Customer-Centered Brand Management

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Brands exist to serve customers, not the other way Customer-Centered around. But you’d never know that from the way brands are Brand Management managed.

by Roland T. Rust, Valarie A. Zeithaml, and Katherine N. Lemon •

Reprint R0409H

Brands exist to serve customers, not the other way around. But you’d never know that from the way brands are managed.

TOOL KIT Customer-Centered Brand Management

by Roland T. Rust, Valarie A. Zeithaml, and Katherine N. Lemon

Most managers today agree with the notion in existence today. In the 1980s, it enjoyed out- that they should focus on growing the lifetime standing brand equity with many customers. value of their customer relationships. Building But as the century wore on, the people who loyalty and retention, cross selling related loved the Olds were getting downright old. The goods and services, broadening offerings to managers that parent company General Mo- fulfill more of customers’ needs—all are ways tors put in charge of the brand realized that of adding to overall customer equity. Indeed, maintaining market share meant appealing to given the cost of winning new customers younger buyers, who unfortunately tended to (much higher than that of keeping current see the brand as old-fashioned. We all know ones), and the ultimately finite universe of what came next: the memorable 1988 ad cam- buyers out there, a mature business would be paign featuring the slogan, “This is not your fa- hard-pressed to increase profits otherwise. ther’s Oldsmobile.” In 1990, less memorably The problem is, for all that managers buy but in the same vein, the company’s marketers into this long-term customer focus, most have unveiled its next message: “A New Generation not bought into its logical implications. Listen of Olds.” Catchy or not, neither campaign to them talk, and you may hear customer, cus- turned back the clock. By 2000, Oldsmobile’s tomer, customer. But watch them act, and market share had sputtered to 1.6%, from 6.9% you’ll see the truth: It’s all about the brand. in 1985. And in December 2000, General Mo- Brand management still trumps customer tors announced that the Oldsmobile brand management in most large companies, and would be phased out. that focus is increasingly incompatible with Car aficionados might have shed a tear at growth. the passing of a proud old marque, but we see Consider the story of Oldsmobile, an Ameri- the tragedy differently. Why did General Mo- can car brand launched earlier than any other tors spend so many years and so much money OPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2004 HARVARD PUBLISHING CORPORATION. C

