6 Summer 2008

A FrameworkBrand Equityfor Measuring and Managing

marketing research 7

For most publicly owned organizations, the majority of their assets cannot be accounted for by current financial accounting methods. On average, accountants account for less than

25% of the value that willing buyers and sellersthe marketplace on public firms. One only needs to compare a public firms book value to its market capitalization to understand just how much of the firms asset value is unaccounted for in their financial statements. For most public firms, the vast amount of that hidden asset value is due to brand equity.

Most people refer to brand value and brand equity as interchangeable and equal entities. Theyre not. In fact, the difference between brand value and brand equity goes to the core of understanding how to cre-ate value in todays world.

The Brand Value ConceptSeveral years ago I was helping a friend look for

an automobile to purchase. He was looking for a smaller SUV with good reliability and was quite par-tial to smaller Japanese vehicles. After we looked over several models he focused in on the Honda Passport as just about the best combination of size, comfort, economy, and price he was looking for. Hearing his description, I did a search of Consumer Reports and found that the Isuzu Rodeo was an identical vehicle and it retailed for a lot less. I told my friend to look

at the Isuzu, instead. He did, but then bought the Passport paying about $4,500 more than he would have for an exact duplicate vehicle with a different nameplate. Basically, my friend paid $4,500 for a Honda emblem on a perfectly good Isuzu Rodeo.

Why would he do such a thing? The answer goes to the heart of understanding the concepts of brand value and brand equity. The answer lies in what my friend perceived to be value. Value is most generally defined as a measure of worth, which is most often expressed as benefits less costs.

Value = Benefits - Costs

The benefits part of this value equation is where most of the complexity lies. A branded product or service should be viewed as a bundle of tangible and intangible benefits. When you accept that premise, then we can expand the value equation to:

Brand Value = Tangible Benefits + Intangible Benefits Costs

Back to my friendsince there was no difference between the two vehicles in terms of tangible benefits (with the possible exception of minor differences in depreciation and trade-in value), he placed high value on the intangible aspects of the Honda brand name. In fact, the value that he placed on the Honda name-plate was around $4,500.

B y W i l l i a m Nea l a nd Ron S t r auss

A FrameworkBrand Equityfor Measuring and Managing

C. J

. Bur

ton/

Veer

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In contrast to the tangible benefits weve just been discuss-ing, the intangible benefits of this relationship are less well understood because they are more complex and more difficult to measure. But understanding this component of the value equation is the key to understanding why my friend paid $4,500 more for a Honda Passport, compared to an identical Isuzu Rodeo.

In reality, the intangible benefits in the value equation are all communicated to the customer and the consumer by the brand name. It is the brand promisewhat the customer/con-sumer believes the brand stands for. It has been described as an implied contract between the producer and user.

The value of that set of intangible benefits is the brands equity. Brand equity encompasses a gestalt of intrinsic values, or benefits, that complement the tangible benefits delivered by a particular product or service. These intrinsic equities may in-clude such things as the image imparted to the purchaser, trust in the producer, long-term reputation for reliability, customer support, social responsibility, previous experiences with the brand, and so forth.

In this model, brand equity is a subset of total brand value. Thus, our value equation now becomes:

Brand Value = (Product Benefits + Service Benefits + Channel Benefits + Brand Equity) Costs

In the marketplace, this concept of brand equity allows Honda to charge a price premium over Isuzu because the Honda name conveys more value to most consumers than does the Isuzu brand name. That price differential allows Honda to reinforce their brand equity through improved product quality, higher levels of customer service, investments in socially responsible programs, and more effective promo-tion. It also gives Honda pricing powerthe power to trade off margin against share. Even at a $4,500 price premium, Honda Passport outsold the Isuzu Rodeo by a ratio of more than 3-to-1 in the U.S. market in the mid 1990s.

Of interest to the marketing research community is that this model provides a direct method for measuring both total brand value and brand equity. Those who have studied brand equity will recognize that this model is at considerable vari-ance with most of the earlier definitions and descriptions of brand equity, with the notable exception of the various publi-cations by V. (Seenu) Srinivasan and colleagues.

