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Chapter 10
Measuring Outcomes of Brand Equity: Capturing Market
Performance
Chapter Objectives
1. Recognize the multidimensionality of brand equity and the
importance of multiple methods to measure it.
2. Contrast dierent comparative methods to assess brand equity.
3. Explain the basics of how conjoint analysis works.
4. Review dierent holistic methods for valuing brand equity.
5. Describe the relationship between branding and 'nance.
Overview
Chapter 2 of the book details seven bene'ts or outcomes that can
result when a 'rm builds positive customer-based equity for a brand:
greater perceived dierentiation, stronger brand loyalty, larger
margins, higher trade support, increased marketing communication
eectiveness, and more opportunities to extend and license the brand
name. Chapter 10 describes procedures that allow a 'rm to assess
whether its marketing programs have, indeed, generated such
outcomes.
Comparative methods help assess the speci'c bene'ts of brand equity.
Marketing-based comparative approaches hold the brand 'xed and
examine consumer responses to changes in the marketing program.
Brand-based comparative approaches hold 'xed a particular marketing
activity being considered and examine how consumer responses to the
activity change as the brand identi'cation is varied between a focal
and a comparison brand. This usually is done through the use of an
experiment in which one group of consumers responds to questions
about a product or an aspect of its marketing program attributed to the
focal brand, and another group of consumers responds to questions
about the same product or aspect of its marketing program attributed
to the comparison brand, typically either 'ctitious, unnamed, or
competitive. A comparison of the responses provides insight into the
equity of the focal brand.
Conjoint analysis varies the attributes or levels of attributes included in
product pro'les presented to consumers. Consumer ratings of the
pro'les can be analyzed to determine the importance attached to each
attribute and the tradeos consumers are willing to make between
them.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
In contrast to techniques just described, holistic methods are used to
derive an overall brand value, either in terms of utility or money. The
residual approach considers brand equity to be what remains when
preferences for objective characteristics of the product are subtracted
from overall brand preference. Data used to determine residual value
can be gathered through scanners, experiments, or surveys.
Valuation approaches measure brand equity in dollars by determining:
a) the amount of money that would be required to reproduce or replace
the brand (cost approach), b) the incremental cash 4ows that would
arise from the sale of the brand versus those that would arise from the
sale of an unbranded product (market approach), or c) the net present
value of the discounted future cash 4ows to be derived from the brand
(income approach).
Brand Focus 10.0 “Branding & Finance” discusses the relationship
between brand equity valuations and stock market information and
performance. It also analyzes the accounting implications of branding.
Science of Branding
THE SCIENCE OF BRANDING 10-1
THE PROPHET BRAND VALUATION METHODOLOGY
Prophet’s brand valuation methodology starts with the realization that
accountants de'ne an asset as “a resource, under the control of an
enterprise, to which future economic bene'ts will 4ow.” Fundamental
to Prophet’s approach is that brands generate future economic
bene'ts, in that consumers who know of a brand and prefer it to other
choices will spend money buying it now and in the future. Prophet’s
brand valuation methodology has four steps:
1. Finance
Economic pro't is the pro't a company earns that exceeds its cost of
capital. It is generally acknowledged that brands are a major cause of a
company earning and sustaining economic pro't. The starting point for
any valuation is therefore to extract from the income statement and
balance sheet the economic pro't earned by the brand being valued.
2. Brand Contribution
The Prophet brand contribution is a procedure that breaks economic
pro't into a set of drivers and then isolates the portion that is
attributable to the brand’s equity or strength.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
3. Category Expected Life
The pro't a brand can earn is to a large extent dictated by the nature
of the category in which it sells. Within the category, supply and
demand pressures will exert an in4uence on the price range consumers
will tolerate, which in turn determines pro't margins brand owners can
achieve. The Prophet model uses an evaluation of the category to
measure the extent to which the category encourages or inhibits the
earning of economic pro't for the brands that compete within it. The
outcome of this evaluation is to set parameters in years of expected
economic life for a notional strong (dominant) and weak (marginal)
brand.
4. Brand Knowledge Structure (BKS)
Brand knowledge structure, or BKS, is the bundle of knowledge
consumers hold in memory and use to decide what products they need
and which of the available brands they will buy. The comparative
strength with which this information is held by the category community
of users determines the success of the competing brands. The Prophet
method uses market research–based measurements of brand strength
and preference to set the number of years in the cash 4ow projection:
the stronger the brand relative to its competitors, the more years in
the model.
