn the ndependent attrbute set. The beta coeffcents or weghts from the regresson (or loadngs from smlar models) reveal the level of contrbuton each attrbute s makng to explan each brand s utlty (derved brand equty.) Choce W Product W Channel W Beneft w Attrbute 1 w Attrbute 2 w Attrbute 3 etc. Brand equty w Image 1 w Image 2 w Image 3 etc. Strategc Implcatons At ths pont, let s stand back and consder the strategc mplcatons of knowng these weghts and utltes for your customers and potental customers. Frst, value drves choce. Once your brand s n the potental purchasers consderaton set, n most crcumstances the brand wth the hghest overall value wll typcally be chosen. marketng research 9
Ths has tremendous mplcatons on the measurement of brand loyalty. Suffce t to say that the elements of ths model, properly crafted for the product/servce category n whch your brand competes, encompasses and explans why purchasers choose, or do not choose, your brand. The brand value equaton can explan why my frend purchased the Honda Passport rather than the Isuzu Rodeo, despte the $4,500 prce premum. The next mplcaton s that the brand value equaton model offers a strategc framework for successfully competng n the marketplace. By dervng the utlty (value) of dfferent performance levels of each ndvdual attrbute for both your customers and the customers of competng brands n a product/servce category, you can determne your strengths and weaknesses for any group of customers or prospects. Ths process wll pnpont where you should nvest n mprovng perceved value for each market segment n whch you compete. In the automoble example, my frend ascrbed value to certan attrbute performance levels for whch he was wllng to pay, both tangble and ntangble. For example, the prestge of drvng the Honda, rather than the Isuzu, was worth some porton of the $4,500 premum he pad. The brand value model wll help Honda management (or a compettor) better understand what that porton s worth. Another strategc mplcaton s that corporate management has four separate levers that can be manpulated to mprove brand value prce, product/servce performance, channel performance, and brand equty. The mportance of weghts assgned as part of the compettve assessment ndcates where management wll get the most ncrease n brand value for a gven nvestment n the brand s performance. Any change n attrbute performance, whether tangble or ntangble, can be prced out, so that a rgorous cost-beneft analyss can be undertaken. In our automoble example, ths gves managers of each brand nsght nto whch tangble and ntangble attrbutes to nvest n, along wth prcng strateges to acheve the best outcomes. It gves management nsght n how ther employees, channels, and partners are dong n satsfyng the customer s expectatons regardng the varous tangble and ntangble attrbutes and assocated value promsed by the brand. Brand Equty Implcatons Yet another mplcaton, and perhaps the most mportant, s that ths model allows you to better understand the role and contrbuton of brand equty n determnng total brand value. If your brand competes n a category where at least some brands enjoy hgh brand equty, then you can dentfy and better understand what specfc mage and trust attrbutes are assocated wth customers underlyng values and whch are most contrbutng to overall brand value. If your brand competes n a category where there are weak brand equtes, you can explore the opportuntes and lkely outcomes of makng hgher nvestments n brand equty. Agan, for our automotve example, ths means that Honda managers would better understand how to maxmze margns and volumes by understandng the ntangble product, servce, and channel benefts that ther customers most value, whch ones to feature n advertsng and other promotonal efforts, and the mportance to customer loyalty when the organzaton successfully delvers those attrbutes. Furthermore the value equaton provdes management wth a quanttatve measure of brand equty. And that measure can be converted nto a currency value at the unt level. In today s hypercompettve marketplace, brand equty s the only element of the brand value equaton that can be used for long-term compettve advantage. Compettors can beat your prces, they can usually duplcate or exceed any of your product/servce performance advantages, and they can normally successfully compete n your channels. Your only truly defensble asset s your brand equty. It s not easly defeated by compettor actons, only your own. Falng to keep the brand promse, engagng n questonable busness practces, or engagng n socally rresponsble actons can deprecate or even destroy