It is tempting to use this measure to manage brands and brand building, but the reality is that it is too imprecise to play this role. The value will be driven by the stock market, competitor innovations, business strategy, product performance, and market dynamics that may have little to do with brand power and is based on several subjective parameter estimates that involve uncertainties and biases.
Brand value estimates can be worthwhile, however, in providing a frame of reference when developing brand-building programs and budgets. If a brand is worth $500 million, a budget of $5 million for brand building might be challenged as being too low. Or if $400 million of the brand’s value was in Europe and $100 million in the United States, a decision to split evenly the brand-building budget may be questioned. Further, the process can add value by stimulating brand-management teams to think through exactly how their brand is working in the business strategy and what its components are. The insights gained will help enhance the business and brand strategy and the associated brand-building efforts.
PAYOFF FROM BRAND BUILDING PROGRAMS
Another approach to demonstrating brand value is to measure statistically the impact of brand equity changes on stock return, which is the ultimate measure of a long-term return on assets. In two studies I conducted with Professor Robert Jacobson of the University of Washington, we explored this relationship using time series data which included information on accounting-based earnings or return on investment (ROI) and models that sorted out the direction of causation.3 The first data base from EquiTrend involved thirty-three brands representing publically traded firms like American Express, Chrysler, and Exxon; the second database, from Techtel, involved nine high tech firms including Apple, HP, and IBM.
Researchers in finance have shown a strong relationship between ROI changes and stock prices. On average, if ROI go up so, does a stock price. We found in both studies that the impact of increasing brand equity on stock return was nearly as great as ROI, 70 percent as much. Figure 1 presents the results of the EquiTrend study. The figure vividly shows that stock return responds to a large loss or large gain in brand equity, nearly as much as the response to ROI changes. In contrast, advertising, also tested in the study, had no impact on stock return except that which was captured by brand equity.
The brand equity to stock return relationship may be in part caused by the fact that brand equity supports a price premium that contributes to profitability. An analysis of the larger EquiTrend database has shown that brand equity is associated with a premium price. Thus, premium-priced brands like Mercedes, Levi, and Hallmark have substantial brand equity (as measured by perceived quality) advantages over competitors such as Buick, Lee Jeans, and American Greetings.
The high-tech study went on to examine the major brand equity changes that were observed. What causes the generally stable brand equity numbers to change? Some of the major changes were associated with significant product innovations (as opposed to incremental ones). But there was more. Major changes could also be attributed to visible product problems, change in top management, major lawsuit results, and competitor actions or fortunes that were notably successful or unsuccessful. The latter, of course, is usually out of the control of the brand’s firm.
These studies show that when a real change in brand equity occurs, which is unlikely to happen with only advertising or promotions, there will be a substantial and measurable effect on stock return. Such a finding is persuasive evidence that brand equity will affect the real value of the business and the brand-as-asset model is valid.
The EquiTrend Study: Stock Market Reaction to Changes in Brand Equity and ROI
Figure 1
A CONCEPTUAL BUSINESS STRATEGY MODEL
The challenge facing those who would justify investments to build brand assets is similar to that facing those who would invest in any intangible. The three most important assets to most organization are people, information technology, and brands. All are intangible; they do not appear on the balance sheet. All add value to the organization that is difficult to quantify. The rationale for investment in any such intangible, therefore, must rest in part on a conceptual model of the business that affirms these intangibles represent key success factors underlying the business strategy.
One conceptual basis for brand investment is to contrast it with its strategic alternative, price competition. It is not a pretty picture. Managers, especially those representing the number three or four brands, respond to excess capacity and price competition by lowering price. Competitors follow. Customers begin to focus more on price than on quality and differentiated features. Brands start resembling commodities, and firms begin to treat them as such. Profits erode.
The choice is between building brands or managing commodities. It does not take a strategic visionary to see that any slide toward commodity status should be resisted. Further, it is usually not inevitable. Consider the price premium paid for Morton’s Salt (few products are more of a commodity than salt), Charles Schwab (a discount broker), or Emirates Airline. In each case, a strong brand has been able to resist pressures to focus on price. Management guru Tom Peters said it well: “In an increasingly crowded marketplace, fools will compete on price. Winners will find a way to create lasting value in the customer’s mind.”4
How should brand-building efforts be measured given that such programs will be expected to pay off over years and there are multiple drivers of success? The answer is to use measures of brand equity—awareness, key associations, and loyalty of a customer base. The relevance of these brand-equity measures requires a compelling conceptual business strategy model that shows that building brand strength is essential and will result in a competitive advantage that will pay off financially in the future.
SETTING AND ALLOCATING BRAND-BUILDING BUDGETS
The budget for any organizational intangible is difficult to create, allocate and defend. But some observations about the process can be made.
First, the role of a brand in the conceptual business strategy model needs to drive the budgeting process. What is its role and how crucial is the brand to the strategy? What are the strengths and weaknesses of the brand and where does the brand need to go? Is the priority to enhance awareness, create or change perceptions, or increase loyalty? How do the segments differ? What budget is likely to accomplish those tasks or at least give the strategy a chance to succeed?
Second, the quality of the communication program is much more important than the budget. One classic study found that quality of advertising (as measured by pre-post TV advertising exposure) was several times more able to explain variance in the market impact (as measured by sales gain) than the change in the advertising budget.5 An implication is to spend more resources on creative ways to discover home-run ideas. It is possible or even likely that a $5 million budget behind a brilliant idea will be superior to a $20 million budget behind a mediocre idea. It is not just about spending money.
Third, measurement and experimentation can help. Experimenting with different brand-building ideas and budget levels takes a lot of the guesswork out of it. Beware, however, of using short-term sales to evaluate (although sometimes the absence of a short-term sales effect may signal a weak long-term effect). Using short-term sales as a criterion can lead to an over-emphasis on price deals, which can damage brands and thus long-term strategy. If running an experiment for a long time period is not feasible, measures of brand equity can be used as a surrogate for long-term market impact.
THE BOTTOM LINE
Brands