Chapter 10 Measuring outcomes of brand equity Bradley Kingston Vassili Zachariou How to market yourself Utilize public relations resources Advertise – remind and persuade Result = Brand Equity Outline of Presentation REVIEW CONTEXT MEASUREMENT APPROACHES – 2 main ways to measure the benefits or outcomes of brand equity Comparative methods Brand-based comparative approaches Marketing-based comparative approaches Conjoint analysis Holistic methods Residual approach Valuation approach QUESTIONS Review Brand Equity (BE): the Brand Knowledge Structure (BKS) that permits a branded product to earn incremental, premium profits over and above those earned by a product without a brand name. Strategic Brand Management: design and implementation of marketing programs and activities to build, measure, and manage brand equity. Process (Step 3): CH 10= Measuring and interpreting brand performance Review CH 2: product with positive BE, enjoys 7 NB customer-related benefits: 1) Perceived differently + different interpretations of product performance. 2) Loyalty + less vulnerable to competitive marketing actions. 3) Command larger margins + more inelastic responses to price increases + elastic responses to price decreases. 4) Greater trade cooperation + support. 5) Increase marketing communications effectiveness. 6) Yield licensing opportunities 7) Support brand extensions CH 9: We can measure these individual components (qualitative and quantitative techniques). However, to provide more direct estimates, we still must assess their resulting value in some way. CH 10: Examines measurement procedures to assess the effects of brand knowledge structures on these and other measures that capture market performance for the brand. Context TREND affecting modern marketers: Need to quantify activities in financial terms Branding and Finance 10.0 (pg 427) Research (Stock Market Reactions) • Stock market reacts to BE for companies and products (Aaker & Jacobson, 1989-92) • Stock market return has positively related to changes in ROI. • Strong relationship btw BE and stock return. • Changes in brand attitude were associated contemporaneously with stock return and led accounting financial performance. (Lane and Jacobson, 1995) • Stock market participants response to brand extension announcements depend interactively on brand attitude and familiarity Context Accounting Evolution – WHY? “(Investors need) better information about intangible assets because those assets are an increasingly important economic resource for many entities and are an increasing proportion of the assets acquired in many business combinations”. – FAS 141, 2001. Context • Changes in International Accounting Standards and Statements (2001-2005): • SFAS 141/142 (US) • IFRS 3/38 (Rest of World) • Historic Cost to Fair Value • How Fair Value is Measured Branding and Finance 10.0 (pg 428) – Accounting Perspectives on Brands (Roger Sinclair) • The new standards require accountants to account for the costs of the intangibles that make up goodwill portion. • They must describe the premium price paid over net asset value (Assets – Liabilities). • Identify and value as many intangibles as the standards permit. E.g. trademarks, tradenames, service marks, etc. Context • Intangible Assets must be valued at Fair Value at the time of purchase. FV = the price that would be received for the asset… in a current transaction between market participants in the reference market (FASB, 2005). • Pending Issue: Internally generated brand assets SFAS 142 and IAS 38 (Intangible Assets). Addressed and resolved: next two years. Comparative Methods Comparative methods approximate specific benefits of brand equity. Use experiments that examine consumer attitudes and behaviour toward a brand, to more directly assess the benefits arising from having a high level of awareness and strong, favourable, and unique brand associations. Brand-based comparative approaches (BBCA) Marketing-based comparative approaches (MBCA) Conjoint analysis (CA) Comparative Methods Brand-based comparative approaches: Experiments in which one group of consumers responds to an element of the marketing program when it is attributed to the brand and another group responds to that same element when it is attributed to a competitive or fictitiously named brand. This approach holds marketing program fixed Examines consumer response based on brand identification Comparative Methods - BBCA Competitive brands can be useful benchmarks. • Consumers may make inferences to supply any missing information based on their knowledge of particular brand (most preferred or leading brand). • Examine how consumers evaluate a proposed new ad campaign, new promotion offerings, or a new product when it is also attributed to one or more major competitors. • Example: & Comparative Methods - BBCA Applications • Product purchase or consumption research for new or existing products • Only if – brand identification can be hidden. • Blind taste testing: Consumers examine or use a product with or without brand identification. • General evaluations: dramatically different perceptions depending on presence/absence of brand BBCA – blind taste testing Pepsi Taste Test commercial  • 1980’s, generally, Pepsi was voted as having better, sweeter taste. • 1985 – “New Coke” debacle • 2008: the60secondmarketer.com Andy Goldsmith, Vice President, Creative and Brand Strategy, American Cancer Society 1. Science is updating the classic "taste test." 2. Your brain connects brand imagery with brand preference, resulting in increased sales. BBCA: Taste testing with technology • Research, Baylor College of Medicine. • Using functional Magnetic Resonance Imaging (fMRI) technology to monitor brain activity • Blind taste test among 67 subjects, preference (Coke and Pepsi) split down the middle. • Brain scans showed that the ventrolateral prefrontal cortex lights up when either brand was consumed. Since that part of the brain responds to rewards, and people were being asked to drink sugar water, no surprise. • But when researchers then told people which cola they were drinking, interesting results. • In those “branded” taste tests, while still hooked up to the fMRI, Coke was preferred by 75% 25% • Why? BRAND IMAGERY. • Turns out that when people knew they were drinking Coke, things like the "dorsolateral prefrontal cortex" and the hippocampus both got excited. So Coke is more likely to light up the brain parts related to things like memory and cognitive control. In most cases Pepsi did not have the same effect. Comparative Methods - BBCA • Holds all aspects of the marketing program fixed for the brand = isolates the value of the brand in a very real sense • Understanding exactly how knowledge of the brand affects consumer responses to prices, advertising and so for this extremely useful in developing strategies in these different areas. NOTE: Cases - difficult for consumers to examine/experience some element of the marketing program without being aware of the brand – we can use detailed concepts statements of that element instead. • Consumers judge proposed new product introduced as brand extension or by an unnamed firm in that product market. • Ask about acceptable price ranges and store locations for the brand named product or hypothetical unnamed version. Concern • Simulations and concept statements may highlight the particular product characteristics enough to make them more salient than they would otherwise be, distorting results. Comparative Methods Marketing-based comparative approaches: Experiments in which consumers respond to changes in elements of the marketing program for the brand or competitive brands. Hold the brand fixed Examines consumer response based to changes in the marketing program Applications • Researching price premium and increase strategy to reveal brand-switching and loyalty patterns. • Assess price sensitivity and thresholds for different brands - example Intel Comparative Methods - MBCA Applications (cont.) • Assessing consumer response to different advertising strategies, executions, or media plans through multiple test markets. • Explore potential brand extensions through consumer evaluations of potential extensions candidates. Example: Kulula.com brand extensions Comparative Methods - MBCA Advantages • Ease of implementation. • Compare virtually any proposed set of marketing actions for the brand. Drawbacks • Difficult to tell whether consumer responses to changes in marketing stimuli are caused by brand knowledge or by more generic product knowledge. • I.e. it may be that for any brand in the product category, consumers are willing to pay certain prices, accept a particular brand extension, etc. • Suggested solution: Determine whether the response is specific to the brand by: Conducting similar tests of consumer response with competitive brands. Comparative Methods Conjoint analysis: A survey-based multivariate technique that enables marketers to profile the consumer buying decision process with respect to products and brands. Ask consumers to express their preferences or to choose among a number of carefully designed product profiles. Goal: Determine the trade-offs consumers are making between various brand attributes, and thus the importance they are attaching to them. Comparative Methods - CA • Each profile consumers see is made up of a set of attribute levels chosen on the basis of experimental design principles to satisfy certain mathematical properties. • The value consumers attach to each attribute level, as statistically derived by the conjoint formula, is called a part worth. • We use the part worths in various ways to estimate how consumers would value a new combination of the attribute levels. • For example one attribute is the brand name. • The part worth for the “brand name” attribute