Valuation
The model calculates the value of the brand by working out how many
years to project the growing part of the cash 4ows and then the shape
and duration of a theoretical decay period. It does this by merging the
BKS data with the category expected life results. The value is the
resulting capitalized value of the projected cash 4ows.
Key Di0erences
A few characteristics distinguish the Prophet brand valuation
methodology. Other models typically look at only 've years of future
cash 4ows, add a perpetuity based on a discounted sixth year, and
simply divide the sixth year by the discount rate. The Prophet approach
models the entire expected economic life of the brand in terms of the
franchise run (its rise) and decay (its decline). The nature of the brand
category (category expected life) and the relative strength of the brand
as measured by the BKS determine the total number of years for the
present-value calculation. The proportions are reversed compared to
many other models. Also, like most corporate 'nance valuations, the
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
Prophet approach uses a classically estimated weighted average cost
of capital (WACC). It takes speci'c risk into account in the cash 4ows,
as opposed to the discount rate. Other methodologies use the market
risk and beta components of WACC to insert their consumer-driven
brand risk premiums.
Branding Briefs
BRANDING BRIEF 10-1
BEAUTY IS IN THE EYE OF THE BEHOLDER
In making acquisitions, a company has to determine what it feels the
acquired brands are worth. In some instances, the hoped-for brand
value has failed to materialize, serving as a reminder that the value of
a brand is partly a function of what you do with it. A classic example is
Quaker Oats’s $1.7 billion acquisition of Snapple in 1994.
Snapple had become a popular national brand through powerful
grassroots marketing and a willingness to distribute to small outlets
and convenience stores. Quaker changed Snapple’s ad campaign and
revamped its distribution system. Quaker also changed the packaging
by updating the label and putting Snapple in 64-ounce bottles, moves
that did not sit well with loyal customers. The results were disastrous.
Another unsuccessful acquisition occurred when Quality Dining bought
Bruegger’s Bagels in 1996 with $142 million in stock. More recently,
despite much success with its Ford brand, Ford Motor Company could
never seem to 'nd the right formula for the overseas acquisitions that
made up its Premier Automotive Group collection. The company sold
the Jaguar and Land Rover brands to India’s Tata Motors in March 2008
for $1.7 billion. After paying $6.5 billion for Volvo in 1999, Ford sold it
to China’s Geely for $1.5 billion in 2010. Ford’s decision was motivated
by a lack of success with its luxury brands and a desire to focus on its
more promising Ford brand. In all these case, despite the best of
intentions, brands were sold with an implicit assumption that could be
more pro'tably marketed by someone else.
Brand Focus
BRAND FOCUS 10.0
BRANDING AND FINANCE
Marketers increasingly must be able to quantify their activities directly
or indirectly in 'nancial terms. One important topic that has received
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
increasing academic interest is the relationship between brand equity
and brand strategies and stock market information and performance.
Another important topic is the accounting implications of branding.
Stock Market Reactions
Several researchers have studied how the stock market reacts to the
brand equity and marketing activities for companies and products.
Brand Equity—In a classic study, David Aaker and Robert Jacobson
examined the association between yearly stock return and yearly
brand changes for 34 companies during the years 1989 to 1992. They
also compared the accompanying changes in current-term return on
investment (ROI). They found that stock market return was positively
related to changes in ROI. Firms that experienced the largest gains in
brand equity saw their stock return average 30 percent. Conversely,
those 'rms with the largest losses in brand equity saw stock return
average a negative 10 percent. The researchers concluded that
investors can and do learn about changes in brand equity by learning
about a company’s plans and programs.
Using data for 'rms in the computer industry in the 1990s, Aaker and
Jacobson found that changes in brand attitude were associated
contemporaneously with stock return and led accounting 'nancial
performance. They also found 've factors (new products, product
problems, competitor actions, changes in top management, and legal
actions) that were associated with signi'cant changes in brand
attitudes. Madden, Fehle, and Fournier found that strong brands not
only delivered greater returns to stockholders versus a relevant market
benchmark, they did so with less risk.
Marketing Activities—Adopting an event study methodology, Lane and
Jacobson were able to show that stock market participants’ responses
to brand extension announcements, consistent with the tradeos
inherent in brand leveraging, depend interactively and
nonmonotonically on brand attitude and familiarity. In another event
study of 58 'rms that changed their names in the 1980s, Horsky and
Swyngedouw found that for most of the 'rms, name changes were
associated with improved performance; the greatest improvement
tended to occur in 'rms that produced industrial goods and whose
performance prior to the change was relatively poor. The researchers
interpreted the act of a name change as a signal that other measures
to improve performance will be seriously and successfully undertaken.
