brand equity a managerial perspective, brand equity is the incremental cash flows which accrue to branded Jacqueline J. Kacen products over and above the cash flows which would result from the sale of unbranded prod- INTRODUCTION ucts (Simon and Sullivan, 1993). From a financial markets perspective, brand equity is the sum of In 2009, the Coca-Cola brand was valued at $68.7 future profits, discounted in each period by a billion dollars and it was the world’s most valu- risk-adjusted interest rate, that result from asso- able brand (www.interbrand.com). The brand ciating that brand name with particular products name alone, an intangible asset, accounted for or services (Simon and Sullivan, 1993). 51% of the stock market value of the Coca-Cola Company (Interbrand, 2004). Coca-Cola is a WHY BRANDS ARE IMPORTANT brand with equity. Coca-Cola not only illustrates the value of a brand name but also demonstrates Customers like brands because brands provide the importance of brands to a company’s financial assurances of quality, reliability, and consis- well-being. tency. Brands reduce perceived risk and allow The term brand equity came to public atten- people to shop quickly and confidently, saving tion in the 1980s. It was first used by advertising time and energy on purchase decisions. Brands practitioners to capture the idea that a brand had provide emotional rewards and experiential plea- value to customers and because of this, the brand sure (Kapferer, 2008). Through brands, individ- had financial value to the firm due to expected uals can construct a self-concept and convey that future sales (Barwise, 1993). In the late 1980s, concept to others. quantifying the financial value of the brand Manufacturers benefit from brands as well. became more important. Financial markets Brands cannot be copied by competitors, were recognizing the increasing gap between allowing manufacturers to command higher companies’ book values and stock market prices for preferred brands, obtain a larger valuations, as well as noticing the premium market share, and spend less on promotional prices paid above stock market value during expenses such as advertising and price promo- the mergers and acquisitions taking place. tions (Shocker and Weitz, 1998). In addition, Large amounts of goodwill on balance sheets customer demand for the brand means manu- needed to be accounted for in an acceptable way facturers are better able to obtain distribution (Feldwick, 1996; Murphy, 1990). and cooperation from channel intermediaries. Customer preference for the brand can lead to DEFINITION OF BRAND EQUITY a strong loyal customer franchise, more reliable demand forecasts, and expectations of cash flow Brand equity is the ‘‘value of the brand’’ (Amer- from future sales. Last, a successful brand can ican Marketing Association, 2009). A brand is ‘‘a be leveraged to increase sales and revenues for name, term, design, symbol, or any other feature the firm through geographic market expansion that identifies one seller’s good or service as and brand extensions. distinct from those of other sellers’’ (American Channel intermediaries, such as wholesalers Marketing Association, 2009). In general, brand and retailers, like brands because they allow for equity can be thought of as a set of brand assets easier entry into markets, higher sales, and the and liabilities linked to a brand, its name and opportunity to build loyalty at the store level. symbol, that add to or subtract from the value provided by a product or service to a firm and/or HOW BRAND EQUITY IS MEASURED that firm’s customers (Aaker, 1991). Value is assessed from both the customer and manage- The brand name and what it represents are a rial (i.e., financial) perspective. From a customer company’s most important assets; a brand is perspective, brand equity is based on consumer the basis of competitive advantage and future attitudes about positive brand attributes and revenue streams (Aaker, 1991). It is clear favorable consequences of brand use. From that brands help generate sales, and that sales Wiley International Encyclopedia of Marketing, edited by Jagdish N. Sheth and Naresh K. Malhotra. Copyright © 2010 John Wiley & Sons Ltd 2 brand equity generate revenue and profits, and that long-term Consumer-based research methods include revenue is earned through repurchase and measures of consumer perceptions, attitudes, customer loyalty. It is also evident that the awareness, knowledge, familiarity, preference, financial value of a brand is a consequence of the purchase intentions, satisfaction, loyalty, value customers place on the brand. purchase share, and repurchase rates. The Measuring a brand’s equity is a useful exercise hierarchy of effects model is a useful framework to firms not only because it allows firms to for understanding customer-based brand equity assign a financial value to the brand for purposes (Agarwal and Rao, 1996). The hierarchy of of balance sheet accounting and other finan- effects model suggests that consumers pass cial transactions but also knowing a brand’s through different