centre for marketing - london business schoolfacultyresearch.london.edu/docs/96-904.pdf · needs...
TRANSCRIPT
Centre for Marketing
MEASURING MARKETING PERFORMANCE
Tim Ambler
PAN’AGRA Working PaperNo. 96-904
November 1996
Tim Ambler is Grand Metropolitan Senior Fellow at London Business School. He isgrateful to David Montgomery for suggesting this paper, Noel Capon, Kent Grayson andDemetrios Vakratsas for comments on drafts; and especially Sri Devi Deepak for research
assistance.
London Business School, Regent's Park, London NW1 4SA, U.K.Tel: +44 (0)171 262-5050 Fax: +44 (0)171 [email protected] http://www.lbs.lon.ac.uk
Copyright © London Business School 1996.
�
Measuring Marketing Performance
Marketing performance needs to be assessable by senior management, and their financialadvisors, as well as the marketers themselves This in turn requires a shared andconsistent vocabulary, especially for marketing performance outcomes. The paperassumes that short- and long-term profits, in whatever form, are the fundamentalobjectives of marketing in commercial business. Differing definitions of “b rand” and“ brand equity”, basic building blocks of marketing, are compared and contrasted. Thechange in brand equity needs to be considered alongside profit measures. Financialvaluations of brand equity are useful but flawed for the purpose of assessing marketingperformance. Non-financial measures can be assembled, however, as a guide to brand“ health” - a word that accurately reflects brand equity as a “ living” entity. As such itneeds not only financial resources but care, attention and warmth. Brand equity is crucialto the assessment of marketing performance, and needs to be understood in non-financiallanguage.
1
Measuring Marketing Performance
The days when marketing and finance could live happily together in mutual
incomprehension are over. Every expenditure is now up for challenge and those costs with
returns difficult to identify, are especially vulnerable. Misunderstandings can be reduced if a
clear and consistent common language is adopted across functions. Financial language is
consistent but this paper will show that it cannot be exclusively used to assess marketing
performance. Financial managers, therefore, need to learn marketing language but,
unfortunately, even such basic terms as “brand” and “brand equity” are used divergently.
Various definitions will be compared later in the paper and recommendations made for
consistent future usage.
The paper focuses on the assets and liabilities (balance sheet) side of measurement and one
key intangible asset, brand equity, in particular. Whether short-term marketing
performance should be assessed as sales, profit contribution, profit before or after tax or
shareholder value is not considered. The objective is simply termed “profit”. To assess
marketing performance by short-term profit, however, requires it to be adjusted for the
change in the intangible asset - brand equity.
Largely ignored by accountants, brand equity is probably more valuable than all other assets
put together. Data for the Standard & Poor 500 leading companies are presented later.
The structure of the discussion is as follows:
2
• Profit returns from marketing performance span accounting periods. Some concept
equivalent to “ brand equity” is needed for the intangible asset brought forward at
the beginning of each accounting period and carried forward at the end;
• “Brand” and “brand equity” are defined. In essence, brand equity exists as
memories in the minds of marketplace participants. It can also be negative, i.e. be a
liability, where the marketing consequences have led to the brand being discounted
against equivalent commodities;
• Brand equity is financially valued whenever brands are bought and sold. The
principle financial methodologies (discounted cash flow and earnings multiple) are,
nonetheless, flawed for the purposes of marketing performance evaluation;
• On the other hand, brand equity can be non-financially quantified as a vector of
market indicators. Ideally, brand equity should help predict future results from
present measures; and
• Brand equity can be seen as a “living” entity. This is not just a metaphor but a
reality: brand equity exists as the sum of synaptic connections within the minds of
marketplace participants. Science does not yet permit us to measure them directly.
Nevertheless, like any other living being, brand equity growth requires
nourishment and inevitably creates waste. The recognition of brand equity’s
organic nature should help CEOs understand the care, attention, warmth and
nurture that any brand needs if it is to survive or, better, thrive.
Role of Intangible Assets in Assessing Marketing Performance
One CEO wrote: "our dilemma is that while we can measure the immediate profit flow
3
from a brand, it is difficult to establish whether we are truly increasing its capacity for
producing long-term profits or merely harvesting the fruits of our predecessors' efforts"
(Sheppard, 1994, p. 98). To judge marketing performance solely on short-term measures
without regard for brand equity is as wise as judging performance by cash flow without
regard for the other assets.
Even if their tangible assets are on the books at only half their value, 90% of Coca-Cola’s
stock market price is the value of their intangibles, the great majority of which are the
equities of their brands. As of September 30, 1996 the market value of the top 500 Wall
Street companies was $5.2Tn. (trillion) of which $3.6Tn. was the excess of market over
book value. “In calculating per-share book value, S&P takes the conservative view by
eliminating intangibles”. On the same date, Coca-Cola was the second most valuable
company (to General Electric) with a market capitalization of $127Bn. Over the previous
decade the ratio of market to book value had doubled to 3.63 (Standard & Poor, 1996).
Making generous allowance for under-valuation of book assets, and intangibles other than
brand equity, it is clear that brand equity is by far the most valuable group of assets for most
companies. Yet it falls outside their accounting systems and vocabulary. Furthermore, the
total S&P 500 brand equity has grown over the last decade from perhaps about parity with
their tangible assets to double their worth. Accounting textbooks, White, Sondhi and Fried
(1994) for example, do not mention the term. In the US, the cost of acquiring “brands and
trademarks in arm’s length transactions can be capitalized” but not the values resulting from
4
that firm’s marketing (White, Sondhi and Fried, 1960, p. 412). Marketers may perceive
some irony in the disproportionate attention given to book assets.
