Sizing up a brand’s equity

Brand equity is an essential component of company profitability, explains Paul Simons, but an accurate means of measuring it is still proving elusive.

The value of a brand extends far beyond its role as a sales and marketing tool. Procter & Gamble managing director and vice-president Paul Polman calculates that his company’s market value is 37bn, if you take into account the equity of its brands. This compares with the accountants’ estimated asset value of 8bn.

The way finance directors and accountants value brands is little more than an attempt to dress up the balance sheet. This is likely to change over the next ten years and brand equity will become an essential balance sheet calculation. But first a method for valuing brands must be agreed upon, and this will have to take into account the way this value changes over the lifecycle of the brand.

Brand equity is not something set in stone – it changes with the different stages of the brand’s development. As companies try to work out the balance sheet value of their brands, they will need to develop a model of “brand equity lifestage” and a way of tracking the changing strength of a brand’s equity over the years.

There are three phases that can describe the equity lifestage of a particular brand.

The first phase is the rapidly rising brand equity strength of a relatively new brand. At this stage come the “entrepreneurial revolutionaries” – brands such as Virgin Atlantic, First Direct, Daewoo and Goldfish, which have destabilised the equilibrium of their different sectors. Old ways of viewing brand equity have to be revised in the light of these brands (see chart two).

First Direct has been a catalyst for change in consumer banking, and is a true revolutionary. Chicken Tonight, however, is simply taking share without making consumers rethink their requirements for an evening meal.

The second phase is the mature brand that is concerned with brand maintenance and defending its position. Brands can either take energetic steps to manage their brand equity in the face of competition, as is the case with Mercedes and BMW, or react to market developments, as with NatWest and Barclays.

The final phase is the waning brand that is experiencing an erosion of its equity and hence losing its reputation and appeal. Among these brands, some will be almost household names – TSB and Woolworths – while others will have faded into the background, such as Smedley’s and Harp Lager.

A continuous erosion of brand equity is not inevitable. Once the danger signals become apparent the brand owner should take steps to avoid further erosion. However, some companies may choose to manage the brand’s decline, recognising that corporate resources are better focused elsewhere. One scenario is a formerly declining brand that is either experiencing, or engineering its own, resurgence.

In the sports market, Adidas’ and Umbro’s brand equities are reviving. Both revivals were triggered by outside factors: the recent fashion for canvas trainers from the Seventies and England’s success at Euro 96. Whereas Adidas has continued to rebuild its brand equity in the three years since the fashion wave, it remains to be seen if Umbro will follow suit.

A second scenario is a brand whose equity is continuing to decline despite, or without, efforts to strengthen itself. Hi-Tec and LA Gear have fast declining brand equities which have not benefited from any of the advances in the sports or youth fashion markets.

In this scenario, the lifestage model introduces the concept of negative brand equity. Negative equity happens when, despite product and price parity with the competition, a product’s branding has a detrimental impact on product purchase intention.

If you want to see this in action, over-brand a teenager’s latest Nike trainers with an LA Gear logo and wait for the reaction.

There are three ways of evaluating brands. One is through its “brand quality”. This reflects the distinctiveness and relevance of its brand associations, its esteem and perceived popularity and leadership.

You can also look at “brand quantity,” which covers awareness, penetration, loyalty, satisfaction ratings, sales share – these are principally consumer measures. The “brand future” reflects its potential for organic growth – potential to boost trial or distribution; its “fitness” for the changing market (new legislation, technologies, consumer patterns and trade structures) and brand extendibility (new launches).

To ascertain a brand’s equity, its performance on the aforementioned dimensions should be compared with that of its competition. Measurements should be made over time to calculate whether its equity is rising, falling or constant.

Several approaches to the evaluation of brand equity have been proposed. They differ in the number and type of criteria used to measure brand equity. Examples of some of the principal approaches are outlined in chart one.

Unfortunately, each approach, although extremely worthwhile in its own respect, suffers from at least one of three weaknesses.

They are all different from each other. The marketing industry should propose a single and consistent framework for the measurement of brand equity. In the future it will become too important an issue for there to be a variety of approaches.

All reflect the brand’s recent past or, at best, its present. None convincingly attempts to incorporate a measure of its future potential.

An important facet of the brand equity lifestage model is whether a brand is on an upward or downward curve.

All use entirely consumer-based measures. This target market is important, but as brand equity rises up the corporate agenda so stakeholders – the shareholders and managers of the brand owning company – and distributors will also become key groups to measure.

Brand equity will rise up the corporate agenda and begin to share equal prominence with financially driven measurements, such as profit or return on investment. Chief executives will have to take more responsibility for developing the equity of their company’s brands.

Brand equity is not a constant, so it is important to think of a brand equity lifestage model. Evaluating where a particular brand sits on the proposed lifestage model must become a fundamental determinant of corporate strategy.

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