Brand equity and brand value
In a market where products are similar, branding can have a large effect on the price that customers will pay. Brands therefore add value to a basic product or service by enabling the product or service to command a higher price, or higher market share than an unbranded equivalent. The term Brand equity is used to describe both the value of the brand and the brand's component values. It's value may be a monetary value (which may be discounted to a net present value), an increase in a rate of return or any number of softer market research measures such as awarenss or consideration.
A common question is how much does the brand add and consequently, what is the value of the brand? There are a number of methods for calculating brand value and so inferring brand equity.
Brand Price Trade-Offs (BPTO)
A Brand-Price-Trade-Off (see example below) is a market research approach and the simplest method for assessing the relative value of the brand. In a research study several brands or products in a category are shown at once and the customer chooses their preferred option. Then prices are adjusted and the customer chooses again from the same list. The result is that a ranking of preference can be inferred relating brand to price that individuals are willing to pay. This allows models to be built across a market as a whole showing likely take up of different brands at different prices, together with estimates of revenue and profitability. Strong brands command premium prices or premium market share over the competition and these models can isolate the brand equity as the extra revenue achievable in a market compared to competitors. This BPTO or brand price trade off not just only identifies individual brand value, but also enables a range of brands in a family to be positioned optimally in a category at appropriate price points (eg high, mid and low brands each positioned to maximise market revenue or market share across the brand family.
BPTO is of most use in consumer type markets where there is little to choose functionally between the products - essentially the products are substitutes for one another. For services, industrial and technical type products there can be feature distinctions between the brands and more sophisticated techniques are needed (see below).
BPTO interactive example
Imagine you are choosing a bottle (2 litres) of soft drink from a shop. If the drinks were priced as follows which would you choose?
Choose a product then click on 'Select'. The prices will change and then you can choose again
This example presents a relatively simple illustration of the way in which BPTO works. Its aim is to assess the relative value of the brand (eg Coca Cola is worth a 5% premium over Pepsi). Care is needed to choose the start point and the way in which the prices change. In some markets (eg hair-care) branded goods can command a hefty premium over their non-branded equivalents.
In some applications, the use of an increasing price rule can give undue attention to price and so make respondents more price sensitive than they really are. To get around this, a discrete choice analysis experiment can be done (a version of conjoint analysis) where prices are varied in an apparently random way. These are often used for 'shelf' display tests. The second alternative is a full conjoint where price is just one of several things that are being varied. This reduces the apparent focus on price and gives less price sensitive measures.
Brand versus functional value
In markets with more complex products where differences in value can be accounted for both by functional differences and the impact of the brand, getting at the value of the brand alone is more complex than for simple products. The brand consists of a functional element and also an emotional or associative element.
To identify the value of the functional parts of the product such as what premium does a bigger engine, or better fuel economy command, unbranded research is carried out. Conjoint analysis is the most powerful and effective tool for understanding how functions drive value.
The second part of the emotional or associative value is to look at brand in addition to these functions. Knowing how different functional combinations are valued, by introducing brand you can measure changes that the brand makes on selection compared to the unbranded. By careful calibration, it is possible to uncover the value of the brand over and above the functional differences.
For product development and pricing purposes, this allows managers to determine whether resources should be focused on strengthening the brand and perceived value, or on strengthening the underlying product offer.
Of course what is also of interest is what it is about the brand that is driving this emotional or associative link. Our techniques such as sensory-emotional studies and brand association studies enable companies to understand how and what elements are driving this additional emotion values.
Researched value versus accountant's value
Some companies measure brand equity completely differently, relying on financial measures of brand performance. Because strong brands have extra value to customers, the brands themselves are able to command a higher price in the market, not just to end users, but also through the distribution channel in the form of reduced margins compared to other similar products.
An alternative to making a research-based evaluation of brand equity is therefore to look at the premium, or value-add from the brand financially in comparison to equivalent products. This can be carried out either in terms of gross margin, or in wider measures such as EVA (economic value added). Put simply, good brands should be more effective at bringing long term profits and returns because of their ability to command higher prices or achieve greater market share for the equivalent product. This will be reflected in a stronger balance sheet with a higher level of profitability for a given cost of sales.
One point to note is that it is also important to have a complete understanding of the brand values and perceptions before a company takes steps to try and increase Brand Equity. For instance, for some brands part of their cachet is exclusivity. However, this exclusivity can be jeopardised if steps are taken to broaden distribution and so attempt to maximise the return on the brand. Therefore the brand needs to be understood not just in terms of it's value, but also how this value is made up. It can be very dangerous to try to match a brand with a reputation for reliability with innovative products as the innovations may fail and damage the brand's perception as reliable for instance. This has particular relevance where a brand is being extended into new markets or uses. The counterpoint is that market needs change over time. Unless the brand continues to adapt to new requirements it can fall back in value, or be overtaken by competitors. For many brands in technology markets for instance, there is a balance between historical requirements and new requirements. Advertising soap powder as being the best white for Sunday best, is much less relevant now. Now the message might be 'wash your clothes every day' - a complete change requiring different brand values.
For help and advice on carrying out BPTO or brand equity measurement contact firstname.lastname@example.org