The classic example of the brand-based comparative approach is “blind testing” research studies in which different consumers examine or use a product with or without brand identification. Invariably, differences emerge. For example, in one study, people who were asked to blind test Coca-Cola and two store brands of cola split their preferences almost evenly among the three—31 percent for Coke and 33 percent and 35 percent for the others. But when the samples were identified, 50 percent of other participants in the experiment said they preferred Coke.5

One natural application of the brand-based comparative approach is product purchase or consumption research for new or existing products, as long as the brand identification can be hidden in some way for the “unbranded” control group. Brand-based comparative approaches are also useful to determine brand equity benefits related to price margins and premiums.

T-Mobile

Deutsche Telecom invested much time and money in recent years in building its T-Mobile mobile communication brand. In the United Kingdom, however, the company has leased or shared its network lines with competitor Virgin Mobile. As a result, the audio quality of the signal that a T-Mobile customer received in making a call should have been virtually identical to the audio quality of the signal for a Virgin Mobile customer. After all, the same network was being used to send the signal. Despite that fact, research showed that Virgin Mobile customers rated their signal quality significantly higher than did T-Mobile customers. The strong Virgin brand image appeared to cast a halo over its different service offerings, literally causing consumers to change their impressions of product performance.6

The main advantage of a brand-based comparative approach is that because it holds all aspects of the marketing program fixed for the brand, it isolates the value of a brand in a very real sense. Understanding exactly how knowledge of the brand affects consumer responses to prices, advertising, and so forth is extremely useful in developing strategies in these different areas. At the same time, we could study an almost infinite variety of marketing activities, so what we learn is limited only by the number of different applications we examine.

Brand-based comparative methods are particularly applicable when the marketing activity under consideration represents a change from past marketing of the brand, for example, a new sales or trade promotion, ad campaign, or proposed brand extension. If the marketing activity under consideration is already strongly identified with the brand––like an ad campaign that has been running for years––it may be difficult to attribute some aspect of the marketing program to a fictitiously named or unnamed version of the product or service in a believable fashion.

Thus, a crucial consideration with the brand-based comparative approach is the realism we can achieve in the experiment. We usually have to sacrifice some realism in order to gain sufficient control to isolate the effects of brand knowledge. When it is too difficult for consumers to examine or experience some element of the marketing program without being aware of the brand, we can use detailed concept statements of that element instead. For example, we can ask consumers to judge a proposed new product when it is either introduced by the firm as a brand extension or introduced by an unnamed firm in that product market. Similarly, we can ask about acceptable price ranges and store locations for the brand name product or a hypothetical unnamed version.

One concern about brand-based comparative approaches is that the simulations and concept statements may highlight the particular product characteristics enough to make them more salient than they would otherwise be, distorting the results.

There is a long academic and industry tradition of exploring price premiums using marketing-based comparative approaches. In the mid-1950s, Edgar Pessemier developed a dollar-metric measure of brand commitment that relied on a step-by-step increase of the price difference between the brand normally purchased and an alternative brand.7 To reveal brand-switching and loyalty patterns, Pessemier plotted the percentage of consumers who switched from their regular brand as a function of the brand price increases.

A number of marketing research suppliers have adopted variations of this approach to derive similar types of demand curves, and many firms now try to assess price sensitivity and willingness-to-pay thresholds for different brands.8 For example, Intel would routinely survey computer shoppers to find out how much of a discount they would require before switching to a personal computer that did not have an Intel microprocessor in it (say, an AMD chip) or, conversely, what premium they would be willing to pay to buy a personal computer that did have an Intel microprocessor in it.

We can apply marketing-based comparative approaches in other ways, assessing consumer response to different advertising strategies, executions, or media plans through multiple test markets. For example, SymphonyIRI’s electronic test markets and similar research methodologies can permit tests of different advertising weights or repetition schedules as well as ad copy tests. By controlling for other factors, we can isolate the effects of the brand and product. Recall from Chapter 2 how Anheuser-Busch conducted an extensive series of test markets that revealed that Budweiser beer had such a strong image with consumers that advertising could be cut, at least in the short run, without hurting sales performance.

Marketers can also explore potential brand extensions by collecting consumer evaluations of a range of concept statements describing brand extension candidates. For example, Figure 10-1 displays the results of a consumer survey conducted at one time to examine reactions to hypothetical extensions of the Planters nuts brand. Contrasting those extensions provides some indication of the equity of the brand.