A mixed branding strategy (where a 'rm used corporate names for
some products and individual names for others) was associated with
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
lower values of Tobin’s Q. The researchers also concluded that most
'rms would have been able to improve their Tobin’s Q had they
adopted a branding strategy dierent from the one suggested by
examining their brand portfolios.
Similarly, Morgan, Rego, and colleagues showed how 've brand
portfolio characteristics (number of brands owned, number of
segments in which they are marketed, degree to which the brands in
the 'rm’s portfolio compete with one another, and consumer
perceptions of the quality and price of the brands in the 'rm’s
portfolio) aected a 'rm’s marketing eectiveness and eMciency and
'nancial performance. Finally, Mizik and Jacobson found that the stock
market reacted favorably when a 'rm increased its emphasis on value
appropriation over value creation.
Accounting Perspectives on Brands
Coinciding with the introduction to business of the main frame
computer in the 1970s and the personal computer in the 1980s, the
gap started to open. At the peak of the “dot.com” boom, market value
was measured at 've times book value. Traditionally, company annual
'nancial accounts were based on “historic cost.” But the cost and the
value of the asset at current market prices often diered.
To provide investors with more readily useful information for making
investment decisions, the major accounting bodies, the Financial
Accounting Standards Board (FASB) in the United States and the
International Accounting Standards Board (IASB) representing
accountants in the rest of the world, took two steps:
1. They moved from historic cost to fair value.
2. They began to develop accounting standards to take account of
assets that have no monetary value and no physical substance.
Over the past decade, FASB and the IASB have worked on the following
four standards relevant to brands:
IFRS 3 Business Combinations—The purpose of this standard is to
guide preparers of 'nancial statements in the treatment of companies
after a merger or acquisition.
IAS 38 Intangible Assets—It contradicts IFRS 3 in that it states that
brands developed by a company do not qualify to be described as
assets.
IFRS 13 Fair Value Management—As its name implies, it explains in
considerable detail how an asset should be measured at its fair value.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
IFRS 36 Impairment of Assets—IFRS 36 requires assets to be tested
annually, and if the value has fallen below what is called the carrying
amount, the dierence must be treated as a loss in the income
statement.
Discussion questions
1. Choose a product. Conduct a branded and unbranded experiment.
What do you learn about the equity of the brands in that product
class?
2. Can you identify any other advantages or disadvantages with the
comparative methods?
3. Pick a brand and conduct an analysis similar to that done for the
Planter’s brand. What do you learn about its extendibility as a
result?
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
4. What do you think of the Interbrand methodology? What do you see
as its main advantages and disadvantages?
5. How do you think Young and Rubicam’s Brand Asset Valuator
relates to the Interbrand methodology (see Brand Focus 9.0)? What
do you see as its main advantages and disadvantages?
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
Exercises and assignments
1. Have students identify brands that have the highest equity levels in
their categories. Discuss the likely reasons for the preeminence of
the brands, and what the implications for marketing strategy are.
Examples of product categories might include motels, computers,
sunglasses, automobiles, ski equipment, and airlines.
2. Have several groups of students take a brand-based comparative
approach by conducting a product purchase or consumption
research on an existing product with the brand identi'cation being
hidden for an unbranded control group. This activity will help
students understand better the concept of blind testing in research
studies.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
3. Have students divided into groups. Have each group pick a brand of
their choice and have one group at a time to treat the others as
consumers and assess their response to dierent advertising
strategies, executions, or media plans of their chosen brand. This
activity will help students understand better the application of
marketing-based comparative approaches.
4. Ask students to identify brands that are market leaders in their
categories, but that are weak on other dimensions. Analyze the
reasons for the weaknesses and describe strategies for overcoming
them.
Key take-away points
1. Comparative methods are research studies or experiments that
examine consumer attitudes and behavior toward a brand to
directly estimate speci'c bene'ts arising from having a high level of
awareness and strong, favorable, and unique brand associations.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
2. The eect of brand equity on consumer response to marketing
activity can be measured using experimental or statistical
techniques.
3. Holistic methods place an overall value on the brand in either
abstract utility terms or concrete 'nancial terms.
4. The actual 'nancial value of a brand can only be estimated, and
researchers have developed several dierent techniques for doing
so.
5. Multiple measures and methods should be used to assess the
multiple outcomes of brand equity.
© 2013 Pearson Education, Inc. publishing as Prentice Hall.