The accountancy profession has long been precise in its use of language when marketers,
perhaps, have been more concerned with creativity. In the current movement toward
making marketing more accountable (Leeds, 1994; Mazur, 1995), which frames this paper,
precise usage of key marketing concepts such as brands and brand equity is important to
the understanding of marketing by both disciplines.
For the moment I just seek to establish that intangible assets, by whatever name, from past
accounting periods are used by marketers in the current period and returned to stock, so to
speak, at the end of the period in better or worse condition. Without assessing the change
in their condition, revenue indicators will be a poor guide to marketing performance.
Is “ Brand Equity” the right label?
This decomposes into two questions:
• What is a “ brand”? We need to distinguish it from a “ product” (a good and/or
service).
• What is “ brand equity” ? Unless the word “ equity” adds something, the term is
redundant. The brand will be defined as the thing the consumer ultimately buys, the
5
product plus the added values, whereas the brand equity is the asset retained by the
brand owner and, very likely, enhanced by the consumer’ s purchase.
What is a “Brand”?
Originally “brand” referred to the mark applied to goods, cattle or slaves which identified
the owner. It helped the owner track the assets and the buyer know the source. Since then,
the brand has come to mean the holistic combination of product, its associations and its
identification. In everyday usage, when we ask for a Budweiser, we would not be pleased
to be given just the label. We ask for a brand assuming it comes with the product included.
This evolution has been unremarked in the literature and some inconsistency has resulted. I
shall use “ brandi” for the former (identification) usage and “ brandh” for the latter
(holistic). Table 1 provides a few examples of both usages. The issue becomes more
important when we get to brand equity.
Table 1: Alternative "Brand" Definitions
Brand as IdentificationBrandi
Holistic Brand Brandh
McCarthy, 1960 McCarthy and Perreault, 1991
Kotler, 1994, but -> Aaker, 1991, but ->
Park and Srinivasan, 1994Farquhar, 1990
Kamakura and Russell, 1993
King, 1973 Pearson, 1996
Kotler, 1994 (p. 456) Aaker, 1996 (inside back cover)
Gardner and Levy, 1955 Murphy, 1990 (but not when it came to
brand valuation, p. 159) Kapferer, 1992
6
Keller, 1993Leuthesser, 1988
Simon and Sullivan, 1993Srinivasan, 1979
Franzen and Holzhauer, 1987 Blackett, 1989 Riezebos, 1994
Zinkhan and Hirschheim (1992) showed how some marketing terminology has evolved
with resulting confusion, sometimes due to the fashionability of “ popular research
paradigms of the time” . The common thread in their analysis of “ brand image” from
1957-91 is that it is the collective expression for the psychological consumer
benefits/attributes of the brand. Thus, in that analysis:
Brandh = Product + Brandi + Brand image.
Clearly concepts such as brand identification, image and identity overlap. For clarity, I will
hereafter use Brandi as a composite for image and identification so that the remaining issue
is whether “brand” should include the product.
In any case, “brand” is broadly defined across all market sectors, be they goods (e.g. Shell
or Smirnoff), services (e.g. Avis or Andersen Consulting), or distributors (e.g. Sears or
Safeway). Brands are probably as important for business-to-business marketers as
consumer goods, though they are more often described as supplier reputations. 19 of the
brand leaders of 22 US product categories in 1925 were the leaders in 1985 (Wurster,
1987) while some beverage brands in Europe are centuries old. Bols’ Dutch Liqueurs and
Truman English beer are 400 year old brands. In other words, “brand” is being used
broadly to include not just conventional consumer brands but identifiable business units
7
which have their own reputations with their customers.
Aaker (1996) refers to the brand as not only a strategic asset but "a company's primary
source of competitive advantage". Some CEOs are in no doubt of their importance, e.g. "If
this company were to be split up, you could have all the factories, equipment and cash and I
could have the trademarks...and I would fare better than you" (John Stuart, Quaker) and
"Volvo's most valuable asset is its brand name" (S`ren Gyll, Volvo).
A financial valuation of Brandi has to separate the profit/cash flow, or worth, due to the
product (commodity) from that attributable to image and identification (the branding). In
other words, if the present value of the free cash flow of Brandh X is $110M and an
equivalent commodity would generate profits of $30M, then the value of Brandi X is
$80M. The difference in this example is significant and realistic given the premium prices
many brands achieve. A company thinking of acquiring Brand X would want to consider
all three estimates since it could probably achieve the $30M without acquiring the brand.
Three reasons for why the word brand should include product are:
• Recognizing everyday usage. "A product is something that is made, in a factory; a
brand is something that is bought, by a customer" (King, 1973);
• The product and its image/identification form one holistic entity worth more than
the sum of the parts; and
8
• Trying to separate product from its image/identification leads to logical problems
since actual product quality is interwoven with perceived quality. Some product
satisfaction arises from brand knowledge and vice versa.
The latter two arguments more formally developed in the Appendix for the reader who is
unconvinced that brandh is the better modern usage. In other words, the definition of
“brand” here proposed includes the product(s) on which it is based, the identification and
the psychological associations and image. On this foundation, “brand equity” can be more
securely defined.
What is “ Brand Equity”?
Barwise (1993), reviewing the brand equity literature, was unable to determine whether it
was a concept inadequately defined or simply did not exist. This brief summary will
illustrate the confusion.
