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)171 724-1145TAMBLER@lbs.lon.ac.uk http://www.lbs.lon.ac.uk

Copyright © London Business School 1996.

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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.

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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:

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• 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

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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

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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

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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

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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

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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

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• 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

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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

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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.

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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

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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

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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

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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:

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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

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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

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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

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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

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(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.

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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

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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

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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

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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

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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).

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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.