Elements of Brand EquityOur research has shown that there are two major compo-

nents to brand equity. The first component is a set of beliefs about how the branded product or service will performhow well the brand will fulfill its promise. We call these the perceived performance attributes, or trust attributes. For example, in automobiles, these trust attributes might include the following:

reputationforreliability

economy

safety

Not only is this value equation essential in understanding brand value and brand equity, but it also provides the frame-work for valid and accurate brand value measurement. When we are talking about tangible benefits, we are addressing the objective performance benefits delivered by the product or service to which the brand name is affixed. These tangible benefits may be delivered by the product or service itself or by the channel in which the product or service is available.

For example, in the automobile category, the tangible product benefits may include vehicle type (e.g., wagon, van, sedan), the horsepower of the engine, handling characteristics, safety features, warranty, and so forth. The intangible benefits might include your trust in the brand name, perceived reliabil-ity, styling, how the image of the brand name aligns with your self-image, and so on.

The channel (dealership) may add additional performance benefits such as location convenience, selection, on-site service and maintenance, readily available parts and expendables, loaner cars, a comfortable waiting room, and so on.

Recognizing these different sources of benefits, we can once again expand our value equation to:

Brand Value = (Product Benefits + Channel Benefits + Intangible Benefits) Costs

Some products, especially in business-to-business cat-egories, also have a significant service component that is an integral part of the product and its value. Examples of adjunct service components include online technical support, trouble-shooting services, maintenance reminders, and so on. Turning to our automobile example, the service attributes may include a free-maintenance period, roadside assistance package, and warranty service reminders.

These service attributes should be viewed as separate com-ponents of the value equation, thus we expand our equation one more time.

Brand Value = (Product Benefits + Service Benefits + Channel Benefits + Intangible Benefits) Costs

And, of course, if we are talking about a primarily services category, such as banking services or real estate services, this is the appropriate value equation.

Executive Summary

This article is an extract from Chapter 7 of the book Value Creation: The Power of Brand Equity, which ex-

plains brand equity, how it differs from brand value,

and the strategic implications of understanding the

true value of brands. The goal of this article is to help

researchers develop a better framework for address-

ing brand equity and better communicate to senior

managers the importance of measuring and closely

managing their most important assetstheir brands.

marketing research 9

performance

customersupport

These are distinct from, and distinctly different than, the objective, tangible attributes like warranty, gas mileage, num-ber and types of airbags, braking distance, horsepower, and so forth. The trust attributes deal with consumer beliefs and values (defined as beliefs, principles, and ideals), not necessar-ily product performance facts.

The second set of components in brand equity is the brand image attributes. These are the attributes that determine whether the brands image, or public persona, aligns with the purchasers personal image and are also related to their values. Sticking with our automobile example, these image attributes may include:

prestigious

luxurious

utilitarian

sporty

funtodrive

flashy

Its not always easy to separate these two classes of brand equity attributes. For example, safety is typically a trust attri-bute. But a brand image of safety may also reinforce what the buyer wants to say to others about himselfI purchased this brand because Im concerned about my safety and the safety of my passengers. One of my values is safety.

Economy is another confounded attribute. The buyer may perceive that the vehicle is economical to operate and main-tain, but the buyer may also desire to communicate to his friends and the public at large, that he is a frugal person.

The best way to keep them separate is to think of the trust attributes as dealing directly with perceived performance of the product or service and the image attributes as dealing with the desires of the purchaser or user to express and reinforce his self-image. Both trust attribute sets and image attribute sets are based on the consumers values, for good or ill, either consciously or subconsciously.

Lets discuss the last element of the value equation, cost. In some product categories, especially in b-to-b and in consumer durables, cost may also have several elementsinitial pur-chase price, operating costs, and maintenance costs. These should be included in the value equation if they apply to your product or service category.

