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Brand Equity: What It Is and How It Should Be Measured

The single most important question a brand manager can ask about the brand they manage is: what must I do today, to add value to my brand? Anyone who has worked in brand management will know that this is a difficult question to answer. Certainly, there are conventional tools of brand management and most brand managers get away with using the conventional tools. They run promotions, commission new adverts, enter into deals with the trade, and so on. But few can say with certainty why they do one thing rather than another. And any can be specific about what the return on their marketing spend will be.

We should not blame brand managers for this state of affairs. They cannot know how the money that they have spent has impacted on brand value until they know how brand value should be measured. In addition, they need to know how to disaggregate all the factors that impact on brand value so that the impact of one action, say, a TV advertising campaign, can be measured. No-one should underestimate the complexity of this task. Yet, with a few simple (but not simplistic) tools, we can make a beginning.

First, we need to understand what a brand is and how to define its value. Both can be defined in a relatively straightforward way: a brand is simply “... everything that attaches to a product and gives it an identity in the minds of people. Its value is simply ... the net present value of its future contribution to profits plus the value of options to create brand extensions“.

These days we commonly talk about “touch points” when we describe how brand identity is created. A touch point is the point at which a person has a direct experience of a brand. It ranges, for example, from seeing a brand being advertised, to seeing it displayed on a shelf, to actually using it. Brand value is something that accountants are developing increasingly sophisticated tools to measure. But what makes it really difficult is the fact that estimating the future is a critical part of estimating brand value. And the future is uncertain.

We anchor our attempts to measure and add value to brands by identifying the broad business areas which capture brand value. They fall into three general areas:

• In the factory: value can be added by bringing the cost of getting the brand to the customer down.
  
• In the market place: value can be added by increasing the brand’s external presence e.g. the number of distribution points.
  
• In the minds’ of people: value can be added by increasing the strength of the desire among people to use that brand and no other.

It’s this framework that we use when we talk about “brand equity”. Brand value is founded on three different types of equity. First, there is production equity created in the “factory”. “Dell Computers” is a brand whose value was built fundamentally in the creation of superior production processes. In South Africa in the early days, Auto and General car insurance created processes whose cost efficiency could not be bettered by insurers like Sanlam and Old Mutual. This allowed Auto and General to provide better service at a lower cost than the established insurers. Measuring production equity is something at which accountants are particularly good.

Second, there is market equity, created by giving the brand a strong physical presence independently of what people think about it. Coca-Cola and Microsoft are two brands that have immense market equity, though for different reasons. The market power of Microsoft is created by what are called “network effects”. A network effect exists whenever every additional user that a brand has increases the likelihood that non-users will become users, whether they like it or not. The powerful need for people to be able to ship computer files around the world in a seamless way creates a pressure for people to use the same software. So, every additional user that Microsoft has creates a pressure for non-users to use it.

Coca-Cola’s market power comes from the basic understanding that a brand must be present if people are going to have the option to use it. An early campaign for Coca-Cola included the slogan “within an arm’s length of desire”. Few people know that what carried Coke into international markets was the fact that it was promoted as the drink of the United States armed forces in the second world war. Coke entered into a deal to be the official drink of the armed forces and linked their distribution to the infrastructure of the armed forces.

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