stages, from exposure to the equity can help guide marketing strategy and brand to intention to buy, before making a tactical decisions, it can help managers assess the purchase. Consumer brand equity begins with extendibility of the brand name to new products brand awareness, and progresses to perceptions and new markets, it can help managers evaluate and associations relating to the brand, pref- the effectiveness of their marketing decisions, erences for the brand, choice intentions, and and it can track a brand’s health over time, and ultimately, purchase. against competitive brands (Keller, 1993). Brand awareness can be assessed based on Many methods have been proposed to measures of unaided recall, recognition, or famil- value a brand. These approaches are generally iarity with the brand name. Without awareness, financially driven methods or research-based a brand cannot become part of the consumer’s methods. Financially driven approaches include consideration set and no purchase can take place, so brand awareness is a critical first step the cost-based value of the brand – that is, to building brand equity. The associations and aggregate expenditures incurred developing the beliefs a consumer has about the brand comprise brand including research and development, the brand image and represent a deeper level of marketing, advertising, and employee training brand knowledge. Brand image can be assessed costs (Aaker, 1991), the residual market value through measures of perceptions of quality, of the brand after other sources of value have specific beliefs about the brand on key attributes, been accounted for (Simon and Sullivan, 1993), and perceived differences with competitive the ratio of the brand’s price to its competitor’s brands. Highly valued brands are perceived as price when both products are equally desirable superior on some valued attribute. Central to to consumers (Crimmins, 1992), net present building a valuable brand is the ability of the value of the price premium the brand commands firm to develop and nurture clear, unique, and over unbranded, generic or competitive brands desirable brand associations. Measures of brand (Aaker, 1991), acquisition value of the brand preference include the consumer’s overall eval- (Brasco, 1988), and net present value of the uation of the brand, consumer willingness to pay brand’s future expected earnings (Brasco, 1988). a premium for the brand, and loyalty or share of Market-level indicators of brand value – a category purchases. Consumer purchase inten- loyal customer base, price premiums, and tion measures include likelihood of purchase sustained market share leadership – are clearly or selection from a choice set. Consumer-based the result of consumer-level effects. One may brand measures are often collected via survey or conceive brand equity as composed of consumer consumer panels and as a result, can be costly to brand equity leading to market brand equity. obtain and are subject to the potential biases and The associations and beliefs the consumer errors inherent in survey research. However, has about the brand (brand image) and the consumer measures are necessary and critical strength of the consumer’s attachment to the antecedents to market-related measures of brand brand (brand loyalty) lead to positive market equity. A firm achieves higher market share or outcomes such as market share leadership, price price premiums because of the perceived value premiums (brand strength) and ultimately, the of the brand to consumers. financial value of the brand as a separate asset on Customer-based measures of equity lead a balance sheet (brand value). to brand strength in the marketplace. Brand brand equity 3 strength can be thought of as consumer demand Bibliography for the brand relative to competitive offerings. Brand strength is a behavioral outcome of the Aaker, D.A. (1991) Managing Brand Equity: Capitalizing perceived value a brand holds for consumers. on the Value of a Brand Name, Free Press, New York. It is captured by measures of competitive Agarwal, M.K. and Rao, V.R. (1996) An Empirical superiority including market share leadership, comparison of consumer-based measures of brand equity. Marketing Letters, 7 (3), 237–247. market penetration, share of requirements, and American Marketing Association (2009) Dictionary, avail- price premiums. In essence, brand strength able online at http://www.marketingpower.com/ is evidenced in the increased volume and/or layouts/Dictionary.aspx (accessed on 1 September, increased margins a firm enjoys compared to 2009). sales of other brands or unbranded products in Barwise, P. (1993) Brand equity: snark or Boojum? Inter- the category. national Journal of Research in Marketing, 10,93–104. Brand strength is a precursor to brand finan- Brasco, T.C. (1988) How brand names are valued cial value – a monetized measure of brand equity for acquisition, Marketing Science Institute Confer- such as the value of the brand on a balance sheet ence, Austin, TX and Marketing Science Institute, or the acquisition value of the brand.