In this example, the survey results suggested that consumers expected any Planters brand extension to be “nut-related.” Appropriate product characteristics for a possible Planters brand extension seemed to be “crunchy,” “sweet,” “salty,” “spicy,” and “buttery.” In terms of where in the store consumers would have expected to find new Planters products, the snack and candy sections seemed most likely. On the other hand, consumers did not seem to expect to find new Planters products in the breakfast food aisle, bakery product section, refrigerated section, or frozen food section.

Consistent with these survey results, besides selling a variety of nuts (peanuts, mixed nuts, cashews, almonds, pistachios, walnuts, and so on), Planters now sells trail mix, sunflower seeds, peanut bars, and peanut butter.

The main advantage of the marketing-based comparative approach is ease of implementation. We can compare virtually any proposed set of marketing actions for the brand. At the same time, the main drawback is that it may be difficult to discern whether consumer responses to changes in the marketing stimuli are being caused by brand knowledge or by more generic product knowledge. In other words, it may be that for any brand in the product category, consumers would be willing to pay certain prices, accept a particular brand extension, and so forth. One way to determine whether consumer response is specific to the brand is to conduct similar tests of consumer response with competitive brands. A statistical technique well suited to do just that is described next.

Conjoint analysis has a number of possible applications. In the past, Ogilvy & Mather ad agency used a brand/price trade-off methodology as a means of assessing advertising effectiveness and brand value.13 Brand/price trade-off is a simplified version of

conjoint measurement with just two variables––brand and price. Consumers make a series of simulated purchase choices between different combinations of brands and prices. Each choice triggers an increase in the price of the selected brand, forcing the consumer to choose between buying a preferred brand and paying less. In this way, consumers reveal how much their brand loyalty is worth and, conversely, which brands they would relinquish for a lower price.

Academic researchers with an interest in brand image and equity have used other variations and applications of conjoint analysis. For example, Rangaswamy, Burke, and Oliva use conjoint analysis to explore how brand names interact with physical product features to affect the extendability of brand names to new product categories.14 Barich and Srinivasan apply conjoint analysis to corporate image programs, to show how it can determine the company attributes relevant to customers, rank the importance of those attributes, estimate the costs of making improvements (or correcting customer perceptions), and prioritize image goals to obtain the maximum benefit, in terms of improved perceptions, for the resources spent.15

The main advantage of the conjoint-based approach is that it allows us to study different brands and different aspects of the product or marketing program (product composition, price, distribution outlets, and so on) simultaneously. Thus, we can uncover information about consumers’ responses to different marketing activities for both the focal and competing brands.

One of the disadvantages of conjoint analysis is that marketing profiles may violate consumers’ expectations based on what they already know about brands. Thus, we must take care that consumers do not evaluate unrealistic product profiles or scenarios. It can also be difficult to specify and interpret brand attribute levels, although some useful guidelines have been put forth to more effectively apply conjoint analysis to brand positioning.16

Some researchers have focused on analysis of brand value based on data sets from supermarket scanners of consumer purchases. In an early study, Kamakura and Russell proposed a measure that employs consumer purchase histories from supermarket scanner data to estimate brand equity through a residual approach.19 Specifically, their model explains the choices observed from a panel of consumers as a function of the store environment (actual shelf prices, sales promotions, displays), the physical characteristics of available brands, and a residual term dubbed brand equity. By controlling for other aspects of the marketing mix, they estimate that aspect of brand preference that is unique to a brand and not currently duplicated by competitors.

More recently, a variation proposed by Ailawadi, Lehmann, and Neslin employs actual retail sales data to calculate a “revenue premium” as an estimate of brand equity, by calculating the difference in revenues between a brand and a generic or private label in the same category.20 Sriram, Balachandar, and Kalwani similarly use store-level scanner data to track brand equity and key drivers of brand equity over time.21

Swait, Erdem, and colleagues have proposed a related approach to measuring brand equity with choice experiments that account for brand names, product attributes, brand image, and differences in consumer sociodemographic characteristics and brand usage.22 They define the equalization price as the price that equates the utility of a brand to the utilities that could be attributed to a brand in the category where no brand differentiation occurred. We can consider equalization price a proxy for brand equity.23

Srinivasan, Park, and Chang have proposed a comprehensive residual methodology to measure brand equity based on the multiattribute attitude model.24 Their approach reveals the relative sizes of different bases of brand equity by dividing brand equity into three components: brand awareness, attribute perception biases, and nonattribute preference.