One special case of price in high-ticket items is financing. The importance and impact of the initial price of a product may be moderated by stating the price in terms of a down payment and monthly payments over a specific period of time. Thus, instead of saying the initial price of our Honda Passport was $25,000, we may say $25,000 or a $999 down payment and $464 per month for five years. Or it could be stated as a lease rate of $329 per month for 36 months. If your brand is operating in a category where price is a major factor, these options for stating price must be included.

We can graphically summarize the brand value equation in Exhibit 1. This set of weights and utilities may be viewed as the individual purchasers value equation. It provides a preference structure for guiding the customer in making a choice between a competing set of offerings. That is, given a set of competing brands in a category and their performance levels and price, if we know a purchasers value equation, we can predict with high reliability which of those brands they are likely to purchase.

Marketing researchers will recognize that there are several approaches for deriving these weights and utilities. In our

book we offer our own approach that uses a two-stage trade-off experiment. Once the utility for a brands equity is derived, that is further decomposed into its component parts using a ridge regression, a kruskal regression procedure, or some other key driver model that overcomes the problems with intercorrela-tions within the independent attribute set. The beta coefficients or weights from the regression (or loadings from similar models) reveal the level of contribution each attribute is making to explain each brands utility (derived brand equity.)

Strategic ImplicationsAt this point, lets stand back and consider

the strategic implications of knowing these weights and utilities for your customers and potential customers.

First, value drives choice. Once your brand is in the potential purchasers consideration set, in most circumstances the brand with the high-est overall value will typically be chosen.

Brand value

Choice

Brand equityChannel benefitsProduct?/

service benefits

Price

W Price

wi Purchase pricewi Operating costs

wi Maintanance costswi Attribute 1wi Attribute 2wi Attribute 3

etc.

wi Attribute 1wi Attribute 2wi Attribute 3

etc.

wi Image 1wi Image 2wi Image 3

etc.

W Product W Channel W Benefit

Exhibit 1 The brand value equation

10 Summer 2008

This has tremendous implications on the measurement of brand loyalty. Suffice it to say that the elements of this model, properly crafted for the product/service category in which your brand competes, encompasses and explains why purchasers choose, or do not choose, your brand. The brand value equation can explain why my friend purchased the Hon-da Passport rather than the Isuzu Rodeo, despite the $4,500 price premium.

The next implication is that the brand value equation model offers a strategic framework for successfully competing in the marketplace. By deriving the utility (value) of differ-ent performance levels of each individual attribute for both your customers and the customers of competing brands in a product/service category, you can determine your strengths and weaknesses for any group of customers or prospects. This process will pinpoint where you should invest in improving perceived value for each market segment in which you com-pete. In the automobile example, my friend ascribed value to certain attribute performance levels for which he was willing to pay, both tangible and intangible. For example, the prestige of driving the Honda, rather than the Isuzu, was worth some portion of the $4,500 premium he paid. The brand value model will help Honda management (or a competitor) better understand what that portion is worth.

Another strategic implication is that corporate management has four separate levers that can be manipu-lated to improve brand valueprice, product/service performance, chan-nel performance, and brand equity. The importance of weights assigned as part of the competitive assessment indicates where manage-ment will get the most increase in brand value for a given in-vestment in the brands performance. Any change in attribute performance, whether tangible or intangible, can be priced out, so that a rigorous cost-benefit analysis can be under-taken. In our automobile example, this gives managers of each brand insight into which tangible and intangible attributes to invest in, along with pricing strategies to achieve the best out-comes. It gives management insight in how their employees, channels, and partners are doing in satisfying the customers expectations regarding the various tangible and intangible at-tributes and associated value promised by the brand.

Brand Equity ImplicationsYet another implication, and perhaps the most important,

is that this model allows you to better understand the role and contribution of brand equity in determining total brand value. If your brand competes in a category where at least some brands enjoy high brand equity, then you can identify and better understand what specific image and trust attributes are associated with customers underlying values and which are most contributing to overall brand value. If your brand competes in a category where there are weak brand equities, you can explore the opportunities and likely outcomes of making higher investments in brand equity. Again, for our automotive example, this means that Honda managers would

better understand how to maximize margins and volumes by understanding the intangible product, service, and channel benefits that their customers most value, which ones to feature in advertising and other promotional efforts, and the impor-tance to customer loyalty when the organization successfully delivers those attributes.