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trying to reposition and refurbish such a tired a big tent by stretching it to accommodate the image? Why not instead move younger buyers tastes of very different markets. His branding along a path of less resistance, toward another reflected his customers’ identities instead of of the brands in GM’s stable—or even launch a his band members’. wholly new brand geared to their tastes? Culti- That kind of thinking led to Honda’s devel- vating the customers, even at the expense of opment and marketing of the Acura Legend the brand, would surely have been the path to in the United States. The same car was intro- profits. duced in most other countries, including Ja- We know why not, of course. It’s because, in pan, as the Honda Legend. But the company large consumer-goods companies like General had good reason to think it would not suc- Motors, brands are the raison d’être. They are ceed using that name Stateside. In the 1980s, the focus of decision making and the basis of U.S. buyers, much more than their counter- accountability. They are the fiefdoms, run by parts elsewhere, associated the Honda brand the managers with the biggest jobs and the big- with economy cars. They expected and gest budgets. And never have those managers trusted the company to provide inexpensive, been rewarded for shrinking their turfs. dependable—if not very exciting—cars. We propose a reinvention of brand manage- Rather than work to change that image ment that puts the brand in the service of the (which served the company well with other larger goal: growing customer equity. This models), management decided to launch a doesn’t mean that brand becomes unimpor- new brand. “Acura” had no positive equity es- tant. Compelling brand images remain essen- tablished with upscale buyers, but neither did tial to winning and keeping customers’ trade. it have baggage to overcome. But it does mean fundamentally changing how Honda’s successful branding strategy management thinks about the goals, roles, and stands in direct contrast to Volkswagen’s more metrics associated with a well-managed brand. recent disappointment with the Phaeton. These changes will be among the most Volkswagen is one of the world’s most recog- wrenching your organization ever undertakes. nizable brands and has excellent brand equity But they’re long overdue. among buyers of low- to medium-priced cars. The Phaeton, however, is a high-priced luxury It’s OK, I’m with the Brand car, positioned to compete with such icons as When a marketer focuses on growing a cus- BMW and Mercedes. To Volkswagen, the car tomer base, and not necessarily a brand, is simply an extension of the engineering things can look very different. Let’s take an ex- prowess it already prides itself on. And by all ample from the entertainment world, cour- accounts, the objective attributes of the Pha- tesy of songwriter and performer George Clin- eton (fit and finish, comfort, and power) are Roland T. Rust (rrust@rhsmith. ton. Known as one of the founders of funk, competitive with those of other luxury umd.edu) holds the David Bruce Smith Clinton in the 1970s sought the attention of marques. Unfortunately, the company’s brand Chair in Marketing at the Robert H. two different segments of record buyers— is defined not so much by its exacting produc- Smith School of Business at the mainstream listeners, who liked vocal soul ers as by its customers. It has virtually no University of Maryland in College music with horns, and progressive listeners, brand equity among luxury buyers. This is un- Park. Valarie A. Zeithaml (valariez@ who liked harder-edged funk. Clinton knew doubtedly why management’s sales projec- unc.edu) is the associate dean of MBA that his band was accomplished enough to tions were so flawed. When the Phaeton was programs and the Roy and Alice H. play both kinds of music, but he realized that launched in Europe in 2003, Volkswagen pre- Richards Bicentennial Professor at the alternating between the styles would muddy dicted 15,000 would be sold. Several months Kenan-Flagler Business School at the the band’s image and serve neither audience later, it admitted that only about 2,500 had University of North Carolina in Chapel well. The solution was simple. The same group been. Hill. Katherine N. Lemon (lemonka@ of musicians, essentially, recorded and per- Finally, let’s turn to an example that really bc.edu) is an associate professor at the formed under two different band names: Par- pushes the envelope. In Japan, there is a Carroll School of Management at Bos- liament, when the music was aimed at popu- brand called WiLL that is owned and man- ton College in Chestnut Hill, Massachu- lar tastes, and Funkadelic, when it was edgier. aged by a consortium of consumer goods setts. They are the authors of Driving Both bands were very successful, even though companies. The companies have little in com- Customer Equity: How Customer Life- some Parliament fans would never listen to mon on the production side of things; they time Value Is Reshaping Corporate Funkadelic and vice versa. The point is that range from carmaker Toyota to electronics Strategy (Free Press, 2000). Clinton did not try to make his original brand marketer Matsushita (Panasonic) to beer harvard business review • september 2004 page 2

