Chapter 18
Brand Equity

Business leaders must know the value their brand contributes to their company and/or products beyond book value. Organizations that are known for having positive reputations typically command higher valuations and prices than their lesser-known competitive counterparts, and measuring this helps company leadership understand the sources of their market strengths. This requires today’s companies to be deeply attuned to the needs of their customers, beyond classic segmentation, targeting, and positioning theory.

To attract and create loyal customers, a company must be customer-centric. This is more than smiling and being friendly. Customer centricity is an explicit investment in being customer-driven and organizing the company’s resources to support this effort. Talking directly to customers to understand their needs, pains, and gains can positively affect the company’s reputation with the market and lead to more distinctive offerings and more sophisticated customer engagement and communication. Since marketing is a strategic asset in today’s business world, company leaders must understand the total value marketing adds to the business at both the tactical and strategic levels as this accounts for the impact of the brand in the market place.

Measuring brand equity has several statistically valid approaches, each helping calculate the intangible value associated with the concept of “brand.” Interbrand, a global brand consultancy, uses a proprietary methodology, the results of which are popularized in their annual Global Brands Scorecard study. Their approach values assets based on how much they are projected to earn in the future.i The challenge is clearly identifying and valuing the intangible factors that are the sources of brand equity. Products often elicit an affective and emotional response from consumers. Singapore Airlines has a highly regarded reputation for consistently superior service in all travel classes, and is consistently among the very top of the annual airline ratings. Its customers know and trust Singapore Airlines and will pay a premium for the superior service offered. Mental images appear when particular companies are mentioned. One of the most significant business trends of the past decade has been design thinking, as represented by IDEO, a U.S.-based consultancy. When IDEO is mentioned, the image of creative, techie, breakthrough thinking is conjured. When electric cars are discussed, Tesla quickly comes to mind. These rapid and varied responses reflect the reputation of the entity. But what is the value of this reputation? While not an easy question to answer, the following simple technique serves as a helpful guide.

Deborah MacInnis, professor of marketing at USC’s Marshall School of Business, and C. Whan Park, the Joseph A. DeBell professor of marketing at USC’s Marshall School of Business, describe brand equity “as the financial value of brand reflecting its efficiency in attracting and retaining customers.”

Table 18.1: Industrial and Marketing Accounting Systems

Source: MacInnis, Deborah; Park, C.W., “Making the Most of Your Brand: Leveraging Brand Equity Through Branding Strategies”, March 2004. Retrieved May 30, 2017 from http://www.marketingprofs.com/4/macpark2.asp.

They describe a marketing accounting method similar to industrial accounting, but with marketing costs substituted for the cost of goods sold. When marketing costs are subtracted from total revenues, a gross magnitude of brand value figure results (Table 18.1).

Calculating the return on marketing (brand value divided by marketing costs) helps determine the effectiveness of marketing investments made on behalf of the brand (see Table 18.2).

Table 18.2: Example 1 of Brand Valuation

Source: MacInnis, Deborah, and C. W. Park. “Making the Most of Your Brand: Leveraging Brand Equity Through Branding Strategies”, March 2004. Retrieved May 30, 2017 from http://www.marketingprofs.com/4/macpark2.asp

A brief look at companies A and B in case 1 shows they have identical brand values, but Company A has a higher return on marketing costs, a sign that Company A is more Table efficient with its marketing expenditures (see Table 18.3).

Table 18.3: Table 18.3. Example 2 of Brand Valuation

Source: MacInnis, Deborah and C. W. Park, “Making the Most of Your Brand: Leveraging Brand Equity Through Branding Strategies”, March 2004. Retrieved May 30, 2017 from http://www.marketingprofs.com/4/macpark2.asp.

Case 2 shows that Company A has a larger brand value than Company B, but Company B has a better return on marketing costs. If this were to continue over time, Company B would eventually overtake Company A in brand value (assuming the other figures remain in the same relative proportions).

MacInnis and Park’s basic brand value calculation is an initial pass at determining the magnitude of gross brand value. It is reasonable to assume that brand value would be attached to a company’s marketing efficiency—companies with better marketing efficiency (higher ratio of brand value to marketing costs) should be rewarded with a higher brand value than companies with a lower marketing efficiency. The converse is likely true as well.

Finally, MacInnis and Park mention that this analysis is useful when evaluating the same brand in the same industry. But if the brand valuation objective is to compare your brand with that from a different industry, then the formula must be adjusted to reflect differing growth rates in each industry. The rationale is that growth rate differences between industries can distort brand-to-brand comparisons since one industry may be growing overall and, thereby, lifting the value of most companies within (a simple example is the prebubble property market of 2007–2008 in the United States and United Kingdom), while a brand being compared to another industry may be affected by a slowdown in its industry (e.g., global newspaper industry). In either case, individual brand values are distorted by larger industry forces. Therefore, adjusting the formula by adding growth rates would be useful:

This approach borrows from classic accounting techniques and, consequently, serves to succinctly illustrate the concept of brand equity. The MacInnis and Park methodology also demonstrates the challenge in precisely determining brand value.

As with any model, the challenge is in determining the best possible estimates. With MacInnis and Park, calculating the marketing efficiency, or the return on investment on marketing costs, is affected by a few not entirely controllable factors: the response of customers to a marketing communication effort, assumptions the company makes about its marketplace and its customers, and the reaction of competitors and how their strategies might impact on or even disrupt your plans.

There are several online sources available for those interested in learning more about brand equity:

iR. J. Best, Market-Based Management: Strategies for Growing Customer Value and Profitability (Upper Saddle River, NJ: Pearson Education, Inc., 1997, 2000, 2004, 2005), 220–223.

iiDeborah MacInnis and C. W. Park, “Making the Most of Your Brand: Leveraging Brand Equity Through Branding Strategies,” March 2004. Retrieved October 9, 2011 from www.marketingprofs.com http://www.marketingprofs.com/4/macpark2.asp