Furthermore the value equation provides management with a quantitative measure of brand equity. And that measure can be converted into a currency value at the unit level.

In todays hypercompetitive marketplace, brand equity is the only element of the brand value equation that can be used for long-term competitive advantage. Competitors can beat your prices, they can usually duplicate or exceed any of your product/service performance advantages, and they can nor-mally successfully compete in your channels. Your only truly defensible asset is your brand equity. It is not easily defeated by competitor actions, only your own. Failing to keep the brand promise, engaging in questionable business practices, or engaging in socially irresponsible actions can depreciate or even destroy brand equityyour key business asset.

Promotion of a brand can address price, tangible brand/channel attributes, or brand equity. Brand equity is communi-cated using consistent visual cues and consistent messages, allowing the consumer to quickly and efficiently distinguish

between brands and their intrinsic product or service attri-butes and underlying values. As a purchaser considers the tan-gible product or service features in concert with brand equity and price, he arrives at a set of products in a category that he will consider for purchasethe consideration set. Thus, a brands equity is somewhat dependent on effective commu-nications to the target market(s), and brand equity can often be improved with more effective communications. However, communications alone cannot overcome a reputation for poor product quality or service, social irresponsibility, or a lack of trust. And communications certainly cannot overcome the on-going poor performance of an organization in not delivering on the brand promise by not creating the total brand experi-ence that the customer is anticipating. Brand equity is heavily dependent on the reality of the brand experience.

A brands equity therefore becomes part of the trade-off ex-ercise a consumer considers as he first selects his consideration set, then decides which product to purchase. That is, purchas-ers actively trade off both the perceived tangible benefits and the perceived intrinsic benefits delivered by products in their consideration set, against price, to arrive at their value hierar-chy and ultimately their purchase decision.

This trade-off is not always a cognitive process. In catego-ries where there is low involvement and regular repurchase, such as consumer packaged goods, the purchasers will often conduct an initial evaluation of the competing brands in the

Your only true defensible asset is your brand equity.

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category, make a selection, and stick with that brand as long as it meets their performance and image expectations. Only when something goes wrong, or their requirements change, or when a competitive offering redefines the consideration set, will they make a cognitive re-evaluation of their choices.

Brand loyalty is primarily a function of perceived brand value. Brands that have high perceived value are almost always included in a purchasers consideration set. If a brands combined tangible and intangible equities are consistently higher than any other brand in the category, that brand will have the highest loyalty in terms of purchase, repurchase, and recommendation. Competing brands can only improve their loyalty against the brand equity leader by lowering price in the short term, improving their products performance on tangible features in the mid term, or improving their brands intangible benefits (or equity) in the long term.

However, how good a job the brand does or does not do in meeting expectations after the purchase will affect individu-al performance attribute weights on future purchases. It will also influence the purchasers hierarchy of brands and their next choice. Therefore, the experience with the brand after purchase affects the attribute weightings, brand value perceptions, and future choice. Exceeding expectations in the areas where a purchaser places high importance (thus higher utility) reinforces brand equity. Disappointing performance

will decrease brand equity. This has profound implications for employees throughout the organization as well as for other stakeholders, such as suppliers, strategic partners in a network, and the impact of word of mouth from those writing on social media sites about their experiences with your brand.

What We LearnedOne huge advantage of this modeling approach is that

we calculate the utilities and importance weights at the respondent level. Thus, we can break out and compare results by known user groups such as your customers versus a competitors customers; heavy users versus light users; or by any other classification scheme, assuming you have an adequate sample size in each group.

The brand value model and its accompanying computer-ized market simulator provide the following detailed information.