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brewer Asahi. But they have a great deal in of the product’s attributes, we can say that it common in their pursuit of a certain new and has positive brand equity for her. If Brand A’s affluent demographic. In fact, this target seg- equity increases in her eyes, Ann is likely to ment of consumers—“new generation” buy it more frequently and perhaps in higher women in their twenties or thirties who like volume per purchase. This of course increases things that are “genuine” and fun—defines Ann’s lifetime value to the company. But what the WiLL brand. The design of the WiLL Web happens if Ann grows tired of Brand A? Or if site, www.willshop.com, is exclusively focused the brand ceases to resonate with her? If we on that rather narrow demographic and psy- manage the customer relationship properly, chographic profile. It features a hip mix of we can introduce Ann to another of our brands Japanese and English, a fashionable color pal- that is a better match with her sensibilities. In ette, and disparate products unified by the fact, we should be willing to do whatever is quirky playfulness of their design. The prod- necessary with our brands (including replacing ucts include the WiLL Vi (an automobile them with new ones) to maintain our cus- manufactured by Toyota), the WiLL PC (made tomer relationships. Our attitude should be by Panasonic), and WiLL beer (brewed by that brands come and go—but customers like Asahi). These megabrands have chosen to be- Ann must remain. come, in essence, private label manufacturers behind a brand they own jointly. It makes The Value of a Brand Depends on sense because, independently, none of them the Customer would have invested so heavily in a branding One of the most important things to under- effort that hit just one segment, no matter stand about a brand is that its value is highly how squarely between the eyes. For that mat- individualized. A customer might grow tired Companies must focus ter, the list of partnering companies could of a brand, or more enamored, independent of change, along with the kinds of products of- how other customers are responding to it. One on customer equity fered, and the WiLL brand would remain reader sees the Wall Street Journal as the pin- rather than brand equity. strong—because its meaning and value stem nacle of probity; another calls it a reactionary from its customers. rag. For some people, Stouffer’s stands for taste and convenience; for others, trans fats Customer Equity Is the Point and carbs. Between the two extremes are infi- Forward thinkers like George Clinton, Honda, nite shades of gray. and the WiLL consortium aside, most compa- Yet most marketing managers speak about nies today are geared toward aggrandizing the value of a brand as though it were solid their brands, on the assumption that sales will and monolithic, and they measure brand eq- follow. But for firms to be successful over time, uity with a summary metric of brand strength. their focus must switch to maximizing cus- It’s a perfect example of what’s been called the tomer lifetime value—that is, the net profit a “flaw of averages.” The value they arrive at is company accrues from transactions with a true for practically no one—and hardly a use- given customer during the time that the cus- ful management tool. tomer has a relationship with the company. In We conducted a survey of customers in other words, companies must focus on cus- two cities to measure brand equity for 23 tomer equity (the sum of the lifetime values of brands in five industries. Look, for example, all the firm’s customers, across all the firm’s at the wide range of values customers as- brands) rather than brand equity (the sum of signed to the American Airlines brand. (See customers’ assessments of a brand’s intangible the exhibit “Customers Differ on Brand Eq- qualities, positive or negative). And though uity.”) Many marketing decisions proceed the two often move in concert, it is important from what managers believe to be the to remember that acting in the best interests strength of the brand. Defining that value as of brand equity isn’t necessarily the same as the average would lead to actions that acting in the best interests of customer equity. weren’t right for many customers. Suppose we have a customer—let’s call her Assigning an average value to brand equity Ann—who tends to favor one of our current is dangerous because it obscures the fact that brands, Brand A. To the extent that Ann values brand value is idiosyncratically assigned by the Brand A above and beyond the objective value customer. Managers begin to believe that the

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value of their brand is somehow intrinsic— and that brand value is only meaningful at a that, like a diamond in a necklace, the brand highly individual level, then you will likely has an objective, inherent value. We know of manage your brands in a profoundly differ- one company, for example, that stumbled ent way. Our work with leading companies badly as it tried to make headway in South crafting customer-centric branding strategies American markets. It was one of the world’s suggests seven directives that go against the largest and most successful brands, and its mar- grain of current practice. keting managers assumed that its outstanding Make brand decisions subservient to deci- brand equity was a given. In truth, while the sions about customer relationships. This brand tended to have very high equity with means creating or strengthening the role of consumers in the United States and many the customer segment manager and allocating other countries, people in South America were resources to that function rather than to tradi- more likely to favor local brands. Confused by tional brand managers. It may even make poor sales, management seemed unable to ac- sense to go beyond segments and assign man- knowledge that the brand might not be such agers to specific customers, if they are big and an asset. The company only redoubled its ef- important enough. In the business-to-business forts at what could be called brand imperial- world, this is known as managing key ac- ism, with limited success. counts; companies like Ericsson and IBM as- sign account managers and give them broad Put Your Brands in Their Place authority in marketing to important custom- If you accept that the goal of management is ers. Consumer companies can also use the ap- to grow customer equity, not brand value, proach, organizing around customers or cus- tomer segments. Brand managers will still have an important role in the marketing func- tion, but they will be dependent on the cus- Customers Differ on Brand Equity tomer segment managers for distributing re- We surveyed customers of 23 brands to measure differences in brand equity. For the sources. Brand management will become a American Airlines example shown here, customers had widely varying perceptions team-oriented task. of the value of the brand. This distribution was typical across brands and industries Build brands around customer segments, and shows why average measures of brand equity are misleading. not the other way around. Some products, like Viagra, are inherently directed at the needs and requirements of a particular cus- Percentage of customers surveyed tomer segment. Others, like the Black Pride beer once sold actively in the African-Ameri- 31% eserved. can neighborhoods of Chicago, are generic

