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Measuring Outcomes of Brand Equity: Capturing Market Performance

BRAND MANAGEMENT 24752

Learning Objectives • Recognize the multidimensionality of brand equity and the

importance of multiple methods to measure it

• Contrast different comparative methods to assess brand equity

• Explain the basic logic of how conjoint analysis works

• Review different holistic methods for valuing brand equity

• Describe the relationship between branding and finance

Brand Equity

• A common denominator that all brands have

• Represents the added value endowed to a product as a result of past investments in the marketing activity of a brand.

• How do we measure “added value”?

Measurement issues

• Assumption –Different outcomes result from the marketing of a

product or service because of its brand name –Requires the following comparison: what would

happen if the same product did not have brand identification but was marketed at the same level of support?

What if..? •2 situations

• Full marketing support = $sales (??)

• Full marketing support = $ sales (??)

Realistic?

•Full marketing support = $$$ ??

•Full marketing support = $ ??

Difference is due to brand equity. No difference = no brand equity

Measuring Brand Equity

• We actually measure outcomes of brand equity

• Very post-hoc in terms of approach

• A sampling of some methods –Comparative methods

1. Brand based – vary the brand 2. Marketing based – vary a marketing mix variable 3. Conjoint Analysis

–Holistic methods 1. Valuation approaches

Comparative Methods • Brand-Based Comparative Approaches

• Marketing-Based Comparative Approaches

• Conjoint Analysis

Presenter

Presentation Notes

Comparative methods are research studies or experiments that examine consumer attitudes and behavior toward a brand to directly estimate specific benefits arising from having a high level of awareness and strong, favorable, and unique brand associations.

Comparative Methods 1. BRAND BASED

• Experiments where one group responds to questions about the product where the brand (Giordano) is identified and the other group responds to questions when it is not (no brand name) or unknown brand

How favorable is your opinion about this ad? How much would you be willing to pay for this outfit?

WEAR HOUSE

Comparative methods • Preference data

–Which box of cornflakes would you prefer?

Brand X [47%]

Brand Y [53%]

Kelloggs [59%]

Brand Y [41%]

Brand-Based Comparative Approaches • Competitive brands used as benchmarks by consumers

– Exemplar: Category leader or some other brand that consumers feel is representative of the category, like their most preferred brand

• Applications – Classic example is blind testing research

▪ Consumers examine or use a product with or without brand identification

▪ Differences typically emerge

• Critique – Learning is limited by the number of different applications

examined

Presenter

Presentation Notes

Applications Consumption research for new or existing products. Useful to determine brand equity benefits related to price margins and premiums. Critique Advantages Isolates the value of a brand in a very real sense. Applicable when the marketing activity under consideration represents a change from past marketing of the brand. Achievement of realism. Disadvantage Simulations and concept statements may highlight the particular product characteristics enough to make them more salient than they would otherwise be, distorting the results.

2. MARKETING BASED –Hold the brand fixed and examine consumer response

based on changes in the marketing program –Which would you prefer?

--x-Bayer for $3.75

-x-Bayer for $3.75

---Bayer for $3.75

---Generic at $3.75

---Generic at $3.50

---Generic at $3.25

-x-Generic at $3.00

-x-Generic at $2.75

Comparative methods

Comparative methods • BRAND COMMITMENT

–Show a step-by-step increase of the price difference between the brand normally purchased and an alternative brand

–Plot the % of consumers who switched from their regular brand as a function of the price increases to reveal brand switching and brand loyalty

–Example: Intel inside vs. not.

Marketing-Based Comparative Approaches • Hold the brand fixed

– Examine consumer response based on changes in the marketing program

• Applications – Long academic and industry tradition of exploring price premiums using

marketing-based comparative approaches ▪ Variations to derive similar types of demand curves

– Many firms now try to assess price sensitivity and willingness-to- pay thresholds for different brands

• Critique – May be difficult to discern whether consumer responses to changes in the

marketing stimuli are being caused by brand knowledge or by more generic product knowledge

Presenter

Presentation Notes

Applications Dollar-metric measure of brand commitment. Assessing consumer response to different advertising strategies. Explore potential brand extensions by collecting consumer evaluations of a range of concept statements. Critique Advantage Ease of implementation. Disadvantage Difficult to discern whether consumer responses to changes in the marketing stimuli are being caused by brand knowledge or by more generic product knowledge.

Reactions to Proposed Planters Extensions

*Consumers rated hypothetical proposed extensions on an 11-point scale anchored by 0 (definitely would not expect Planter’s to sell it) and 10 (definitely would expect Planter’s to sell it).

Presenter

Presentation Notes

Marketers can explore potential brand extensions by collecting consumer evaluations of a range of concept statements describing brand extension candidates. For example, the results of a consumer survey conducted at one time examined reactions to hypothetical extensions of the Planters nuts brand. Contrasting those extensions provides some indication of the equity of the brand. This figure displays the results of a consumer survey conducted at one time to examine reactions to hypothetical extensions of the Planters nuts brand. Contrasting those extensions provides some indication of the equity of the brand.