Srivastava and Shocker (1991) provide a representative definition of brand equity: a set of
associations and behaviors on the part of a brand's customers, channel members and
parent corporation that permits the brand to earn greater volume or greater margins than
it could without the brand name and that gives a strong, sustainable and differential
advantage (see also Rangaswamy et al., 1993). By inference, brand equity may also be a
9
liability where negative associations require the brand owner to discount relative to
commodity prices to move the products. Examples include Perrier after contamination and
Exxon after the Valdez oil spill.
Aaker (1991) defined brand equity as a set of assets and liabilities linked to a brand, its
name and symbol, that add to or subtract from the value provided by a product or service
to a firm and/or that firm's customers. (p.15) His five components of brand equity are:
brand loyalty; name awareness, perceived quality, brand associations in addition to
perceived quality, and a bundle of intellectual properties such as patents, trademarks, and
channel relationships.
Most authors similarly equate brand equity with the additional intangible asset over and
above the any due to the product, i.e. brandi (Park and Srinivasan, 1994; Farquhar, 1990;
Kamakura and Russell, 1993; Keller, 1993; Leuthesser, 1988; Simon and Sullivan, 1993;
Srinivasan, 1979). The literature is not consistent. For example, Aaker and Jacobson
(1994) link a firm's stock price with perceived product quality in language where "product"
and "brand" seem interchangeable. Simon and Sullivan (1993, p. 35) and Rangaswamy et
al. (1993) include product quality as part of brand equity.
The Park and Srinivasan model of brand equity requires (p. 277) the creation of a
hypothetical weak store or national brand that is "presumed to have minimal equity" to
identify the incremental market share and price premiums that "are useful summary
10
measures of brand equity". They do not use a generic product as the benchmark on the
grounds that generic quality may be less good. Thus Park and Srinivasan solve the problem
of product separation in theory. Brandh would be simpler.
Others equate brand equity with the brand’s financial value which adds to the confusion
(Holbrook, 1992; Shocker and Weitz, 1988; Simon and Sullivan, 1993). Riezebos (1994)
distinguishes between brand equity as seen by the brand owner (financial valuation) and as
seen by the consumer which he calls "BAV" (brand added value), defined in similar terms
to Aaker’s brand equity above.
To summarize thus far:
• Some intangible asset is created by the marketer. It exists during the interval
between carrying out the marketing actions and their final rewards as profits or cash
flow;
• If “brand” is used broadly, brand equity is the appropriate label for that intangible
asset;
• It should include all the accumulated value whether it is seen as belonging to the
product image/identification, the product itself or customers. Otherwise we would
still be seeking a another collective label for the component parts; and
• One could argue that there should be a new label, given the multiple definitions that
have been used, but “brand equity” is the closest term in general use. It seems
simpler to bring some accounting rigor to the existing term rather than start again.
11
Building on Srivastava and Shocker (1991), brand equity is now defined as a set of
memories in the extended minds of a brand's customers, channel members and parent
corporation that permits the brand to earn greater volume or greater margins than it
could without the brand name and that gives a strong, sustainable and differential
advantage. The comparison with non-branded situation does not admit brandi
(identification) but simply recognizes that that the brand’s existence is a pre-condition:
brandh is still intended. Memory is here used in the neuro-biological sense of both
“ procedural” (what we have learned about how to do things, habits and behaviors) and
“declarative” (things we remember) memory (Rose, 1993).
Advertising, one of the primary tools available to the marketer to drive brand equity, works
through memory. Direct response advertising aside, there is a delayed effect between the
customer seeing the advertising and next being in a choice situation. It follows that the
effects of the advertising at the time the customer saw it are irrelevant; what matter are the
lasting effects that the advertising left in memory.
Defining brand equity, as above, in terms of human memory is significant because it
indicates where brand equity exists between marketing implementation and ultimate profit
returns. To say that advertising works if and only if it leaves some lasting impression, also
implies that advertising effects should be measured as the change in brand equity. This does
not make measurement any easier. Science is beginning to understand what memory is and
12
how it grows and changes (Goelet et al., 1986; Dudai, 1989; Kandel, 1991; Rose, 1993;
Squire, 1995). Memories are synaptic connections between neurons. In time we will
discover more about how advertising affects which memories and how they in turn affect
purchase and usage decisions. Meanwhile we will have to use more conventional
measures.
In the brand equity definition above, “e xtended minds” refers both to non-brain parts of the
body (hormonal conditioning and somatic memory) and to computerized extensions of our
logical and memory capacity. When the liquor store clerk presses the re-order vodka
button on the computer and an order for Smirnoff arrives automatically with the supplier,
that computer programming is part of Smirnoff’ s brand equity.
As noted above, brand equity may also be a liability: in the mid-80s, after the Korean 747
was shot down by Russian forces, Stolichnaya, then the US brand leader, could only be
sold at a discount to commodity vodka. When the product quality of a particular brand is
experienced as disappointing, that experience may well dominate whatever marketing
efforts the firm makes. Brand equity remains a liability. Having recognized this
occurrence, this paper will retain “ asset” as the general usage of which liability is simply
the negative form.
Brand equity, in this perspective, is an asset, not the financial valuation of that asset. Most
assets may be measured in many ways, depending on the interests, or purpose, of the
13
measurer. A habitation, for example, may be measured by the number of people it
accommodates or floors or windows or total height or area or age. Financial valuations of
property depend on whether the purpose is purchase, sale, probate or insurance. None of
these measures is the house itself nor does ambiguity about measurement imply that the
house does not exist. The confusion in the literature about brand equity and measurement
(Barwise, 1993) does not, by analogy, imply that brand equity does not exist.
