Chapter 6: Measuring Brand

Equity

Contents

• Need for measuring brand equity• Methods of measuring brand equity• Financial measures• Customer based measures

Need for measuring brand equityMeasuring brand equity helps us in the following ways:• If we know the value of the brand, it is easier to accurately set royalty rates

and transfer prices. • The value of a brand can help in boosting the share price by generating

positive public relations for the company.• It helps the management effectively measure the return on investment (ROI).• The brand valuation process helps throw light on a number of factors such as

the performance of the brand relative to the competition; it also helps identify the strengths and weaknesses of the brand, and the various opportunities in the market, and the opinion of the customers. This objective opinion gives a useful insight into the performance of the brand.

Measuring Brand Equity

• Brand equity consists of two components—brand strength and brand value—and to understand how customers evaluate band equity, we need to have an understanding of both these components

• Brand value or the financial performance • Brand strength or customer based measures

Brand value

Brand value

• Cost-based valuation• Market-based valuation• Royalty relief method• Economic use method

Cost based valuation

• The value of a brand is calculated on ‘the basis of what it actually cost to create or what it might theoretically cost to recreate’ the brand.

• Thus, ‘historical advertising and promotion expenditures, campaign creation cost, trademark registration cost, etc.’, are taken into account.

• This, however, does not correctly reflect the current value of the brand, as the cost of generating a brand does not truly reflect the income-generating potential of the brand.

Market-based valuation

• If information regarding ‘market transactions involving comparable brands is available, it is possible to estimate one brand’s value by comparing it with another brand.’

• This method is rarely used, as such data is scarce and due to the fact that each brand is unique and it will be difficult to compare brands.

Royalty relief method• This method is based on the assumption that if the company did not

actually own the brand, but had to license it from a third party, then what royalty it would pay for using the brand name.

• This is estimated by calculating the sales likely to occur in the future and ‘then applying an appropriate rate to arrive at the income attributable to the brand royalties in the future years. The notional brand loyalty is then discounted back to a net present value that is the brand value.’

• This method is widely used in India, as it is favored by the fiscal and tax authorities and the courts, because the calculation is based on publicly available marketing and financial information.

Economic use method

• This method ‘takes into account the economic value of the brand to the current owner in its current use.’

• This is the most widely used method and just like the valuation of shares, it is a ‘cash-flow valuation’.

• This is measured by calculating the increase in gross profit due to selling a branded product versus selling an unbranded product.

Brand strength

Brand strength

• Customer-based brand equity measures help in overcoming the limitations of the financial measures as they help managers evaluate marketing strategies.

• For example, promotional and positioning strategies can be evaluated by customer-based measures and this evaluation can help managers build sound long-term health of their brand.

• The two models that have been widely used to measure brand equity are:– Brand asset valuator model – Aaker model

Brand asset valuator model Quadrant 2:Niche / Unrealized

Quadrant 4: Eroding

Quadrant 3: Leadership

Quadrant 1: Unfocused / New

Bra

nd S

tren

gth

(Fut

ure

perf

orm

ance

)

Low

Low High

High

D R E K

Brand Stature (Current performance)

D R E K

Declining

D R E K D R E K

D=differentiation

E=esteemR=relevance

K=knowledge

In-class exerciseBrand asset valuator - Examples

Quadrant 2:Niche / Unrealized

Quadrant 4: Eroding

Quadrant 3: Leadership

Quadrant 1: Unfocused / New

Bra

nd S

tren

gth

(Fut

ure

perf

orm

ance

)

Low

Low High

High

Brand Stature (Current performance)

Declining

Aaker Model

Measuring Brand Equity

Market Behaviour MeasuresMarket sharePrice and Distribution indices

Loyalty MeasuresPrice premiumSatisfaction /loyalty

Perceived Quality/ Leadership Measures

Perceived QualityLeadership

Awareness MeasuresBrand Awareness

Associations/ Differentiation Measures

Perceived ValueBrand PersonalityOrganizational Associations

Quick Recapitulation

• Need for measuring brand equity• Methods of measuring brand equity• Financial measures• Customer based measures

Questions?