Reactions to Proposed Planters Extensions

Average Scale Rating* Proposed Extensions 10 Peanuts

9 Snack mixes, nuts for baking

8 —

7 Pretzels, chocolate nut candy, caramel corn

6 Snack crackers, potato chips, nutritional granola bars

5 Tortilla chips, toppings (ice cream/dessert)

4 Lunchables/lunch snack packs, dessert mixes (cookie/cake/brownie)

3 Ice cream/ice cream bars, toppings (salad/vegetable)

2 Cereal, toaster pastries, Asian entrees/sauces, stuffing mix, refrigerated dough, jams/jellies

1 Yogurt

*Consumers rated hypothetical proposed extensions on an 11-point scale anchored by 0 (definitely would not expect Planter’s to sell it) and 10 (definitely would expect Planter’s to sell it).

Presenter

Presentation Notes

Conjoint Analysis

Presenter

Presentation Notes

Application Assess advertising effectiveness and brand value. Explore how brand names interact with physical product features to affect the possibility of extending brand names to new product categories. Determination of the company attributes relevant to customers. Critique Advantage Study different brands and different aspects of the product or marketing program simultaneously. Disadvantages Marketing profiles may violate consumers’ expectations based on what they already know about brands. Difficult to specify and interpret brand attribute levels.

Conjoint Analysis • Survey-based multivariate technique that enables marketers to profile

the consumer decision process with respect to products and brands – Part worth: The value consumers attach to each attribute level, as

statistically derived by the conjoint formula

• Applications – Allows study of different brands and different aspects of the

product or marketing program simultaneously ▪ Product composition, price, distribution outlets, etc.

• Critique – Marketing profiles may violate consumers’ expectations based on

what they already know about brands

Presenter

Presentation Notes

Holistic Methods (1 of 2) • Residual Approach

– Examines the value of the brand by subtracting consumers’ preferences for the brand from their overall brand preferences

• Valuation Approach – Places a financial value on brand equity

Presenter

Presentation Notes

Holistic methods place an overall value on the brand in either abstract utility terms or concrete financial terms. Thus, holistic methods attempt to “net out” various considerations to determine the unique contribution of the brand.

Holistic Methods (2 of 2) • Residual approach

– Examines the value of the brand by subtracting consumers’ preferences for the brand (objective characteristics) from their overall brand preferences ▪ Based on physical product attributes alone

• Valuation approach – Places financial value on brand equity for

▪ Accounting purposes, mergers and acquisitions, or other such reasons

Residual Approaches (1 of 2) • Scanner Panel

• Choice Experiments (Equalization price)

• Multi-Attribute Attitude Models – Brand awareness – Attribute perception bias – Non-attribute preference

Presenter

Presentation Notes

Scanner panel Researchers have focused on analysis of brand value based on data sets from supermarket scanners of consumer purchases. Some of the models used by researchers: Estimate that aspect of brand preference that is unique to a brand and not currently duplicated by competitors. Employ actual retail sales data to calculate a “revenue premium” as an estimate of brand equity. Use store-level scanner data to track brand equity and key drivers of brand equity over time. Choice experiments Equalization price: Equates the utility of a brand to the utilities that could be attributed to a brand in the category where no brand differentiation occurred. Multi-attribute attitude models Reveals the relative sizes of different bases of brand equity by dividing brand equity into three components: Brand awareness Attribute perception biases: Difference between subjectively perceived attribute values and objectively measured attribute values. Consumer reports Nonattribute preference: Difference between subjectively perceived attribute values and overall preference. Model for decomposing attribute ratings of a brand into two components: Brand-specific associations, meaning features, attributes, or benefits that consumers link to a brand. General brand impressions based on a more holistic view of a brand.

Residual Approaches (2 of 2) • Residual approach is most suited for brands with many

product-related attribute associations – Cannot distinguish between different types of

nonproduct-related attribute associations – Generally take a static view of brand equity

Presenter

Presentation Notes

The disadvantage of residual approaches is that they are most appropriate for brands with a lot of product-related attribute associations, because these measures are unable to distinguish between different types of nonproduct-related attribute associations. Consequently, the residual approach’s diagnostic value for strategic decision making in other cases is limited.