Young and Rubicam (1994) measure brand equity in ways useful for advertising strategy:
Differentiation, Relevance, Esteem, and Familiarity. They believe that brands develop their
consumer equities in that order (D→R→E→F). The Chairman of Coalition for Brand
Equity, Larry Light (1994) previously suggested a different sequence of the same factors:
F→R→E→D.
This learning process is driven by the consumer as well as the marketer. Fortunately,
consumers are keen brand learners. In the unliberated Soviet Union, branding was not
permitted. Consumers recognized that some soaps were better than others and began to
look for the factory numbers printed in small type on the back of the packaging.
Apparently, Factory #19 produced the best soap and it soon commanded premium prices.
In summary:
• A brand is a combination of product, identification and image;
• Brand equity is the owner’s continuing intangible asset (liability) arising from marketing
14
activities;
• It exists as memories of consumers/end users and the other market place players; and
• Consumers are active participants in the creation of brand equity which based on the
whole brand, not just identification and image.
Brand Equity Valuation
Separating the value of the product from the brand presents severe practical problems
(Barwise et al., 1989). In the holistic perspective of this paper, no such separation is
necessary. Both views agree that branding adds value beyond that derived from a product's
functionality (e.g. Hershey stands for more than taste; BMW means more than a mode of
transport) and this can be valued financially. Whenever a brand or its owning company
changes hands, such calculations are carried out.
The classical view of corporate purpose is to make profits for shareholders (Friedman,
1962). Stakeholder theory, by contrast, suggests that the manager's task is to protect the
various rights of all stakeholders (Freeman, 1984). These issues, and marketing in not-for-
profit organizations, are beyond the scope of this paper: the purpose of marketing is here
taken to be making profits for the shareholders. Thus in assessing marketing performance
we must, as noted above, adjust the short-term profits by the change in brand equity during
that period. Thus, conceptually:
15
Marketing Performance = Profit (Contribution) + ∆ Brand Equity
In practice, the financial adjustment can only be made if brand equity can meaningfully be
expressed in currency. In other words, a single financial number could adequately express
brand equity for marketing control purposes if, and only if, a satisfactory methodology
exists. The main methodologies are briefly reviewed.
Murphy, then Chairman of Interbrand one of the leading brand valuation consultancies,
lists, and then rejects "due to serious inherent drawbacks" (1990, p.158), five valuation
methods:
1. Aggregate cost of all marketing, advertising and R&D expenditure on the brand
over a stipulated period, and also replacement cost. Clearly cost is not value and
this method is not considered further;
2. Premium pricing, also Coopers & Lybrand (1989). This method considers only
relative price and not the wide range of other measures - see Table 2. It would be
valid if, and only if, the other key measures, e.g. market share, closely correlated;
3. Comparable market value. This method take the valuation from an arm’s length
purchase of a similar brand, making adjustments for differences. Brand sales are
too infrequent and so contaminated by non-marketing factors to make this practical
for year to year brand evaluations;
4. Consumer attitudes such as esteem, recognition and awareness. Whilst these
should be included, considering only these measures ignores, similarly to relative
price, primary considerations such as brand size; and
16
5. Future earnings potential discounted to present day values. The "DCF Method"
(also: Andersen, 1992; Elton and Gruber, 1995) is discussed below.
As will have been apparent from references above, brand equity has not always been
separated from brand valuation and other methods have also been formulated:
6. Earnings multiple which is also discussed below (Murphy, 1990; Andersen, 1992;
Birkin, 1994);
7. Estimated royalty income (Andersen, 1992) which hypothesizes an independent
brand owner who licenses the brand;
8. Stock market (Simon and Sullivan, 1993, pp. 34-35). The stock market value of a
company, less the tangible assets provides the market valuation of the intangibles
which, by progressive subtraction, reduces to valuations of the company's brands.
This method assumes perfect marketing information is used by investors. However
well informed, it seems unlikely that stockmarkets can have a sufficiently accurate
and detailed understanding of brand performance for year to year control purposes.
On the other hand, this paper also used stockmarket valuations as a broad brush
guide to brand equity valuation. Share prices represent investors’ estimates of
future dividends (profits) and therefore brand equities which are the storehouses of
those future profits which have already been earned by marketing activities. Thus
one would expect broad correlation but, because information is rarely immediate,
one would also expect share prices normally to lag marketplace realities. In the
case of “Marlboro Friday” in April 1993, the share price effect of reducing brand
17
prices was instantaneous;
9. Expert evaluations of hypothetical mergers to separate and estimate the value of
brand equity vs. other assets (Rao, Mahajan and Varaiya, 1991; Mahajan, Rao and
Srivastava, 1992). Conceptually valid, subjectivity arises in the procedure; and
10. Momentum accounting (Farquhar and Ijiri, 1991; 1993). The method attempts to
recognize the dynamic nature of performance. Two years may have the same profit
result but one may be improving and one declining. By relating mass (size of
brand) to velocity (current sales trends), momentum accounting distinguishes these
situations.
Methods 2 and 4 are partial. Methods 7 and 9 require substantial estimation which would
be worthwhile for a capital sale or purchase of the brand but would not be procedurally
feasible for year to year control. Like method 10 (Momentum Accounting), whose validity
for brand valuation is uncertain, they have not been widely adopted by practitioners. I
therefore further consider only the DCF and earnings multiple methods (5 and 6).