reflects its value. Comparative Methods - CA Applications • Brand/price tradeoff methodology (simplified version of conjoint analysis) with 2 variables – brand and price. Consumers make a series of stimulated purchase choices between different combinations of brands and prices. Each chose between buying a preferred brand and paying less. In this way consumers reveal how much their brand loyalty is worth. • Each choice triggers an increase in price of the selected brand, forcing the consumer to choose between buying a preferred brand and paying less. In this way, consumers reveal how much their brand loyalty is worth and, conversely, which brands they would relinquish for a lower price. CA – Brand/price trade-off Which jeans would you buy: R200 R500 R300 R400 R500 R600 R1000 R1500 CA – Brand/price trade-off CA – Brand/price trade-off Comparative Methods - CA Advantage • Allows marketer to study different brands and different aspects of the product or marketing program simultaneously): Product composition, price, distribution outlets, etc • Uncover information about consumer’s responses to different marketing activities for both the focal and competing brands. Disadvantage • Marketing profiles may violate consumer’s expectations based on what they already know about brands. • Thus care must be taken not to evaluate unrealistic product profiles or scenarios. • Can also be difficult to specify and interpret brand attribute levels. Holistic Methods • Holistic methods place an overall value on the brand in either an abstract utility terms or in concrete financial terms • Therefore holistic methods attempt to assess the unique contribution of the brand to (over all product equity) Two Approaches • 1. The residual approach which examines the value of the brand by subtracting consumers preference for the brand (based on physical product attributes alone) from the over all brand preference. • Overall brand preference – consumer preference = residual value Critique for Residual Approach • Residual approaches provide a useful benchmark for interpreting brand equity, especially when approximations of brand equity or financially orientated perspectives are required. • The disadvantage of residual approaches is that they are most appropriate for brands with a lot of product related attribute associations. • E.G. Natasha Chapter 9 Nokia Valuation Approaches • The valuation approach places a financial value on brand equity for accounting purposes • Putting a specific value on brands may be useful for 1. Mergers and acquisitions 2. Branding licensing : internally for tax reasons, and to third parties 3. Fund raising: e.g. looking for more sponsorship can have a brand like coca cola as a backer. 4. Brand management decisions: such as preparing financial reports Historical Perspective • Grand Metropolitan • Grand Met used two different methods, 1. If a company consisted of one brand, it was said that the brand value was 75% of the purchase price. 2. Whereas if the company consisted of many brands, a multiple of an income figure was used. Accounting firms in favour of valuing brands say that it is a way to 1. Strengthen the presentation of a companies accounts 2. Record hidden assets so as to reveal them to the companies shareholders 3. Enhance a companies shareholder funds so as to improve its earnings ratios 4. Provide a basis for management and investors to measure a companies performance 5. And reveal brand strengths so that management can formulate appropriate brand strategies General Approaches • When firms need to determine the value of a brand in an acquisition or merger, they can choose from three main approaches. 1. Cost approach 2. Market approach 3. Income approach The Cost Approach • The cost approach maintains that brand equity is the amount of money that would be required to reproduce or replace the brand which include all costs for research and development, test marketing, advertising and so on. • One criticism however is that this approach, rewards past performance in a way that may play no role in future profitability. • E.G. Gizmondo & Kellogg's The Market Approach • According to the market approach, we can think of brand equity as the present value of the future economic benefits to be derived by the owner of the asset. • In other words, brand equity is the amount an active market would allow for the asset to be exchanged between a willing buyer and seller. • McDonalds vs. Gillette vs. BMW The Income Approach • Argues that brand equity is the future discounted cash flow from the future earnings stream for the brand. • Three such income approaches are as follows. 