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Brand equity and brand value

Understanding brand equity and brand value In markets branding can have a large effect on the price that customers will pay due to reputation, image and consideration. Brands therefore add value and enable the product or service to command a higher price, or higher market share than an unbranded equivalent.

The term Brand equity is used to describe both the value of the brand and the brand's component values. It's value may be calculated in financial terms in comparison to unbranded products, shown as an increase in a rate of return, or presented as a more complex mix of softer market metrics such as awareness, consideration, brand strength or brand image.

Brand Price Trade-Offs (BPTO) to show brand equity

To illustrate Brand Equity, a Brand-Price-Trade-Off exercise (see example below) is a market research approach to calculate relative willingness-to-pay for brands. Several brands or products in a category are shown at once and the customer chooses their preferred option. Prices are then adjusted and the customer chooses again from the same list, but with different prices.

The resulting ranking of preference can be used to infer the relative price that individuals are willing to pay for each brand or product. The choices and preferences can then be used in BTPO models to estimate likely purchase rates of different brands at different prices, and from that estimates revenue and profitability.

Strong brands command premium prices or premium market share over the competition and these type of purchase models allow brand equity to be estimated as the extra revenue achievable in a market, compared to competitors or unbranded products. The same type models can also be used to look at product range and market coverage.

BPTO is of most use in consumer type markets where brand is a strong determinant of choice with few feature-level differences - essentially the products are substitutes for one another. For services, industrial and technical type products there can be feature distinctions between the brands and more sophisticated techniques are needed such as full conjoint analysis.

BPTO interactive example

Imagine you are purchasing a bottle of soft drink from a shop. If the drinks were priced as follows which would you choose?

Choose a product then click on 'Select'. The prices will change and then you can choose again

Brand Price Choose...
7 Up
Coca Cola
None of these  

This example gives a simple illustration of the way in which BPTO works, and the possibilities for price premiums for brands over competitors.

In some applications, the use of an increasing price rule in this BPTO-type model can give undue attention to price and so make respondents more price sensitive than they really are. To get around this, a more sophisticated discrete choice analysis experiment can be done (a version of conjoint analysis) using a shop-shelf type display where prices are varied in an apparently random way. Where features and brands need to be understood, a full conjoint analysis study can be carried out where price is just one of several things that are being varied. This reduces the apparent focus on price and gives less price sensitive measures.

Brand versus functional value

In markets with more complex products where differences in value can be accounted for both by functional differences and the impact of the brand, getting at the value of the brand alone is more complex than for simple products. The brand consists of a functional element and also an emotional or associative element.

To identify the value of the functional parts of the product such as what premium does a bigger engine, or better fuel economy command, unbranded research is carried out. Conjoint analysis is the most powerful and effective tool for understanding how functions drive value.

The second part of the emotional or associative value is to look at brand in addition to these functions. Knowing how different functional combinations are valued, by introducing brand you can measure changes that the brand makes on selection compared to the unbranded. By careful calibration, it is possible to uncover the value of the brand over and above the functional differences.

For product development and pricing purposes, this allows managers to determine whether resources should be focused on strengthening the brand and perceived value, or on strengthening the underlying product offer.

Researched value versus accountant's value

Some companies measure brand equity on pure financial measures of brand performance. Because strong brands have extra value to customers, the brands themselves are able to command a higher price in the market, not just to end users, but also through the distribution channel in the form of reduced margins compared to other similar products.

An alternative to making a research-based evaluation of brand equity is therefore to look at the full financial benefit or value-add from the brand in comparison to equivalent products. This can be carried out either in terms of gross margin, or in wider measures such as EVA (economic value added). Good brands should be more effective at bringing long term profits and returns and this will be reflected in a stronger balance sheet with a higher level of profitability for a given cost of sales.

The financial or accounting measure of brand value can then be triangulated with the customer value measure of brand equity to understand the brand's potential for growth.


Brand equity as a basket of measures

Brand equity as value is achieved by creating positive associations with the product in the mind of the customer. The financial benefit is therefore created in intangible meaning and value - for instance, for some brands part of their cachet is exclusivity, some with value, others with service.

Strengthening brand equity therefore involves understanding how the constituent parts of the brand contribute to the overall value and sense of brand worth. Brands can be undercut by poor investment or poor understanding of the value they offer to consumers.

Similarly, understanding the values of the brand, and adapting these to changing market conditions, allows the brand to grow, and possibly to stretch into new markets. Advertising soap powder as being the best white for Sunday best, is much less relevant now. Now the message might be 'wash your clothes every day' with an encouragement to play and get dirty - a complete change in positioning requiring adjustments in brand values.

Consequently, brand equity needs to understand the overall value of the brand, and develop and monitor the contribution of the key pillars of value, to ensure these are reinforced and maximise the potential of the brand.

For help and advice on carrying out BPTO or brand equity measurement contact

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