978-0132664257 Chapter 10 Solution Manual

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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 dierent comparative methods to assess brand equity.

3. Explain the basics of how conjoint analysis works.

4. Review dierent 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 dierentiation, stronger brand loyalty, larger

margins, higher trade support, increased marketing communication

eectiveness, 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 tradeos consumers are willing to make between

them.

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.

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

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

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 tradeos

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

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 dierent 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) aected a ‘rm’s marketing eectiveness 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 diered.

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.

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 dierence 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?

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?

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.

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 dierent 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.

2. The eect 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 dierent techniques for doing

so.

5. Multiple measures and methods should be used to assess the

multiple outcomes of brand equity.