1. Capitalizing royalty earnings from a brand name 2. Capitalizing the premium profits that are earned by a branded product (by comparing its performance against an unbranded product) 3. Capitalizing the actual profitability of a brand after allowing for the costs of maintaining it and the effects of taxation. What is a Brand Worth • Brand Metrics • The model is based on the accounting definition of an asset. • “Resources under control of an enterprise that will generate future economic benefits for the enterprise” Applies to brands as well • The researchers conventionalized brand equity as “incremental cash flows that accrue to a branded as compared to a non branded product” What is a Brand Worth Cont… • Economic Profit; is the amount after tax operating profit a company earns that exceeds the cost of the capital the company has employed in operating the business. • The Band Metrics approach therefore starts with a calculation of the economic profit • The excess profit over and above the cost of capital is attributed to resources that must be identified • Among these are the brand and its customers • Actuarial sciences techniques are then used to determine how much of this profit is attributed to brands What is a Brand Worth Cont… • The resource recognition procedure (RRP) 1. Firstly the group generates a list of possible resources that might drive economic profit. 2. By means of voting and ranking, the list is reduced usually to about 5-8 items. 3. The members then allocate 100% across the list, thereafter the scores are averaged to give a weighting to each item. 4. Finally each member allocates a score from 0 and 10 to indicate the extent to which brand equity influences each resource. What is a Brand Worth Cont… • The mean, weighted scores are then summed to produce a percentage that, when applied to the economic profit, produces the brand premium profit, which is the portion attributed to the brand. Simon and Sullivan’s Brand Equity Value • Assume that the market value of a firm is based on the earning power of both tangible and intangible assets • They also make the assumption that the financial markets valuation of the firm incorporates the expected value of future cash flows and returns • A study conducted by Simon and Sullivan during the 1980’s whereby tracing the brand equity of Pepsi and Coca Cola showed that the introduction of diet Coke, increased the equity of Coca Cola and decreased the equity of Pepsi Interbrands Brand Valuation Methodology • Interbrand approached the problem of brand valuation, by assuming that the value of a brand, just like the value of any other economic asset, was the present worth of the benefits of future ownership • I.e. what the brand value is today, of the earnings or cash flow that the brand can be expected to generate in the future. • Interbrand largely follows a methodology based on an income approach. Interbrands Brand Valuation Methodology • To capture the complex value creation of a brand, Interbrand recommends the following 5 valuation steps. 1. Market segmentation 2. Financial analysis (role of branding) 3. Demand analysis (brand strength) 4. Competitive benchmarking 5. Brand value calculation Summary Comparative methods: Use experiments that examine consumer attitudes and behaviour toward a brand, to more directly assess the benefits arising from having a high level of awareness and strong, favourable, and unique brand associations. Brand-based comparative approaches: Experiments in which one group of consumers responds to an element of the marketing program when it is attributed to the brand and another group responds to that same element when it is attributed to a competitive or fictitiously named brand. Marketing-based comparative approaches: Experiments in which consumers respond to changes in elements of the marketing program for the brand or competitive brands. Conjoint analysis: A survey-based multivariate technique that enables marketers to profile the consumer buying decision process with respect to products and brands. Holistic methods: Attempt to place an overall value on the brand in either abstract utility terms or concrete financial terms. Thus, holistic methods attempt to "net out" various considerations to determine the unique contribution of the brand. Residual approach: Examines the value of the brand by subtracting out from overall brand preferences consumers' preferences for the brand based on physical product attributes alone. Valuation approach: Places a financial value on the brand for accounting purposes, mergers and acquisitions, or other such reasons. Conclusion NO single measure that fully captures BRAND EQUITY. Brand Equity is multidimensional concept. Depends - knowledge structures in consumer’s minds - actions firms take to capitalize on the potential offered by these knowledge structures (CH 2) Customer Based Brand Equity: the differential effect that brand knowledge has on consumer response to the marketing of that brand. CBBE model: emphasizes employing a range of research measures and methods to fully capture the multiple potential sources and outcomes of brand equity.
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