The DCF method appears to be the most widely used by practitioners (Elton and Gruber,
1995; Interbrand, 1996). Nevertheless, Murphy (1990) suggests that "the determination of
reliable forecast cash flows, future growth patterns and an appropriate discount rate is
fraught with difficulty." The marketing managers whose performance is being evaluated
may be more optimistic about their own performance, and negative about their
predecessors’, than their accounting colleagues, yet their expertise must be a determinant in
18
the selection of sales, marketing expenditure and profit forecasts. Variations in discount
rates can radically change present values, and thus apparent marketing performance
without, in fact, any real change. Similarly, growth patterns have to distinguish between
outcomes from previous marketing and future changes. Future variations in the rest of the
portfolio, production sources and distribution channels, will substantially alter the
prospective profitability of the brand but cannot be included in the review before they
appear on management’s horizon.
Brand equity is the state of the intangible marketing asset today: it is the store of unrealized,
but already earned, profit. The DCF methodology, however, forecasts all future profits
irrespective of whether they are due to the marketing activities under review or remain to
be earned by future marketing activities. The last paragraph considered unanticipated
future events; this paragraph deals with matching profits to the relevant marketing activity.
Under the DCF method, future cash flows are discounted back to present value to reflect
the time aspect of money but not the period of time when the relevant marketing efforts
took place. Thus the DCF method should, theoretically, require future streams of profit to
be split between those arising from prior brand equity and current marketing activities. This
is not done (Andersen, 1992) in practice and it is hard to see how it could be.
Interbrand initially preferred the earnings multiple method for its simplicity and empirical
grounding in company share price p/e ratios (Murphy, 1990). The brand is valued by
multiplying profit or cash flow (earnings) by a relevant p/e ratio based on stock prices of
19
(brand) companies with similar profit profiles and growth prospects. Once again this is a
valuable technique for capital brand transactions but it has two flaws for annual control
purposes:
• Instead of forming a counterbalance to short-term profit, the valuation magnifies it;
and
• P/e multiples needed for comparison can shift from year to year for environmental
or comparator reasons and thus distort apparent marketing performance.
Two examples of the former difficulty are year end trading and price promotions. At the
year end most companies have some flexibility is deciding whether to put through trades for
the old year or hold them for the new one. In reality, marketing performance is the same
but the earnings multiple method will show higher performance in the first case than the
second. Brand equity should go down to compensate for the pull forward of sales but
because earnings are multiplied it goes up. Thus the extra business benefits both the short-
term profit and the brand valuation.
Similarly, a price promotion in the final accounting month will draw new year sales into the
old, as has long been recognized by upwardly mobile sales managers. It will therefore raise
the apparent brand equity when brand equity may even be damaged. Thus the earnings
multiple valuation method can work in the opposite direction of the truth. Although, in
theory, the p/e ratios can be adjusted to offset year end problems of this nature, and those
of the year end before, in practice they are too coarse to do so.
20
These flaws should be recognized but do not imply these financial valuation methodologies
should be abandoned for marketing evaluation purposes. Some analysis is preferable to the
general practice of, at least until recently, ignoring brand equity altogether. I suggest:
• The flaws be recognized when valuations are prepared;
• Brandh is adopted which removes the problem of separating hypothetical profits that
some artificial but equivalent commodity might earn; and
• The analysis focus on the change in brand equity since the period of review started. The
flaws mostly apply to the years beyond the period under review. If the before and after
forecasts are consistently prepared then some of the difficulties net out by subtraction.
An alternative, or perhaps complementary, approach is to find non-financial measures that
approximate as closely as possible to the brand memories in the extended minds of
marketplace participants.
Non-Financial Brand Equity Measures
Direct measures of brand equity are those which attempt to quantify what we have in our
minds (e.g. awareness, recall, attitudes, perceived quality) and should be distinguished from
indirect measures which infer brand equity from behavior, behavior changes and marketing
inputs. Table 2 combines some conventional measures from both the advertising
(Vakratsas and Ambler, 1996) and brand equity literatures (Ambler, 1995):
Table 2: Some Conventional Brand Equity Measures
21
Stage of Input /Outcome Model Measures
Indirect measures - inputs
Share of voice Marketing exp. % of sales Marketing exp. - currency Advertising as % marketing expenses
Direct measures
Awareness, top of mind prompted, totalReason to buyValue for money/perceived pricing factorsAttitudes (various such as brandpower/strength, stature/importance, esteem,differentiation, commitment, trust, vitality,salience, brand personality, liking)Perceived qualityIntention to purchaseBrand relevance/personality fitUsage experience recall/satisfactionClaimed loyaltyAdvertising responses (recall, liking)
Indirect measures- outcomes
Sales % sales on promotion Market share/rank Relative price Price elasticity Distribution Penetration Behavioral loyalty (various measures) Profit contribution Relative profitability Economic profit/shareholder value
22
Table 2, as an incomplete listing, makes it apparent that there are too many candidate
measures for companies to track. As noted above, Park and Srinivasan (1994) suggest that
market share and price premiums are "useful summary measures" but they are indirect and
not necessarily predictive. Good brand equity measures should indicate today the level of
profits the brand will deliver tomorrow, over and above the efforts of tomorrow.
A recent alternative to the conventional perspective is the “ Relational Paradigm” (Wilson
and Moller, 1991) which sees the marketplace as “ a network of value added
relationships” (Kotler, 1994). Some of its main constructs, with an indication of usage
frequency, are shown as Table 3:
Table 3: Some Relational Measures
Frequency of Construct
Trust 5Satisfaction 4Transaction specific or irretrievable investment 4Power of buyer & seller 3 eachDependence on buyer/seller 3 eachCommunication 3Outcome of value performance 3Transaction costs 3Age of relationship 3Expectations 312 others 2 each10 others 1 each
Source: Wilson and Moller (1991) analysis of seven studies (their table 5.1, p. 104).Whilst this paradigm is derived largely from the social sciences and channels literature,
Sheth and Parvatiyar (1995) and Fournier (1995) have extended the paradigm to consumer
23
brands. We have long associated brands with having personalities and thus, in a sense,
being living entities with whom consumers associate (Gardner and Levy, 1955). In
principle, the constructs from this school, such as trust, commitment, satisfaction,
dependence should be useful measures of brand equity. In this context, practitioner usage
of such variables is growing, e.g. Young and Rubicam (1994).
