Brand equity is defined and a comprehensive framework is described that incorporates recent theoretical advances and managerial practices in understanding and influencing consumer behavior. This framework identifies sources and outcomes of brand equity and permits tactical guidelines as to how to build, measure, and manage brand equity, as will be developed further in other sections of the article.
Customer-Based Brand Equity
Understanding the needs and wants of consumers and customers is at the heart of marketing. A brand equity framework should therefore recognize the importance of the customer in the creation and management of brand equity. Accordingly, customer-based brand equity is defined as the differential effect that brand knowledge has on consumer response to the marketing of that brand. A brand is said to have positive customer-based brand equity when customers react more favorably to a product and the way it is marketed when the brand is identified as compared to when it is not (e.g., when it is attributed to a fictitiously named or unnamed version of the product). Accordingly, the key to branding is that consumers perceive differences among different products in a category. As noted above, brand differences often are related to attributes or benefits of the product itself. In other cases, however, brand differences may be related to more intangible image considerations.
There are three key ingredients to this definition “differential effect,” “brand knowledge,” and “consumer response to marketing.” First, brand equity arises from differences in consumer response. If no differences occur, then the brand name product can essentially be classified as a commodity or generic version of the product. Second, these differences in response are a result of consumer’s knowledge about the brand. Thus, although strongly influenced by the marketing activity of the firm, brand equity ultimately depends on what resides in the minds of consumers. In other words, “customers own brands and your brand is what customers will permit you to have.” Third, the differential response by consumers that makes up the brand equity is reflected in perceptions, preferences, and behavior related to all aspects of the marketing of a brand (e.g., product evaluations or choice, recall of copy points from an ad, actions in response to a sales promotion, or evaluations of a proposed brand extension).
Read More About: Keller’s Brand Equity Model
Sources of Brand Equity
What causes customer-based brand equity to exist? Customer-based brand equity occurs when the consumer has a high level of awareness and familiarity with the brand and holds some strong, favorable, and unique brand associations in memory. The latter consideration is critical. For branding strategies to be successful and brand equity to be created, consumers must be convinced that there are meaningful differences among brands in the product or service category. The key to branding is that consumers must not think that all brands in the category are the same.
Thus, establishing brand awareness and a positive brand image in consumer memory — in terms of strong, favorable, and unique brand associations — produces the knowledge structures that can affect consumer response and produce different types of customer-based brand equity. In some cases, brand awareness alone is sufficient to result in more favorable consumer response, e.g., in low involvement decision settings where consumers are willing to base their choices merely on familiar brands. In other cases, the strength, favorability, and uniqueness of the brand associations play a critical role in determining the differential.
Benefits of Brand Equity
Customer-based brand equity occurs when consumer response to marketing activity differs when consumers know the brand from when they do not. The actual nature of how that response differs will depend on the level of brand awareness and how favorably and uniquely consumers evaluate brand associations, as well as the particular marketing activity under consideration. A number of benefits can result from a strong brand, both in terms of greater revenue and lower costs for the firm, including the following:
- Greater customer loyalty,
- Less vulnerability to competitive marketing actions,
- Less vulnerability to marketing crises,
- Larger price margins,
- More inelastic consumer response to price increases,
- More elastic consumer response to price decreases,
- Greater trade cooperation and support,
- Increased marketing communication effectiveness,
- Possible licensing opportunities, and
- Additional brand extension opportunities.
Measuring Sources of Brand Equity
The indirect approach to measuring customer-based brand equity attempts to assess potential sources for customer-based brand equity by measuring brand knowledge structures, i.e., consumers’ brand awareness and brand associations. The indirect approach is useful in identifying what aspects of the brand knowledge may potentially cause the differential response that creates customer-based brand equity. Because any one measure typically only captures one particular aspect of brand knowledge, multiple measures need to be employed to account for the multi-dimensional nature of brand knowledge. Brand awareness can be assessed through a variety of aided and unaided memory measures that can be applied to test brand recall and recognition. The strength, favorability, and uniqueness of brand associations can be assessed through a variety of qualitative and quantitative techniques Measuring outcomes of brand equity. The direct approach to measuring customer-based brand equity, on the other hand, attempts to more directly assess the impact of brand knowledge on consumer response to different elements of the marketing program for the firm. The direct approach is useful in assessing the possible outcomes and benefits that arise from the differential response that makes up customer-based brand equity. The two main ways to measure the outcomes and benefits of brand equity are comparative methods and holistic methods, as follows. Comparative methods are a means to better assess the effects of consumer perceptions and preferences on specific aspects of the marketing program. Comparative methods involve experiments that examine consumer attitudes and behaviors towards a brand and its marketing activity that arise from having a high level of awareness and strong, favorable, and unique associations.