28% rights r products positioned for a specific segment. Procter & Gamble markets an extensive port- folio of soap brands, each targeted to a differ- ent psychographic or demographic segment. Its laundry detergents, too—Tide, Gain, 18% Cheer, Ivory, Bold—are differentiated more by target customer segment than by product fea- blishing Corporation. All tures. The world’s largest women’s clothing 13% company, Liz Claiborne, has a similar focus on the customer. Each of its customer segments has its own named brand and personality. The company makes the high-end Dana Buchman 5% 5% brand for professional women; the stylish Ellen Tracy brand for sophisticated but casual women; the young, upscale Laundry brand for individualists; the Liz Claiborne brand for its 0%–3 9% 40%–49% 50%–59% 60%–69% 70%–79% 80%–100% traditional casual market; and the Elizabeth Customers’ ratings of the American Airlines brand brand for plus-size women. The lines are so pyright © 2004 Harvard Business School Pu well differentiated by brand, fit, and style that (relative to maximum) Co harvard business review • september 2004 page 4

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few consumers know they are made by the companies are guilty of brand overexten- same company. sion—usually because they evaluate exten- Make your brands as narrow as possible. sions according to how similar the new prod- Henry Ford may have sold the Model T to a uct is to the old one. Instead, they should be broad cross section of consumers, but today thinking about whether the two products’ cus- there are men’s and women’s formulas of vita- tomers are similar. Clearly, it makes no sense mins and distinct television channels for Lati- to try to extend a brand to a dissimilar product nos, African-Americans, women, golfers, se- with dissimilar customers. But even extending nior citizens, and gays. As advances in a brand to a similar product doesn’t work very technology and customer information make well if the customers have little in common. such segmentation easier, this trend is likely to This was Volkswagen’s mistake with the Pha- become even more pronounced. And it eton. It also caused headaches for IBM when should. If the customer is central, then the the company entered the personal computer purpose of a brand should be to satisfy as market in 1981. It was widely believed at the small a customer segment as is economically time that IBM’s superior brand equity in com- feasible. Allowing for the fact that some puters would guarantee its dominance of the breadth is desirable for its own sake, the ten- PC marketplace. In fact, IBM had a far more dency should be toward brands that are in- difficult time than expected. Customers of creasingly narrow over time. A tighter focus IBM’s PC (individuals) were entirely different can only enhance the clarity and value of the from customers of its mainframe computers brand in customers’ eyes (see the sidebar (business buyers). Personal computer buyers “How Big to Brand?”). had much less attachment to IBM and were Plan brand extensions based on customer open to competing products from Apple, needs, not component similarities. Many Atari, and other previously minor players in