brand equty your key busness asset. Promoton of a brand can address prce, tangble brand/ channel attrbutes, or brand equty. Brand equty s communcated usng consstent vsual cues and consstent messages, allowng the consumer to quckly and effcently dstngush Your only true defensble asset s your brand equty. between brands and ther ntrnsc product or servce attrbutes and underlyng values. As a purchaser consders the tangble product or servce features n concert wth brand equty and prce, he arrves at a set of products n a category that he wll consder for purchase the consderaton set. Thus, a brand s equty s somewhat dependent on effectve communcatons to the target market(s), and brand equty can often be mproved wth more effectve communcatons. However, communcatons alone cannot overcome a reputaton for poor product qualty or servce, socal rresponsblty, or a lack of trust. And communcatons certanly cannot overcome the ongong poor performance of an organzaton n not delverng on the brand promse by not creatng the total brand experence that the customer s antcpatng. Brand equty s heavly dependent on the realty of the brand experence. A brand s equty therefore becomes part of the trade-off exercse a consumer consders as he frst selects hs consderaton set, then decdes whch product to purchase. That s, purchasers actvely trade off both the perceved tangble benefts and the perceved ntrnsc benefts delvered by products n ther consderaton set, aganst prce, to arrve at ther value herarchy and ultmately ther purchase decson. Ths trade-off s not always a cogntve process. In categores where there s low nvolvement and regular repurchase, such as consumer packaged goods, the purchasers wll often conduct an ntal evaluaton of the competng brands n the 10 Summer 2008
category, make a selecton, and stck wth that brand as long as t meets ther performance and mage expectatons. Only when somethng goes wrong, or ther requrements change, or when a compettve offerng redefnes the consderaton set, wll they make a cogntve re-evaluaton of ther choces. Brand loyalty s prmarly a functon of perceved brand value. Brands that have hgh perceved value are almost always ncluded n a purchaser s consderaton set. If a brand s combned tangble and ntangble equtes are consstently hgher than any other brand n the category, that brand wll have the hghest loyalty n terms of purchase, repurchase, and recommendaton. Competng brands can only mprove ther loyalty aganst the brand equty leader by lowerng prce n the short term, mprovng ther product s performance on tangble features n the md term, or mprovng ther brand s ntangble benefts (or equty) n the long term. However, how good a job the brand does or does not do n meetng expectatons after the purchase wll affect ndvdual performance attrbute weghts on future purchases. It wll also nfluence the purchasers herarchy of brands and ther next choce. Therefore, the experence wth the brand after purchase affects the attrbute weghtngs, brand value perceptons, and future choce. Exceedng expectatons n the areas where a purchaser places hgh mportance (thus hgher utlty) renforces brand equty. Dsappontng performance wll decrease brand equty. Ths has profound mplcatons for employees throughout the organzaton as well as for other stakeholders, such as supplers, strategc partners n a network, and the mpact of word of mouth from those wrtng on socal meda stes about ther experences wth your brand. What We Learned One huge advantage of ths modelng approach s that we calculate the utltes and mportance weghts at the respondent level. Thus, we can break out and compare results by known user groups such as your customers versus a compettor s customers; heavy users versus lght users; or by any other classfcaton scheme, assumng you have an adequate sample sze n each group. The brand value model and ts accompanyng computerzed market smulator provde the followng detaled nformaton. 1. An estmate of overall brand equty for each brand n the study and the average per unt prce premum that equty s worth at the market level or wthn defned market segments. Gven accurate volume estmates, the per-unt prce premum can be projected to a total value of the brand n any partcular category. marketng research 11