• The attribute-perception biased component of brand equity is the difference between subjectively perceived attribute values and objectively measured attribute values. Objectively measured attribute values come from independent testing services such as Consumer Reports or acknowledged experts in the field.

• The nonattribute preference component of brand equity is the difference between subjectively perceived attribute values and overall preference. It reflects the consumer’s overall appraisal of a brand that goes beyond the utility of individual product attributes.

The researchers also incorporate the effects of enhancing brand awareness and preference on consumer “pull” and the brand’s availability. They propose a survey procedure to collect information for estimating these different perception and preference measures.

Dillon and his colleagues have presented a model for decomposing attribute ratings of a brand into two components: (1) brand-specific associations, meaning features, attributes, or benefits that consumers link to a brand; and (2) general brand impressions based on a more holistic view of a brand.25

Residual approaches provide a useful benchmark for interpreting brand equity, especially when we need approximations of brand equity or a financially oriented perspective on it. The disadvantage of residual approaches is that they are most appropriate for brands with a lot of product-related attribute associations, because these measures are unable to distinguish between different types of non-product-related attribute associations. Consequently, the residual approach’s diagnostic value for strategic decision making in other cases is limited.

More generally, residual approaches take a fairly static view of brand equity by focusing on consumer preferences. This contrasts sharply with the process view advocated by the customer-based brand equity framework. The brand-based and marketing-based comparative approaches stress looking at consumer response to the marketing of a brand and attempting to uncover the extent to which that response is affected by brand knowledge.

This distinction is also relevant for the issue of “separability” in brand valuation that various researchers have raised. For example, Barwise and his colleagues note that marketing efforts to create an extended or augmented product, say, with extra features or service plus other means to enhance brand value, “raise serious problems of separating the value of the brand name and trademark from the many other elements of the ‘augmented’ product.”26 According to customer-based brand equity, those efforts could affect the favorability, strength, and uniqueness of various brand associations, which would, in turn, affect consumer response to future marketing activities.

For example, imagine that a brand becomes known for providing extraordinary customer service because of certain policies and favorable advertising, publicity, or word-of-mouth (like Nordstrom department stores or Singapore Airlines). These favorable perceptions of customer service and the attitudes they engender could create customer-based brand equity by affecting consumer response to a price policy (consumers would be willing to pay higher prices), a new ad campaign (consumers would accept an ad illustrating customer satisfaction), or a brand extension (customers would become interested in trying a new type of retail outlet).

The assets of a firm can be either tangible or intangible. Tangible assets include property, plant, and equipment; current assets (inventories, marketable securities, and cash); and investments in stocks and bonds. We can estimate the value of tangible assets using accounting book values and reported estimates of replacement costs.

Intangible assets, on the other hand, are any factors of production or specialized resources that permit the company to earn cash flows in excess of the return on tangible assets. In other words, intangible assets augment the earning power of a firm’s physical assets. They are typically lumped under the heading of goodwill and include things such as patents, trademarks, and licensing agreements, as well as “softer” considerations such as the skill of the management and customer relations.

In an acquisition, the goodwill item often includes a premium paid to gain control, which, in certain instances, may even exceed the value of tangible and intangible assets. In Britain and certain other countries, it has been common to write off the goodwill element of an acquisition against reserves; tangible assets, on the other hand, are transferred straight to the acquiring company’s balance sheet.

Brand valuation’s more recent past started with Rupert Murdoch’s News Corporation, which included a valuation of some of its magazines on its balance sheets in 1984, as permitted by Australian accounting standards. The rationale was that the goodwill element of publishing acquisitions––the difference in value between net

assets and the price paid––was often enormous and negatively affecting the balance sheet. News Corporation used the recognition that the titles themselves contained much of the value of the acquisition to justify placing them on the balance sheet, improving the debt/equity ratio and allowing the company to get some much-needed cash to finance acquisition of some foreign media companies.