Research is required to determine which of this array direct measures, from whichever
paradigm, are most predictive. The advertising literature is not encouraging with low
correlations reported (0.0 to 0.2) between direct measures and changes in sales (Vakratsas
and Ambler, 1996). Wilson et al. (1989) provide insights on why researched attitudes are
such poor predictors. Their research indicates that cognitive analysis of attitudes disrupt
their reliability. For example, attitudes towards makes of strawberry jam (perceived
qualities) closely matched objective quality measures (Consumer Reports) until the
respondents were asked to explain their reasons. The cognitive effect on consumers’
feelings, however, did not change subsequent behavior.
Individual firms with substantive databases may be more fortunate and establish at least
Granger causality (Granger, 1969) between brand equity indicators and future profitability
after factoring out post-period marketing, competitive and environmental effects. A
pragmatic approach would be to collect a wide variety of measures from all paradigms and
quantitatively analyze their relationships. In principle similar research could be conducted
as part of inter-firm benchmarking and across a wide variety of industries. It would seem
24
likely that some indicators are more relevant to some situations than others.
There are competitive advantages for those firms which can pool their financial, marketing
and research talents and discover better measures of brand equity, and these advantages
may discourage shared activities across firms and with academic researchers. I hope that
will not prove to be the case as the transfer of people will soon leak discoveries. There is
so much opportunity in this area that the better approach is to research at all three levels:
• Intra-firm (private);
• Inter-firm, benchmarking and industry studies (confidential to participants); and
• Broad academic research (sources are protected and the lead times in publication
provide participants with early mover advantages).
The Living Brand
This paper has compared two approaches to brand definition: those that include and
exclude the underlying product. An “umbrella” originally meant something that kept off the
sun, not the rain. Similarly, the meaning of “brand” has evolved from the original practice
of burning marks onto chattels to the holistic brandh.
Three arguments were advanced for regarding the brand/product relationship as holistic and
these lead to a holistic view of brand equity as the store of unrealized profits. It physically
exists in the minds (and figuratively in the hearts) of the players in the marketplace and
ultimately the end users. Brand equity can be seen as an intangible, unkickable, asset.
Invisibles are easy to forget. This paper began with stockmarket valuations which imply
25
that brand equities are more valuable, for the S&P 500 top companies in aggregate, than
their tangible assets. Brand equity needs greater understanding by senior and financial
management as well as marketers.
A brand, or more correctly brand equity, exists as a living entity. As such it requires regular
and consistent nourishment, typically through advertising. Like other beings, brand equity
creates waste but firms should be cautious in making that a primary target for savings. The
waste created is less important than the return on investment. Waste can only be eliminated
by eliminating growth.
Financial investment is only part of the story: brands need constant management attention.
Most of all they need brand equity reviews as part of assessing marketing effectiveness.
Reviews should be regular but not too frequent. Tearing a plant up every month to see
how the roots are doing inhibits growth. Brand equity reviews, or brand audits, are the
equivalent of health checks. Disease is likely to be more obvious, once looked for, than the
triggers of future growth. Both are important.
CEOs should demand brief statements of brand health, using the most sensitive measures
from the section above, to set beside their revenue statements. Without knowing if their
brands are thriving or diseased, their accounts will be giving an incomplete picture. Most
companies have their brand information spread around the organization; collecting it
together into focused brand equity statements will reveal its power. Measurement and
26
assessment are just the beginning. Brands need the commitment of human, as well as
financial, resources. Living beings need light, and preferably sunshine, from above. The
CEO needs to cherish the company’s brands: Take care of brand equity and that will take
care of the shareholders.
27
References
Aaker, David A., Managing Brand Equity, New York: Free Press (1991).
----- " -------, Building Strong Brands, New York: Free Press (1996).
----- " ------- and Robert Jacobson, The Financial Information Content of Perceived Quality.Journal of Marketing Research. 31 (May 1994): 191-201.
Ambler, Tim, Brand Equity as a Relational Concept. The Journal of Brand Management,Vol. 2, #6 (1995):.
Andersen, Arthur, The Valuation of Intangible Assets. Special Report Number P254,London: The Economist Intelligence Unit (1992).
Barwise, Patrick, Chris Higson, Andrew Likierman, and Paul Marsh, Accounting forBrands. London: London Business School and Institute of Chartered Accountants inEngland and Wales. 1989.
Barwise, Patrick, Brand Equity: Snark or Boojum? International Journal of Research inMarketing. 10(1) (1993): 93-104.
Birkin, Michael, Assessing Brand Value in Brand Power, Paul Stobart, ed., London: Macmillan, (1994): 209-224.
Blackett, T., The Nature of Brands, in Brand Valuation, J. Murphy ed., London:Hutchinson Business Books (1989).
Coopers & Lybrand, Brands and the Balance Sheet: A Positive View. London: Coopers &Lybrand. 1989.
Dudai, Y, The Neurobiology of Memory, Oxford University Press. 1989.
Elton and Gruber, Modern Portfolio Theory and Investment Analysis, Chapter 18, 1995,pp. 450-476.