- Brand-based comparative approaches typically involve experiments where one group of consumers responds to an element of the marketing program or some marketing activity (e.g., the product) when it is attributed to the brand and another group of identically matched consumers responds to that same element when it is attributed to a competitive or fictitiously named version of the product or service.
- Marketing-based comparative approaches typically involve experiments where consumers respond to changes in elements of the marketing program or marketing activity for the target brand or competitive brand (e.g., different prices for a brand).
Comparing responses of different groups of consumers (with the former approach) or different responses from the same consumers (with the latter approach) provide insight into how brand knowledge affects response to marketing activity. Holistic methods, on the other hand, are an attempt to place an overall value for the brand in either abstract utility terms or concrete financial terms. Thus, holistic methods attempt to “net out” various considerations to determine the unique contribution of the brand. The residual approach attempts to examine the value of the brand by subtracting out consumers’ preferences for the brand based on physical product attributes alone from their overall brand preferences. The valuation approach attempts to extend such analyses to place a financial value on the brand for accounting purposes, mergers and acquisitions, or other such reasons. For example, Inter brand has developed a two-step method of calculating brand value: 1) identifying the “true” brand earnings and cash flow and 2) capitalizing the earnings by applying a multiple to historic earnings as a discount rate to future cash flow. Both steps involve a number of different calculations, e.g., the discount rate that is applied to brand earnings is based on an assessment of brand strength as a result of a detailed review of factors related to the brand, its positioning, the market in which it operates, competition, past performance, future plans, risks to the brand, etc.
To identify and monitor sources of brand equity, it is necessary to design and implement a brand equity measurement system.
A brand equity measurement system is a set of activities and procedures that is designed to provide timely, accurate, and actionable information and guidelines for marketers so that they can make the best possible tactical decisions in the short-run and strategic decisions in the long-run. Designing and implementing such a system involves four steps, as described in detail below: 1) Conducting brand audits, 2) analyzing brand positioning and brand planning, 3) employing brand tracking studies, and 4) creating a brand equity management system.
1. Conducting Brand Audits
A brand audit is a comprehensive examination of a brand involving activities to assess the health of the brand, uncover its sources of equity, and suggest ways to improve and leverage that equity. The brand audit can be used to set strategic direction for the brand. Are the current sources of brand equity satisfactory? Do certain brand associations need to be strengthened? Does the brand lack uniqueness? What brand opportunities exist and what potential challenges exist for brand equity? As a result of this strategic analysis, a marketing program can be put into place to maximize long-term brand equity. A brand audit should be conducted whenever important shifts in strategic direction are contemplated. Moreover, conducting brand audits on a regular basis (e.g., annually) allows marketers to keep their “fingers on the pulse” of their brands so that they can be more proactively and responsively managed. As such, they are particularly useful background for managers as they set up their marketing plans.
A brand audit requires understanding sources of brand equity from the perspective of both the firm and the consumer. From the perspective of the firm, it is necessary to understand exactly what products and services are currently being offered to consumers and how they are being marketed and branded. From the perspective of the consumer, it is necessary to dig deeply into the minds of consumers and tap their perceptions and beliefs to uncover the true meaning of brands and products. Specifically, the brand audit consists of two activities:
- Brand inventory: The purpose of the brand inventory is to provide a complete, up-to-date profile of how all the products and services sold by a company are marketed and branded. For each product, the relevant brand elements must be identified, as well as the supporting marketing program. This information should be summarized visually and verbally. Although primarily a descriptive exercise, some useful analysis can be conducted as to the consistency of branding and marketing efforts.
- Brand exploratory: The brand exploratory is research activity designed to identify potential sources of brand equity. The brand exploratory provides detailed information as to what consumers think of and feel about the brand. Although reviewing past studies and interviewing relevant personnel inside or outside the company provides some insights, additional research is often required. To allow a broader range of issues to be covered and also to permit those issues to be pursued in-depth, the brand exploratory often employs qualitative research techniques. To provide a more specific assessment of the sources of brand equity, a follow-up quantitative phase is often necessary.