Valuation Approaches (1 of 2) • Widely held belief is that much of corporate value of it is wrapped up in the value of a

brand

Company Brand Value (in $ billions)*

Total Value (in $ billions)**

Brand Value as a Percentage of Overall Value

Apple 184.1 868.88 21%

Google 141.7 729.1 19%

Microsoft 79.9 659.9 12%

Coca-Cola 69.7 195.5 36%

Amazon 64.7 563.5 11%

Samsung # 56.2 300 19%

Toyota 50.3 188.2 27%

Facebook 48.2 420.8 11%

Mercedes 47.8 79.3 60%

IBM 46.8 142 33%

*Source: Data are for 2017; http://interbrand.com/best-brands/best-global-brands/2017/ranking/

**Source: Market Capitalization information based on data from CRSP Monthly # Samsung market capitalization converted to US Currency from South Korean Won

Presenter

Presentation Notes

Based on a number of different analyses, a widely held belief is that much of the corporate value of many companies is wrapped up in the value of their brands. The recognition of the important role of brand names has spurred much research on valuation. The ability to put a specific price tag on a brand’s value is useful for a number of reasons: Mergers and acquisitions: Both to evaluate possible purchases as well as to facilitate disposal. Brand licensing: Internally for tax reasons and to third parties. Fund raising: As collateral on loans or for sale or leaseback arrangements; to establish to current and future investors how the firm’s efforts have resulted in valuation creation, as demonstrated by the valuations of the brands owned by the firm. Brand portfolio decisions: To develop brand strategy of a portfolio of brands based on their brand valuation. Internal resource allocation decisions and understanding return on investment (ROI): Capital allocation decisions within a firm could revolve around the valuations of different brands. The valuation of brand names could help in establishing the return on investment of marketing expenditures.

http://interbrand.com/best-brands/best-global-brands/2017/ranking/

Valuation Approaches (2 of 2) • Accounting Background

– Tangible – Intangible

• Historical Perspectives

• General Approaches – Cost – Market – Income

Presenter

Presentation Notes

Accounting background Tangible assets: Property, plant, and equipment; current assets; and investments in stocks and bonds. Intangible assets: Augment the earning power of a firm’s physical assets. Goodwill Historical perspectives British firms used brand values primarily to boost their balance sheets. Recording brand value as an intangible asset from the firm’s perspective is a means to increase the asset value of the firm. General approaches Cost approach: Brand equity is the amount of money that would be required to reproduce or replace the brand. Market approach: The amount an active market would allow so that the asset would exchange between a willing buyer and willing seller. Income approach: Brand equity is the discounted future cash flow from the future earnings stream for the brand. Capitalizing royalty earnings from a brand name. Capitalizing the premium profits that are earned by a branded products. Capitalizing the actual profitability of a brand after allowing for the costs of maintaining it and the effects of taxation.

Brand Valuation: A Review of Major Approaches • Academic approaches

– Seminal academic research study proposed estimating a firm’s brand equity derived from financial market estimates of brand-related profits

• Three additional well-established brand valuation approaches

– Interbrand (Best Global Brands) – BrandZ (Brandz Top 100 Most Valuable Global Brands) – Brand finance (Global 500)

Presenter

Presentation Notes

There have been many approaches suggested by academic researchers to systematically value brands. One seminal academic research study proposed a technique for estimating a firm’s brand equity derived from financial market estimates of brand-related profits. The methodology defined brand equity as the incremental cash flows accruing to branded products over and above the cash flows that would result from the sale of unbranded products. This fundamentally assumed that the market value of the firm’s securities would provide an unbiased estimate of the future cash flows attributable to all the firm’s assets. Further, brand equity was regarded as an intangible asset contributing to firm value. By taking into consideration factors such as the age of the brand, order of entry in the category, and current and past advertising share, the approach was able to estimate brand equity. Aside from such academic approaches, there are a few well-established brand valuation approaches that derive from industry, and we review three of them here. All three approaches—Interbrand, BrandZ, and Brand Finance—combine brand equity measurement and financial valuation in deriving estimates of brand value.

Interbrand • Leading brand valuation firm

• How a brand benefits an organization – Internally and externally

• Three key components:

1. Financial forecast 2. Role of brand 3. Strength analysis

https://www.youtube.com/watch?v=tK2ozWQ0HA4

Presenter

Presentation Notes

Financial forecast The basic principle underlying this step is that the worth of brands—like any other asset owned by a firm or the firm’s overall value—can be calculated based on the estimates of present value of its future cash flows. For each of the segments identified as important to a brand, the valuation process involves identifying and forecasting the net revenues (or potential cash flows). Role of brand Role of brand measures the portion of the customer decision to purchase that is attributable to brand—exclusive of other purchase drivers such as price or product features. Strength analysis Brand strength measures the ability of the brand to secure the delivery of expected future earnings. Brand strength is reported on a scale of 0 to 100 based on an evaluation across 10 dimensions of internal and external aspects.

https://www.youtube.com/watch?v=tK2ozWQ0HA4

BrandZ (1 of 2) • Based on the Meaningfully Different Framework

– Suggests brands create value if they offer three key benefits: ▪ They are meaningful ▪ They are different ▪ They are salient

Presenter

Presentation Notes

Meaningfully Different Framework: They are meaningful (they meet customer needs) They are different (they are unique and they set trends); and They are salient (they are top of mind) These benefits translate into power (by increasing sales), premium (by commanding a high price), and potential (by helping to sustain future growth). Their findings indicate that meaningfully different brands capture significantly higher volume (five times as much), have a 13 percent price premium, and are more likely to increase their share of value.