Ehrenberg, Andrew S.C., Repetitive Advertising and the Consumer, Journal of AdvertisingResearch, Vol. 14 (April 1974): 25-34.
Farquhar, Peter H., Managing Brand Equity, Journal of Advertising Research. (August/September 1990): 7-12.
Farquhar, Peter and Yuji Ijiri, Brand Valuation, Momentum Accounting and Periodic
28
Reinvestments. Working Paper, Carnegie-Mellon University, Pittsburgh, PA (1991).
________________________, A Dialogue on Momentum Accounting for BrandManagement. International Journal of Research in Marketing. 10(1) (1993): pp. 77-92.
Fournier, Susan, Understanding Consumer-Brand Relationships, HBS Working Paper#96-018 (1995).
Franzen, G and F. Holzhauer, Het merk I (tekens, namen en merken). Kluwer Bedrijftswetenschappen B.V., The Netherlands (1987).
Freeman R. E., Strategic Management: A Stakeholder Approach, Advances inStrategic Management. London: Pitman. 1984.
Friedman, Milton, Capitalism & Freedom, The University of Chicago Press. 1962.
Gale, Bradley T., Managing Customer Value. New York: The Free Press (1994).
Gardner, Burleigh B. and Sidney J. Levy, The Product and the Brand. Harvard BusinessReview. (March/April 1955): 33-39.
Goelet, P., V.F. Castellucci, S. Schacher and E. R. Kandel, The Long and the Short ofLong Term Memory - A Molecular Framework. Nature, 322 (1986): 419-22.
Granger, C., Investigating Causal Relations by Econometric Methods and Cross-SpectralMethods, Econometrica, 34(4): 424-38.
Hoch, Stephen J. and Young-Won Ha, Consumer Learning: Advertising and the Ambiguityof Product Experience. Journal of Consumer Research, Vol. 13 (October 1986): 221-33.
Holbrook, Morris R., Product Quality, Attributes and Brand Name as Determinants ofPrice: The Case of Consumer Electronics. Marketing Letters. 3(1) (1992): 71-83
Interbrand, Presentations given to the Conference Partnership Brand Valuation andEvaluation Workshops, (6 and 7 February 1996).
Kamakura, Wagner A. and Gary J. Russell, Measuring Brand Value with Scanner Data. International Journal of Research in Marketing. 10(1) (1993): 9-22.
Kandel, Eric R., Brain and Behavior, Principles of Neural Science (3rd Edition) (Eds.: EricR. Kandel, James H. Schwartz and Thomas M. Jessel), Norwalk, Conn.: Appleton andLange, 1991. pp. 5-17.
29
Kapferer, Jean Noel, Strategic Brand Management: New Approaches to Creating and Evaluating Brand Equity. London: Kogan Page. 1992.
Keller, Kevin Lane, Conceptualizing, Measuring and Managing Customer-Based BrandEquity. Journal of Marketing. 57 (January 1993): 1-22.
King, Stephen, Developing New Brands, London: Pitman (1973).
Kotler, Philip, Marketing Management: Analysis, Planning and Control, (8th Edition), Englewood Cliffs, NJ: Prentice Hall. 1994.
Leeds, Doug, Accountability is In-Store for Marketers in > 94. Brandweek 35 (11) (March14, 1994):17.
Leuthesser, Lance, Defining, Measuring, and Managing Brand Equity. Summary ofMarketing Science Institute Conference, Report No. 88-104. Cambridge, MA: MarketingScience Institute (1988).
Light, Larry, Brand Building Carries the Day, (Emily DeNitto), Advertising Age 65 (12)(March 21, 1994): S-4, S-16.
Mazur, Laura, Top of the Forum. Marketing (May 25, 1995): 10-11.
Mazur, Laura, New Ideas on Board. Marketing (June 1, 1995): 14-15.
McCarthy, Jerome E., Basic Marketing: A Managerial Approach, Homewood Ill.:Richard D. Irwin. 1960.
McCarthy, Jerome E. and William D. Perreault Jr., Basic Marketing: A ManagerialApproach, Homewood Ill.: Richard D. Irwin. 1991.
Mahajan, Vijay, Vithala R. Rao and Rajendra K. Srivastava, An Approach to Assess theImportance of Brand Equity in Acquisition Decisions. Working paper # 93-124 Cambridge,Mass: Marketing Science Institute (1993).
Murphy, John M., Brand Strategy, Cambridge: Director Books (Fitzwilliam Publishing).1990.
Park, Chan Su and V. Srinivasan, A Survey-Based Method for Measuring andUnderstanding Brand Equity and Its Extendibility. Journal of Marketing Research. 31(May 1994): 271-288.
30
Pearson, Stewart, Building Brands Directly, London: Macmillan (1996).
Rangaswamy, Avrind, Raymond R. Burke and Terence A. Olivia. Brand Equity and theExtendibility of Brand Names. International Journal of Research in Marketing. 10(1)(1993): 61-76.
Rao, Vithala R., Vijay Mahajan and Nikhil P. Varaiya, A Balance Model for EvaluatingFirms for Acquisition. Management Science, (37) (1991): 331-349.
Riezebos, H.J., Brand-Added Value: Theory and Empirical Research About the Value ofBrands to Consumers, Eburon Delft, PhD Series in General Management #9, RotterdamSchool of Management (1994).
Rose, Steven P.R., The Making of Memory, London: Bantam Books. 1993.
Sheth, Jagdish N. and Atul Parvatiyar, Relationship Marketing in Consumer Markets.Journal of the Academy of Marketing Science, 23, 4 (Fall 1995): 255-271.