How Big to Brand? Once your frame of reference has shifted to general interest magazines. If you were fe- mented customer markets. Meanwhile, com- customer management, the central problem male, you might put a finer point on your puterization and modular manufacturing are of brand management becomes: How big reading by buying a women’s magazine. To- making it progressively cheaper to customize should the brand be? Customers are individ- day, the Lifes, Looks, and Saturday Evening goods and services—and individualized com- uals with unique tastes and desires. Suppose, Posts are gone, and even the idea of a munication networks like the Internet, com- for example, a customer named Benito was women’s magazine is laughably vague. De- bined with computerized data analysis, en- being targeted by a company. In an ideal pending on the woman, the right magazine able companies to microtarget their world, where money was no object, would might focus on general fitness (Shape), health messages. this mean creating a “Benito” brand? (Natural Health), self-esteem (Self), parenting The shift to narrower and more numerous Not quite. To some extent, customers look (Working Mother), high fashion (Vogue), high brands is difficult for even the most astute to brands to provide safety in numbers. Buy- fashion in midlife (More), shopping (Lucky), marketers to accept. Unilever, for example, ing a popular brand not only increases the ethnic women (Essence), gay women fought against market fragmentation by in- customer’s trust that the offering will per- (Curve)—the choices go on and on. stituting a brand consolidation program in form as promised but also contributes to the The key, of course, whether we’re talking 1999. Its management eliminated hundreds customer’s social needs (why buy a Harley if about magazines or cars, is identifying the of brands in search of economies of scale. not for the Harley community?). So even if it point at which creating a narrower, clearer Among the discarded were such successful were financially and operationally feasible to brand yields customer benefits insufficient to brands as Elizabeth Arden cosmetics and the create millions or billions of separate brands, pay back the company’s costs of supporting Diversey cleaning and hygiene business. The it would not be advisable. Still, brands should it. Long-term historical trends indicate that strategy was lauded by some analysts at the cater to individual needs as specifically as this trade-off point is steadily shifting toward time, but it doesn’t seem to be aging well. possible, given the current threshold of econ- even narrower brands, due primarily to Five years later, Unilever’s sales have stag- omies of scale. changes in both customer tastes and produc- nated, while primary competitor Procter & The magazine industry is a good indicator tion capabilities. In the United States and Gamble, with its niche branding strategy, has of how narrow the niches can become, given other developed countries, explosions of im- enjoyed healthy gains. the technology and consumer information migrant populations and the proliferation of available today. People used to subscribe to media have made for increasingly frag- harvard business review • september 2004 page 5

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the computing market. This paved the way for budget hotel brand. What if the company has success by later entrants into the PC category discovered that he is a good prospect to move such as Dell, Compaq, and Hewlett-Packard. up to the higher-priced Marriott brand, per- Brand extensions are more likely to be suc- haps by analyzing the customer’s purchase cessful if the customers are similar, even if the history and connecting that to patterns with products are not. Virgin, for example, has ex- other customers? Under traditional brand tended into a wide variety of unrelated prod- management, nothing would happen; Fair- ucts, including airlines, music stores, soft field Inn would hold on to its customer at all drinks, and mobile