BrandZ (2 of 2) • Key steps in the BrandZ valuation include:

– Calculating financial value – Calculating brand contribution – Calculating brand value

Brand Finance • Based on the “relief from royalty” approach

– Brand’s value is based on the royalties that a company would have paid for licensing that brand from a third party ▪ Assuming it was not the brand owner

Presenter

Presentation Notes

The net present value of the projected royalty stream becomes the estimate of brand value. The approach can be summarized as follows. First, Brand Finance calculates the brand strength on a scale of 1 to 100 using data from the Brand Asset Valuator database, which results in a Brand Strength Index (or BSI score). Second, the methodology involves assessing the brand royalty rate by applying the BSI score to the royalty rates that are applicable to a given industry. These industry-specific royalty rates are identified through databases containing comparable licensing agreements. For example, if the industry royalty rates range between 1 to 5 percent, and the brand has a strength score of 80 out of 100, the appropriate royalty rate for the brand in this industry would be 4 percent. Third, these royalty rates when applied to forecasted revenues, help determine brand value. Revenue forecasts are further generated based on a combination of historic revenues, equity analyst forecasts as well as economic growth rates. Finally, brand value is determined by discounting forecasted revenues to net present value terms.

Comparing the Major Brand Valuation Approaches (1 of 4) 1. All three approaches are based on some variation of the

income-based approach to brand valuation

– All are based on projections of income

2. All three methods compute the present value of projected future earnings

– Based on an estimate of brand strength, and – An application of a discount rate

Comparing the Major Brand Valuation Approaches (2 of 4) 3. All three approaches use available financial and market

data

– And compute the economic value added

4. Types of data used to measure brand perceptions vary across the three approaches

Presenter

Presentation Notes

Despite having some similarities in their approaches, the three methods have enough differences to produce some fairly significant differences in estimates of brand value for the same brand, causing considerable criticism regarding the validity of these approaches. The comparisons of the three valuation approaches for a sample of 68 brands for which real financial transaction data was available, revealed significant anomalies, with all approaches overestimating value by nearly two or three times. Further, these approaches are also inconsistent with each other.

Comparing the Major Brand Valuation Approaches (3 of 4) • Comparisons of Brand Values in 2016 ($ millions)

Blank Interbrand BrandZ Brand Finance

Google 133,252 245,581 109,470

Apple 178,119 234,671 107,141

Amazon 50,338 139,286 106,396

Coca-Cola 73,102 78,142 31,885

Toyota 53,580 28,660 46,255

Presenter

Presentation Notes

This table shows the comparison of the three approaches—and the variations in their assessments of brand value—for five major brands.

Comparing the Major Brand Valuation Approaches (4 of 4) • Spend Wisely

– Focus and be creative

• Look for Benchmarks – Examine competitive spending levels and historical

company norms

• Be Strategic – Apply brand equity models

• Be Observant – Track both formally and informally

Presenter

Presentation Notes

Guidelines for creating and measuring ROI from brand marketing activities Spend wisely: Investing in distinctive and well-designed marketing activities increases the chance for a more positive and discernible ROI. Look for benchmarks: Understand the target market before entering. Be strategic: Use a structured approach to planning, implementing, and interpreting marketing activity. Be observant: Qualitative and quantitative insights can help in understanding brand performance.

Measuring Outcomes of Brand Equity: Capturing Market Performance�
Learning Objectives
Brand Equity
Measurement issues
What if..?
Realistic?
Measuring Brand Equity
Comparative Methods
Comparative Methods
Comparative methods
Brand-Based Comparative Approaches
Comparative methods
Comparative methods
Marketing-Based Comparative Approaches
Reactions to Proposed Planters Extensions
Reactions to Proposed Planters Extensions
Conjoint Analysis
Conjoint Analysis
Holistic Methods (1 of 2)
Holistic Methods (2 of 2)
Slide Number 21
Residual Approaches (1 of 2)
Residual Approaches (2 of 2)
Valuation Approaches (1 of 2)
Valuation Approaches (2 of 2)
Brand Valuation: A Review of Major Approaches
Interbrand
Brand Z (1 of 2)
Brand Z (2 of 2)
Brand Finance
Comparing the Major Brand Valuation Approaches (1 of 4)
Comparing the Major Brand Valuation Approaches (2 of 4)
Comparing the Major Brand Valuation Approaches (3 of 4)
Comparing the Major Brand Valuation Approaches (4 of 4)