Sheppard, Allen, now Lord, Adding Brand Value, in Brand Power, Paul Stobart, ed.,London: Macmillan, 1994: 85-102.
Shocker, Allan and Barton Weitz, A Perspective on Brand Equity Principles and Issues. InLeuthesser, Lance (ed.), a summary of a Marketing Science Institute Conference, March 1-3, 1988, Austin Texas, Report No. 88-104 (1988): 2-4.
Simon, Carol J. and Mary W. Sullivan, The Measurement and Determinants of BrandEquity: A Financial Approach. Marketing Science, 12(1) (1993): 28-52.
Smith, Robert E., Integrating Information from Advertising and Trial: Processes andEffects on Consumer Response to Product Information. Journal of Marketing Research,Vol. 30 (May 1993): 204-219.
Squire, L.R., Memory and Brain Systems, Neuroscience, Memory and Language, Decadeof the Brain, Vol. 1, (R. Broadwell, ed.). US Government Printing Office. 1995. pp. 59-75.
Srinivasan, V., Network Models for Estimating Brand Specific Effects in Multi-AttributeMarketing Models. Marketing Science, 25 (January 1979): 11-21.
Srivastava, Rajendra K. and Allan D. Shocker, Brand Equity: A Perspective on its Meaningand Measurement, Working Paper No. 91-124, Cambridge, Mass: Marketing ScienceInstitute (1991).
Standard & Poor, The Outlook, Special Issue, Vol. 68, No. 17, Section 2, McGraw-Hill,
31
New York, (September 30, 1996).
Tellis, Gerard J. and Claes Fornell, The Relationship Between Advertising and ProductQuality Over the Product Life Cycle: A Contingency Theory. Journal of MarketingResearch, Vol. 25 (February 1988): 64-71.
Vakratsas, Demetrios and Tim Ambler, Advertising Effects: A Taxonomy and Review ofConcepts, Methods and Results From the Academic Literature, Working paper,forthcoming. Cambridge, Mass: Marketing Science Institute (1996).
White, Gerald I., Ashwinpaul C. Sondhi and Dov Fried, The Analysis and Use of FinancialStatements, John Wiley & Sons, New York. 1994.
Wilson, David T. and Kristan K.E. Moller, Buyer-Seller Relationships: Alternative Conceptualizations. New Perspectives on International Marketing, Chapter 5, Stanley J. Paliwoda (ed.), Routledge, London. 1991.
Wilson, Timothy D., Dana S. Dunn, Dolores Kraft and Douglas J. Lisle, “Introspection,Attitude Change, and Attitude-Behavior Consistency: The disruptive effects of explainingwhy we feel the way we do”, Advances in Experimental Social Psychology, Vol. 22,Academic Press. 1989. pp. 287-343.
Wurster, T., The Leading Brands: 1925 - 1985, Perspectives, Boston Consulting Group(1987).
Young and Rubicam, Brands Need Not Die, Press presentation, London (June14, 1994).
Zinkhan, George M. and Rudy Hirschheim, Truth in Marketing Theory and Research: AnAlternative Perspective. Journal of Marketing, Vol. 56, (1992): 80-88.
Appendix
Two Arguments For the Holistic Use of “ Brand”
• The whole is more valuable than the sum of the parts (the value of brandh > the
32
values of brandi + product). Separation therefore undervalues the whole,
• Perceived and actual quality are interdependent.
1. The whole is more valuable than the sum of the parts
Smith (1993) found that, when advertising precedes brand usage, it can reduce
(memories of) negative usage experience. On the other hand, when negative usage
experience precedes advertising, advertising evaluations are still more negative. Thus
the intended changes to brand image interact asymmetrically with brand usage.
Ehrenberg (1974) was one of the first proponents of the weak theory in which brand
advertising reinforces, as distinct from changes, buyer behavior. In both cases, the
brandi can be seen as an qualifier, usually amplifier, of product attributes. A brand
without an underlying product cannot be purchased by a consumer; a brand without a
product makes no profit. In other words, the separated brandi has no value either to
the buyer or to the seller: profit only arises when it is reunited with the product. I do
not, of course, refer to the sale of trade marks but the day to day transactions with
customers.
Thus, using the notation value{x} for the value of x, in this transactional sense,
value {brandi, product} > value {product} but value {brandi} = 0.
Replacing {brandi, product} by {brandh} and combining the two equations above, we
have
33
value {brandh} > value {brandi} + value {product}.
In other words, the value of brandh is greater than the sum of its parts and needs to be
managed accordingly.
2. Perceived and Actual Quality Are Interdependent
The third argument is similar. Proponents of brandi have to allocate actual quality to
the product since it is independent of the brand but consumer perceived quality to
brandi. Increased advertising is widely recognized as signaling high quality (Tellis and
Fornell, 1988; Gale, 1994) especially where quality is not obvious (high experience and
ambiguous goods) (Hoch and Ha, 1986).
35
Over time the consumer is not fooled. PIMS data (Gale, 1994) indicate that market
perceived quality, i.e. by the consumer, is a function of actual, i.e. measurable, quality,
advertising, other communications (and/or brand usage experience, presumably), and a
lag time for those to take effect. Gale cites Schlitz beer as an example where the
reduction in the authenticity of ingredients and the brewing cycle was not apparent
from the beer itself but became widely known following publicity in Forbes.
Thus if brandi is a function including perceived but not actual quality, and
perceived quality = f{actual quality, communications, brand experience, lag},
replacing perceived quality, brandi becomes a function which includes actual quality.
In other words, we have a contradiction.
Brandh includes both perceived and actual quality; and, in this case, the problem does
not arise.