1. An estimate of overall brand equity for each brand in the study and the average per unit price premium that equity is worth at the market level or within defined market segments. Given accurate volume estimates, the per-unit price premium can be projected to a total value of the brand in any particular category.

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2. Brand equity, price, and product/service feature values derived for each respondent can be used to segment the marketplace into benefit groups such as price-sensitive, service-sensitive, brand-loyal for an individual brand, brand-combination loyal, and attribute importance groups. Within each segment, the equity of each brand in the category is calculated.

3. Market simulations can be run to estimate share of choice, given each brands equity derived from the model, coupled with a known or contemplated product feature profile and a particular price. Thus, the user can observe the effects on share of choice for price changes and changes in tangible product attribute levels for any brand or brand combina-tion. A series of simulations whereby only price is varied allows the user to develop estimates of price elasticity and cross-elasticities for a brand at the total market level or within any market segment.

4. In a similar fashion, the model can be used to test and evaluate the extension of a known brand name into a new product/service category and to evaluate the equity trans-fer of the brand name into the new category.

5. Longitudinally, the user can observe the effects on brand value, brand equity, and share of choice due to changes in the marketing mix or a brand repositioning for any brand or combination of brandsyours or your competitors.

6. Given additional ratings of brands on the more intrinsic features of a brands image (e.g., trust, quality of advertis-ing, contribution to the community, social responsibility, protecting the environment, etc.), the model can directly relate brand equity values to particular activities of the firm.

More broadly speaking, corporate financial officers can use this tool to provide a very accurate estimate of the asset value of brand names or trademarks. This may be very useful for Managements Discussion and Analysis in annual financial statements.

The model can also be used to assess the value of brand names and trademarks in an acquisition situation where the true value of a firm may be understated because the value of brands and trademarks are not adequately reflected on the balance sheet.

We explore the implications further in our book when we discuss how the financial community can apply this type of economic analysis for valuation of brands. The advantages of the modeling approach, using external surveys, follow:

1. The model is not dependent on internal financial data.

2. After the initial design and a baseline study, it is relatively fast and easy to replicate the process over time using these proven research methods.

3. The survey and model derivation can be executed at any time in the business cycle. That is, it is not dependent on internal cyclical accounting changes.

4. It takes into account all major relevant brands in a defined product/service category.

5. It measures brand equity relative to other current and potential brands in the category, including unbranded or store-brand items when they exist in the category.

6. It can be used to measure the transfer of a brands equity into another category.

7. It recognizes that value of any one brands equity can be defeated in the marketplace by competitor pricing strate-gies, at least in the short run.

8. It allows calculation of total brand value and brand equity over alternative pricing scenarios and volume scenarios for total market or within defined subsegments.

9. Results can be projected to estimate the total value of a brand name under alternative sales projections. Thus, this modeling approach can be used to evaluate the total dollar value of a brand name for purposes of evaluation and acquisition.

10. If self-explicated ratings of the components of brand eq-uity are acquired from the same respondents, brand equity can be further decomposed into specific equity-building activities.

11. The results can be used as part of a closed-loop process to create more effective definitions of subsegments as part of an overall brand quality management and continuous improvement initiative.

Although marketing researchers have been using and improving trade-off procedures for more than three decades, these have primarily been applied to tactical product and service optimization and forecasting issues. We argue that similar techniques can, and should, be applied to the key strategic issue of brand asset values by deeply understanding total brand value and brand equitythe strategic assets of the owning organization. And those techniques can be directly linked to the financial value of brands and the financial performance of the firm. We further argue that tracking and reporting the active measurement and management of brand equity leads to a new managerial focusone that focuses on corporate values and the effective management of intangible assets. We call it values-based leadership.

This article has been reprinted from the book Value Creation: The Power of Brand Equity (2008, Texere, an imprint of Cengage Learning/South-Western). For more information visit www.valuecreationbook.com. l

William Neal is founder and senior partner at SDR Consult-ing. He may be reached at wdneal@sdr-consulting.com. Ron Strauss is founder and president of BrandZone. He may be reached at rstrauss@brand-zone.com.