phones. What unites Vir- costs. But most of us would agree that the gin’s offerings is value pricing, high quality, company should forfeit the Fairfield Inn and a hip, fun image that attracts a particular brand relationship for a higher-value cus- customer segment. This psychographic similar- tomer relationship with the Marriott brand. ity in Virgin’s customers makes it possible for In practice, that would mean that if Fairfield the company to create brand extensions that customers who begin traveling more fre- would not otherwise work. Likewise, Tiffany’s quently and more widely tend to switch to the found it possible to extend from expensive jew- Marriott brand, then customers who fit that elry to expensive perfume because both prod- profile should be actively invited to try the ucts attract the wealthy prestige buyer. Disney Marriott brand, perhaps with promotional is involved with products as diverse as movies, hotel stays or special deals. Future profits are hotels, and amusement parks. These exten- driven not by repeat business at Fairfield Inn sions work because the target market (the but by the customer’s purchases across all young and the young at heart who want to be Marriott brands. entertained) does not change. Take no heroic measures. Sometimes a Brand managers need to The best results, though, come when both brand becomes very unattractive to a cus- the products and customers are similar. This is tomer segment. Reversing that impression know their customers one reason that line extensions are so com- might simply be too hard to do. By analogy, well enough to tell when mon. It was not difficult to predict that Caf- suppose you went on a summer vacation for feine-Free Coke would be an easy stretch for two weeks, left the car at home, and returned it’s time to hand them off. Coca-Cola or that Visa could extend from to find that a skunk had jumped into it, credit cards to debit cards. Even when the sprayed, then died. Given your investment in brand extension is not just a line extension, a the car and its replacement cost, you would similar enough product and a similar customer labor mightily to get that smell out of the car. make success more likely. Yamaha could ex- But we can tell you with some authority, it tend from organs to pianos to guitars with would be a lost cause. Now suppose such a lin- some confidence because all were musical in- gering stench has attached itself to your struments and all had similar customers. The brand. At what point would you cut your brand equity that a musician accorded to losses and invest in a new one? Yamaha pianos could easily be extended to- For discount airline ValuJet, that point came ward guitars. just as the brand had started to build momen- Develop the capability and the mind-set to tum. ValuJet was off to a stellar start when in hand off customers to other brands in the May 1996 one of its airliners crashed, killing all company. There’s absolutely no sense in aboard. The National Transportation Safety spending disproportionately to hold on to a Board accused ValuJet of failing to ensure the brand’s customer relationship if the customer safe handling of the hazardous materials that is a more natural fit with another brand in the had set the plane on fire and caused the crash. company’s portfolio. Brand managers need to No question: The brand stunk. Rather than try know their customers well enough to tell to redeem it, ValuJet dumped the name. It when it’s time to hand off customers. In ex- merged with another carrier, AirTran, and its treme cases, a company might even encour- fleet was soon back in business under that age some customers to abandon a brand to brand. AirTran is currently one of the few U.S. which they are loyal if another brand will bet- airlines making a profit. ter cultivate the relationships and increase In a ValuJet situation, the decision seems customer equity. Imagine, for example, a obvious. Unfortunately, most companies face longtime customer of Fairfield Inn, Marriott’s decisions more like GM’s with Oldsmobile.