2. Brand equty, prce, and product/servce feature values derved for each respondent can be used to segment the marketplace nto beneft groups such as prce-senstve, servce-senstve, brand-loyal for an ndvdual brand, brand-combnaton loyal, and attrbute mportance groups. Wthn each segment, the equty of each brand n the category s calculated. 3. Market smulatons can be run to estmate share of choce, gven each brand s equty derved from the model, coupled wth a known or contemplated product feature profle and a partcular prce. Thus, the user can observe the effects on share of choce for prce changes and changes n tangble product attrbute levels for any brand or brand combnaton. A seres of smulatons whereby only prce s vared allows the user to develop estmates of prce elastcty and cross-elastctes for a brand at the total market level or wthn any market segment. 4. In a smlar fashon, the model can be used to test and evaluate the extenson of a known brand name nto a new product/servce category and to evaluate the equty transfer of the brand name nto the new category. 5. Longtudnally, the user can observe the effects on brand value, brand equty, and share of choce due to changes n the marketng mx or a brand repostonng for any brand or combnaton of brands yours or your compettors. 6. Gven addtonal ratngs of brands on the more ntrnsc features of a brand s mage (e.g., trust, qualty of advertsng, contrbuton to the communty, socal responsblty, protectng the envronment, etc.), the model can drectly relate brand equty values to partcular actvtes of the frm. More broadly speakng, corporate fnancal offcers can use ths tool to provde a very accurate estmate of the asset value of brand names or trademarks. Ths may be very useful for Management s Dscusson and Analyss n annual fnancal statements. The model can also be used to assess the value of brand names and trademarks n an acquston stuaton where the true value of a frm may be understated because the value of brands and trademarks are not adequately reflected on the balance sheet. We explore the mplcatons further n our book when we dscuss how the fnancal communty can apply ths type of economc analyss for valuaton of brands. The advantages of the modelng approach, usng external surveys, follow: 1. The model s not dependent on nternal fnancal data. 2. After the ntal desgn and a baselne study, t s relatvely fast and easy to replcate the process over tme usng these proven research methods. 3. The survey and model dervaton can be executed at any tme n the busness cycle. That s, t s not dependent on nternal cyclcal accountng changes. 4. It takes nto account all major relevant brands n a defned product/servce category. 5. It measures brand equty relatve to other current and potental brands n the category, ncludng unbranded or store-brand tems when they exst n the category. 6. It can be used to measure the transfer of a brand s equty nto another category. 7. It recognzes that value of any one brand s equty can be defeated n the marketplace by compettor prcng strateges, at least n the short run. 8. It allows calculaton of total brand value and brand equty over alternatve prcng scenaros and volume scenaros for total market or wthn defned subsegments. 9. Results can be projected to estmate the total value of a brand name under alternatve sales projectons. Thus, ths modelng approach can be used to evaluate the total dollar value of a brand name for purposes of evaluaton and acquston. 10. If self-explcated ratngs of the components of brand equty are acqured from the same respondents, brand equty can be further decomposed nto specfc equty-buldng actvtes. 11. The results can be used as part of a closed-loop process to create more effectve defntons of subsegments as part of an overall brand qualty management and contnuous mprovement ntatve. Although marketng researchers have been usng and mprovng trade-off procedures for more than three decades, these have prmarly been appled to tactcal product and servce optmzaton and forecastng ssues. We argue that smlar technques can, and should, be appled to the key strategc ssue of brand asset values by deeply understandng total brand value and brand equty the strategc assets of the ownng organzaton. And those technques can be drectly lnked to the fnancal value of brands and the fnancal performance of the frm. We further argue that trackng and reportng the actve measurement and management of brand equty leads to a new manageral focus one that focuses on corporate values and the effectve management of ntangble assets. We call t values-based leadershp. Ths artcle has been reprnted from the book Value Creaton: The Power of Brand Equty (2008, Texere, an mprnt of Cengage Learnng/South-Western). For more nformaton vst www.valuecreatonbook.com. l Wllam Neal s founder and senor partner at SDR Consultng. He may be reached at wdneal@sdr-consultng.com. Ron Strauss s founder and presdent of BrandZone. He may be reached at rstrauss@brand-zone.com. 12 Summer 2008