In the United Kingdom, Grand Metropolitan was one of the first British companies to place a monetary value on the brands it owned and to put that value on its balance sheet. When Grand Met acquired Heublein distributors, Pearle eye care, and Sambuca Romana liqueur in 1987, it placed the value of some of its brands––principally Smirnoff––on the balance sheet for roughly $1 billion. In doing so, Grand Met used two different methods. If a company consisted of primarily one brand, it figured that the value of the brand was 75 percent of the purchase price, whereas if the company had many brands, it used a multiple of an income figure.

British firms used brand values primarily to boost their balance sheets. By recording their brand assets, the firms maintained, they were attempting to bring their shareholder funds nearer to the market capitalization of the firm. In the United Kingdom, Rank Hovis McDougal (RHM) succeeded in putting the worth of the company’s existing brands as a figure on the balance sheet to fight a hostile takeover bid in 1988. With the brand value information provided by Interbrand, the RHM board was able to go back to investors and argue that the bid was too low, and eventually to repel it.

Accounting firms in favor of valuing brands argue that it is a way to strengthen the presentation of a company’s accounts, to record hidden assets so they are disclosed to company’s shareholders, to enhance a company’s shareholders’ funds to improve its earnings ratios, to provide a realistic basis for management and investors to measure a company’s performance, and to reveal detailed information on brand strengths so that management can formulate appropriate brand strategies. In practical terms, however, recording brand value as an intangible asset from the firm’s perspective is a means to increase the asset value of the firm.

Actual practices have varied from country to country. Brand valuations have been accepted for inclusion in the balance sheets of companies in countries such as the United Kingdom, Australia, New Zealand, France, Sweden, Singapore, and Spain. In the United Kingdom, Martin Sorrell improved the balance sheet of WPP by attaching brand value to its primary assets, including J. Walter Thompson Company, Ogilvy & Mather, and Hill & Knowlton, stating in the annual report that:

Intangible fixed assets comprise certain acquired separable corporate brand names. These are shown at a valuation of the incremental earnings expected to arise from the ownership of brands. The valuations have been based on the present value of notional royalty savings arising from [ownership] and on estimates of profits attributable to brand loyalty.32

In the United States, generally accepted accounting principles (blanket amortization principles) mean that placing a brand on the balance sheet would require amortization of that asset for up to 40 years. Such a charge would severely hamper firm profitability; as a result, firms avoid such accounting maneuvers. On the other hand, certain other countries (including Canada, Germany, and Japan) have gone beyond tax deductibility of brand equity to permit some or all of the goodwill arising from an acquisition to be deducted for tax purposes.

In determining the value of a brand in an acquisition or merger, firms can choose from three main approaches: the cost, market, and income approaches.33

The cost approach maintains that brand equity is the amount of money that would be required to reproduce or replace the brand (including all costs for research and development, test marketing, advertising, and so on). One common criticism of approaches relying on historic or replacement cost is that they reward past performance in a way that may bear little relation to future profitability––for example, many brands with expensive introductions have been unsuccessful. On the other hand, for brands that have been around for decades (such as Heinz, Kellogg’s, and Chanel), it would be virtually impossible to find out what the investment in brand development was––and largely irrelevant as well.

It is also obviously easier to estimate costs of tangible assets than intangible assets, but the latter often may lie at the heart of brand equity. Similar problems exist with a replacement cost approach; for example, the cost of replacing a brand depends a great deal on how quickly the process would take and what competitive, legal, and logistical obstacles might be encountered.

According to the second approach, the market approach, we can think of brand equity as the present value of the future economic benefits to be derived by the owner of the asset. In other words, it is the amount an active market would allow so that the asset would exchange between a willing buyer and willing seller. The main problems with this approach are the lack of open market transactions for brand name assets, and the fact that the uniqueness of brands makes extrapolating from one market transaction to another problematic.