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And just think of the angst that must have sur- Retiring ineffective brands is easier to do if the rounded the renaming of McCall’s magazine marketing resources of the firm are controlled first to Rosie’s McCall’s and then to Rosie (not to by customer segment managers, as we pro- mention the second-guessing after the new pose, rather than brand managers. If brand venture imploded). Now think of the discus- managers control the resources, they will per- sion going on at Martha Stewart Omnimedia. sist too long with a brand that has lost its Nabisco phased out its Mr. Salty brand when punch in a particular segment. To do any less the public became concerned about the ill ef- would feel like a personal failing. fects of too much sodium. Painting over the Change how you measure brand equity. WorldCom sign was an easy decision. But A focus on customer equity doesn’t mean would it make sense to walk away from the brand equity is unimportant. To the contrary, Tyco name? improving brand equity remains one of the Brands should never be scrapped frivo- most important marketing tasks. And that lously, but companies should retain only those means it needs to be reliably measured and that have avid customers—not sentimental tracked. The task is greatly complicated—but owners or overly aggressive brand managers. not rendered impossible—by the realization

Brand Equity in the Scheme of Things To manage something, you need to be able to of learning curves, user-community bene- tomer satisfaction analysis, success depends measure it, and brand managers have long fits, or other considerations perhaps as sim- on defining drivers that are directly related to struggled to find the right formula for measur- ple as friendships with salespeople. The first specific areas of expenditure and capable of ing brand equity. If what we care about most is challenge is to determine the relative influ- being perceived and rated by individual cus- customer lifetime value, then that has two ence of these three drivers on a given com- tomers. A number of companies (among them major implications for how we measure brand pany’s customer equity. This can vary dra- IBM, Sears, ChevronTexaco, and Saks Fifth Av- equity. First, we must put it in the context of matically from category to category and enue) are already applying the technique to customer equity. Second, we must recognize even from product to product. Our own re- tease out the drivers of customer equity and that it varies by individual. Any aggregate search, for instance, reveals that brand eq- brand equity. measure we produce must not be a meaning- uity is a dominant driver in the facial tissue The final step is to statistically link the less average. category and for grocery products in gen- customer equity drivers (brand equity driv- The model shown here presents a way to eral. It makes sense: These are classic in- ers plus value equity drivers, relationship eq- measure customer equity and brand equity by stances of what marketers call “low involve- uity drivers, and inertia) to customer life- understanding what drives each one and to ment goods”—relatively low-priced and time value—at the level of the individual what degree. By extension, the model is a tool frequently purchased products that consum- customer. Conceptually, this amounts to es- for decision making. Once management ers don’t want to spend much time thinking timating how “consumer utility,” or the con- knows the drivers and their relative weights, it about. Brand equity is far less important in sumer’s perception of value from the trans- can predict the impact of specific brand-build- industries like air travel and rental cars, action, is affected by those drivers, and, in ing actions on customer equity and, in turn, where value is examined more carefully and turn: how that level of consumer utility re- on profitability. relationship equity has become a greater lates to switching patterns (the tendency of Let’s start with the bottom line of the factor since the advent of loyalty programs. consumers to change brands); what those model, which is customer equity, the sum of Once the relative importance of brand eq- switching patterns mean for projected fu- the lifetime values of the firm’s customers. uity is established, the next challenge is to fig- ture choice; and what that projection of fu- As shown, a customer’s lifetime value is ure out what drives brand equity in a particu- ture choice yields in customer lifetime driven by choices, and those choices are lar company. Typically, as shown, these drivers value. With these relationships established, driven by three considerations, or, as we include elements like consumers’ awareness a company can tell how much customer eq- term them, forms of equity. Value equity is of the brand, their attitudes toward the brand, uity will increase as a result of a given im- the objectively considered quality, price, and and their perceptions of the company’s ethics provement in any one of the drivers of convenience of the offering. Brand equity is and corporate citizenship. Finding the relative brand equity. the customer’s subjective assessment of a weight of these drivers is again the challenge, As an example, we applied this approach branded offering’s worth above and beyond but it involves no surprising technique. This to a major airline we’ll call Aerosphere (the its objectively perceived value. Relationship type of key-driver analysis is done routinely to example is based on actual data, but the equity factors in switching costs—the cus- measure customer satisfaction using survey company has been disguised1). Consider Aero- tomer’s reluctance to go elsewhere because data of individual customer ratings. As in cus- sphere’s decision whether to invest in seat- harvard business review • september 2004 page 7

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that brand equity varies dramatically from cus- drivers. For example, companies have long as- tomer to customer. In the sidebar “Brand Eq- sessed advertising effectiveness in terms of rec- uity in the Scheme of Things,” we describe in ognition and recall. Typically, they refer to detail a workable method. It starts with a these measures based on their averages, at- means for helping managers understand the tempting to differentiate good ads from poor drivers of customer equity and the extent to ads. But it is possible, using the same data set, which brand equity affects customers’ buying to relate the measures associated with each in- decisions (more so in some industries than in dividual to that person’s choice of brand. Be- others). The method then involves an analysis cause a sample of customers (perhaps aug- of the drivers of brand equity. mented by customer panel data or purchase Most important, for measurements to be intent data) gives individual-level data on both truly useful, brand values must be calculated brand choice and advertising, the two mea- on an individual customer basis and rolled up sures can be related statistically. Likewise, if a only at the highest level. The alternative, full set of drivers, including advertising activi- tempting in its simplicity, is to average the ties, is measured at the individual customer measures associated with each of the brand level, then we can statistically infer which driv-