2. Analyzing Brand Positioning and Brand Planning
Determining the desired brand knowledge structures involves positioning a brand in the minds of consumers. According to the customer-based brand equity model, deciding on a positioning requires determining a frame of reference — by identifying the target market and the nature of competition – and the ideal point-of-parity and point-of-difference brand associations. Deciding on these four ingredients will then determine the brand positioning and dictate the desired brand knowledge structures. Points-of-difference are those associations that are unique to the brand that are also strongly held and favorably evaluated by consumers. Points-of-parity, on the other hand, are those associations that are not necessarily unique to the brand but may in fact be shared with other brands. Category point-of-parity associations are those associations that consumers view as being necessary to be a legitimate and credible product offering within a certain category. Competitive point-of-parity associations are those associations designed to negate competitor’s points-of-differences.
Once the brand positioning is decided on as part of the brand audit or in some other way, a marketing program can be put into place to build the desired brand knowledge structures and maximize the potential benefits that may result. Brand planning involves designing marketing programs to create the desired brand knowledge structures and sources and outcomes of brand equity. Once marketers have a good understanding from the brand audit of current brand knowledge structures for their target consumers and have decided on the desired brand knowledge structures for optimal positioning, additional research still may be necessary to test out the viability of alternative tactical programs to achieve that positioning. As part of the brand planning process, there may be a number of different possible marketing programs that, at least on the surface, may be able to achieve the same goals, and additional research may be useful to assess their relative effectiveness and efficiency. Employing brand tracking studies. To check the success of the marketing program that emerges from the brand plan, tracking studies are often conducted. Whereas the brand audit is done on a non-recurring basis to help sharpen or change the brand positioning, tracking studies involve information collected from consumers on a routine basis over time. Tracking studies can achieve three major objectives. First, tracking studies can monitor consumer brand knowledge and brand awareness and the strength, favorability, and uniqueness of brand associations that represent key sources of brand equity. Second, tracking studies can also measure relevant outcomes of brand equity such as overall attitudes or preference for the brand, reported past usage and intended future usage, and price sensitivity. Finally, tracking studies can also analyze the marketing program with respect to its effects on the current brand image and how it can help to achieve the desired brand image. In summary, tracking studies can provide useful information as to how a brand is doing as well as why. Creating a brand equity management system. To fully benefit from the research findings that emerge from brand audits and brand tracking studies and to provide proper control and direction, a brand equity management system needs to be implemented within the firm. Such a system would include minimally the following three ingredients:
1) Brand Equity Charter, 2) Brand Equity Report, and 3) Brand Overseers.
- Brand Equity Charter: The company view of brand equity should be formalized into a document, the Brand Equity Charter that provides relevant guidelines to marketing managers. This document should: 1) Define the brand equity concept and explain its importance; 2) specify what the assumed equity is for all relevant brands (e.g., in terms of key associations); 3) explain how brand equity is measured by the firm in terms of the content and structure of tracking studies and the resulting Brand Equity Reports (described below); and 4) suggest how brand equity should be managed in terms of general principles. The Charter should be updated annually to identify new opportunities and risks and to fully reflect information gathered by the brand inventory and brand exploratory as part of any brand audits.
- Brand Equity Report: The results of the tracking survey and other relevant outcome measures for the brand should be assembled into Brand Equity Reports that are distributed to management on a regular basis (monthly, quarterly, or annually). The report ideally would combine relevant tracking information with other internal information and effectively integrate all these different measures into an interpretable and actionable form. In this way, the Brand Equity Report would provide descriptive information as to what is happening within a brand as well as diagnostic information as to why it is happening. With advances in computer technology, it will be increasingly easy for firms to place the information that makes up the Brand Equity Report “on-line” so that it can be accessible to managers through the firm’s intranet or some other means. Brand Overseers. Finally, a group headed by Director(s) or Vice-President(s) of Brand Management or Brand Equity should be appointed within the organization. This group would be responsible for overseeing the implementation of the Brand Equity Charter and Brand Equity Reports. Their task would be to make sure that, as much as possible, product and marketing actions across divisions and geographical boundaries are done in a way that reflected the spirit of the Brand Equity Charter and the substance of the Brand Equity Report to maximize the short-term performance and long-term equity of brands
- Brand-product matrix: The brand-product matrix is a graphical representation of all the brands and products sold by the firm. The matrix or grid has the brands for a firm as rows and the corresponding products as columns: The rows of the matrix represent brand-product relationships and capture the brand extension strategy of the firm with respect to a brand; the columns of the matrix represent product-brand relationships and capture the brand portfolio strategy in terms of the number and nature of brands to be marketed in each category.