The third approach to determining the value of a brand, the income approach, argues that brand equity is the discounted future cash flow from the future earnings stream for the brand. Three such income approaches are as follows:

1. Capitalizing royalty earnings from a brand name (when these can be defined)

2. Capitalizing the premium profits that are earned by a branded product (by comparing its performance with that of an unbranded product)

3. Capitalizing the actual profitability of a brand after allowing for the costs of maintaining it and the effects of taxation

For example, as an example of the first income approach, brand consultancy Brand Finance uses a Royalty Relief methodology for brand valuation. Their approach is based on the premise that brand value can be thought of in terms of what a company avoids in paying a license fee from actually owning the trademark. Their rationale is that such an approach has much credibility with accountants, lawyers, and tax experts because it calculates brand values on the basis of comparable third-party transactions. They use publically available information to estimate future, post-tax royalties of a brand and thus its net present value and overall brand value.34

The next sections and The Science of Branding 10-1 describe other income-based valuation approaches.35

In a seminal academic research study, Simon and Sullivan developed a technique for estimating a firm’s brand equity derived from financial market estimates of brand-related profits.37 They define brand equity as the incremental cash flows that accrue to branded products over and above the cash flows that would result from the sale of unbranded products.

To implement their approach, they begin by estimating the current market value of the firm. They assume the market value of the firm’s securities to provide an unbiased estimate of the future cash flows attributable to all the firm’s assets. Their methodology attempts to extract the value of a firm’s brand equity from the value of the firm’s other assets. The result is an estimate of brand equity based on the financial market valuation of the firm’s future cash flows.

From these basic premises, Simon and Sullivan derive their methodology to extract the value of brand equity from the financial market value of the firm. The total asset value of the firm is the sum of the market value of common stock, preferred stock, long-term debt, and short-term debt. The value of intangible assets is captured in the ratio of the market value of the firm to the replacement cost of its tangible assets. There are three categories of intangible assets: brand equity, nonbrand factors that reduce the firm’s costs relative to competitors like R&D and patents, and industry-wide factors that permit monopoly profits, such as regulation. By considering factors such as the age of the brand, order of entry in the category, and current and past advertising share, Simon and Sullivan then provide estimates of brand equity.

Interbrand is probably the premier brand valuation firm. Figure 1-5 from Chapter 1 listed the 25 most valuable global brands according to Interbrand. In developing its brand valuation methodology, Interbrand approached the problem by assuming that the value of a brand, like the value of any other economic asset, was the present worth of the benefits of future ownership. In other words, according to Interbrand, brand valuation is based on an assessment of what the value is today of the earnings or cash flow the brand can be expected to generate in the future.38

Because Interbrand’s approach looks at the ongoing investment and management of the brand as an economic asset, it takes into account all the different ways in which a brand benefits

an organization both internally and externally—from attracting and retaining talent to delivering on customer expectations. One advantage of the Interbrand valuation approach is that it is very generalizable and can be applied to virtually any type of brand or product.

Three key components contribute to the brand value assessment: (1) the financial performance of the branded products or services, (2) the role of brand in the purchase decision process, and (3) the strength of the brand.39 Here’s how Interbrand addresses each of these three components.

Brand valuation and the “brands on the balance sheet” debate are controversial subjects. There is no one universally agreed-upon approach.40 In fact, many marketing experts feel it is impossible to reduce the richness of a brand to a single, meaningful number, and that any formula that tries to do so is an abstraction and arbitrary.

The primary disadvantage of valuation approaches is that they necessarily have to make a host of potentially oversimplified assumptions to arrive at one measure of brand equity. For example, Sir Michael Perry, former chairman of Unilever, once objected for philosophical reasons:

The seemingly miraculous conjuring up of intangible asset values, as if from nowhere, only serves to reinforce the view of the consumer skeptics, that brands are just high prices and consumer exploitation.41

Wharton’s Peter Fader points out a number of limitations of valuation approaches: they require much judgmental data and thus contain much subjectivity; intangible assets are not always synonymous with brand equity; the methods sometimes defy common sense and lack “face validity”; the financial measures generally ignore or downplay current investments in future equity like advertising or R&D; and the strength of the brand measures may be confounded with the strength of the company.42

At the heart of much of the criticism is the issue of separability we identified earlier. An Economist editorial put it this way: “Brands can be awkward to separate as assets. With Cadbury’s Dairy Milk, how much value comes from the name Cadbury? How much from Dairy Milk? How much merely from the product’s (replicable) contents or design?”43

To draw a sports analogy, extracting brand value may be as difficult as determining the value of the coach to a team’s performance. And the way a brand is managed can have a large effect, positive or negative, on its value. Branding Brief 10-1 describes several brand acquisitions that turned out unsuccessfully for firms.

As a result of these criticisms, the climate regarding brand valuation has changed. See Brand Focus 10.0 for more on how accounting standards have changed to accommodate the concept of brand value.