Image Brand Free samples, etc. Ethical corporate advertising, etc. behavior back video units to enhance customers’ per- ceptions of cabin service. (Cabin service is a Brand awareness Attitude toward Brand ethics driver of quality, which in turn drives value eq- the brand uity.) Say installing the units would cost $100

million, and an additional $5 million would be eserved. required annually for upkeep. If test market re- s r sults indicated that having seat-back video units would result in an average improvement of 0.2 (on a five-point rating scale) for per- Value Equity BRAND EQUITY Relationship Equity ceived cabin service, the rating would rise from a current average of 3.6 to 3.8. Given a discount rate of 10% and a time horizon of

three years (because Aerosphere probably lishing Corporation. All right couldn’t be confident about the nature of the market and competitive reactions past that period), we can predict the chain of effects: Brand Choice Aerosphere’s customer equity would increase from $6.8 billion to $6.94 billion. That in- crease would outweigh the net present value Customer Lifetime Value of the improvement costs ($112 million), and the result would be an ROI of 28.8%. Now suppose that costs turned out to be somewhat higher than anticipated ($105 mil- lion for installation) and that the perception of CUSTOMER EQUITY pyright © 2004 Harvard Business School Pub

cabin service actually improved a bit less than Co anticipated (to 3.79). Inserting these revised figures into the statistical model yields an ROI 1. For more statistical details, see Rust, Lemon, and Zeith- of 17.1%. The framework provides something aml, “Return on Marketing: Using Customer Equity to management has long sought: financial ac- Focus Marketing Strategy,” Journal of Marketing, January 2004. To pursue this example further or try other poten- countability for marketing decisions, both be- tial expenditures, download our free software from http:/ fore and after an investment is made. /www.rhsmith.umd.edu/ces/books/Customer%20Equity. html.

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Customer-Centered Brand Management•••TOOL KIT

If brand managers ers are the most important, as well as how important. But they are not all-important. much an improvement in one of the drivers Therefore, companies cannot be structured, control the resources, would increase choice. staffed, and motivated to grow their brands, they will persist too long full stop. It is top management’s job to correct Overcome Your Blind Spot this focus, and only top management can do it. with a brand that has lost The changes we’re suggesting will reverberate The first step is to develop a competent cadre throughout an organization, shifting roles and of customer segment managers. The second is its punch. responsibilities, budgeting processes, perfor- to hand them the purse strings. The third is to mance measurement systems, and more. This track and reward their progress using reliable kind of broad-based reinvention is possible metrics for customer and brand equity. Make only when it also entails a fundamental these adjustments and you in turn will see change in perspective on the part of the exec- changes—subtle at first, but substantial over utive team. People learning to drive realize time. Your people will understand that brands quickly that they have a vulnerable area are only a means to an end, and the end is this: where their vision is hindered or obscured. For to create and cultivate profitable, long-term re- many management teams, brand is one of lationships with customers. those blind spots. Executives must begin look- ing at the problem of brand management Reprint R0409H more deliberately and from the customer’s To order, see the next page point of view. or call 800-988-0886 or 617-783-7500 In a customer-centered company, brands are or go to www.hbr.org

harvard business review • september 2004 page 9

Further Reading The Harvard Business Review Paperback Series

Harvard Business Review OnPoint Here are the landmark ideas—both articles enhance the full-text article contemporary and classic—that have with a summary of its key points and established Harvard Business Review as required a selection of its company examples reading for businesspeople around the globe. to help you quickly absorb and apply Each paperback includes eight of the leading the concepts. Harvard Business articles on a particular business topic. The Review OnPoint collections include series includes over thirty titles, including the three OnPoint articles and an following best-sellers: overview comparing the various perspectives on a specific topic. Harvard Business Review on Brand Management Product no. 1445

Harvard Business Review on Change Product no. 8842

Harvard Business Review on Leadership Product no. 8834

Harvard Business Review on Managing People Product no. 9075

Harvard Business Review on Measuring Corporate Performance Product no. 8826

For a complete list of the Harvard Business Review paperback series, go to www.hbr.org.

To Order

For reprints, Harvard Business Review OnPoint orders, and subscriptions to Harvard Business Review: Call 800-988-0886 or 617-783-7500. Go to www.hbr.org

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