Brand-product relationships capture the brand extension strategy of the firm. Brand extensions are when firms use existing brand names to enter new categories (e.g., Diet Coke, Swiss Army watches, and Ivory Shampoo). Potential extensions must be judged by how effectively they leverage the existing brand equity to the new product, as well as how well they, in turn, contribute to the equity of the existing brand. In other words, what is the level of awareness likely to be and what is the expected strength, favorability, and uniqueness of brand associations of the particular extension product? At the same time, how does the introduction of the extension affect the prevailing levels of awareness and strength, favorability, and uniqueness of brand associations of the existing products associated with the brands? In general, the closer the “fit” or similarity of an extension, the more likely it is that parent brand associations “transfer” to an extension but, at the same time, the more likely it is that any unfavorable reactions to the extension will produce negative feedback effects to the parent brand.
Product-brand relationships capture the brand portfolio strategy in terms of the number and nature of brands to be marketed in each category. A firm may offer multiple brands in a category to attract different — and potentially mutually exclusive — market segments. Brands can also take on very specialized roles in the portfolio — as flanker brands to protect more valuable brands, as low-end entry level brands to expand the customer franchise, as high-end prestige brands to enhance the worth of the entire brand line, or as cash cows to milk all potentially realizable profits. As part of the long-term perspective in managing a brand portfolio, it is necessary that the role of different brands and the relationships among different brands in the portfolio be carefully considered over time. In particular, a brand migration strategy needs to be designed and implemented so that consumers understand how various brands in the portfolio can satisfy their needs as they potentially change over time or as the products and brands themselves change over time (e.g., BMW’s 3, 5, and 7 series). Brand hierarchy. The brand hierarchy reveals an explicit ordering of brands by displaying the number and nature of common and distinctive brand components across the firm’s products. By capturing the potential branding relationships among the different products sold by the firm, a brand hierarchy is a useful means to graphically portray a firm’s branding strategy. One simple representation of possible brand components and levels of a brand hierarchy, from top to bottom, are:
- Corporate or company brand,
- Family brand,
- Individual brand,
- Individual item or model modifier,
- Product descriptor.
Brand elements at each level of the hierarchy may contribute to brand equity through their ability to create awareness and foster strong, favorable, and unique brand associations. The challenge in setting up the brand hierarchy and arriving at a branding strategy is: 1) To design the proper brand hierarchy in terms of the number and nature of brand elements to use, if at all, at each level and 2) to design the optimal supporting marketing program in terms of creating the desired amount of brand awareness and type of brand associations at each level.
In terms of designing a brand hierarchy, the number of different levels of brands that will be employed and the relative emphasis or prominence that brands at different levels will receive when combined to brand any one product must be defined. In general, the number of levels employed typically is at least two or even three. For example, sub-brand strategies combine brands from two different levels. One particularly useful sub-branding strategy is where an existing brand name (either the company or family brand name) is combined with a new brand name (e.g., Levi’s Dockers). Such a strategy offers two potential benefits in that it can both: 1) allow for leverage of secondary associations by facilitating access to perceptions and preferences toward the existing brands (e.g., the quality and credibility perceptions of Levi’s), and 2) allow for the creation of specific brand beliefs (e.g., that Dockers are psychologically and physically comfortable 100% cotton pants). When multiple brand names are used, as with a sub-brand, the relative prominence of a brand name as compared to other brand names determines its strength of association to the product. Brand visibility and prominence will depend on factors such as the order, size, color, and other aspects of physical appearance of the brand name.
In terms of designing the supporting marketing program in the context of a brand hierarchy and sub-branding situation, the desired awareness of a brand at any level will dictate the relative prominence of the brand and the extent to which associations linked to the brand will transfer to the product. In terms of building brand equity, determining which associations to link at any one level should be based on principles of relevance and differentiation: Associations should be created that are relevant to as many brands nested at the level below (e.g., Sony, 3M, and Microsoft with “innovation”) and any brands at the same level should be clearly distinguished. Corporate or family brands can establish a number of valuable associations that can help to differentiate the brand such as common product attributes, benefits, or attitudes; people and relationships; programs and values; and corporate credibility (i.e., perceived expertise, trustworthiness, and likability). A corporate image will depend on a number of factors, such as: 1) the products a company makes, 2) the actions it takes, and 3) the manner with which it communicates to consumers. Communications may focus on the corporate brand in the abstract or on the different products making up the brand line.