For a long time marketing and market research people have tried to evaluate the true meaning of “brand equity”. Conversely, those of us in finance have been asking our most important question “what is it worth?” Ads build brand value and within this paper we hope to shed some light on how companies build up their brand value and then go forth to put a number on that worth.
What is Brand Equity?
Brand Equity is quite simply the value of the brand in the marketplace. It is a term most of us are very familiar with and have seen throughout finance and advertising, but as a business concept most of us have a very broad understanding of it. In essence, a high equity brand has high value in the marketplace. Usually, this would mean that your brand is easily recognizable when encountered in advertising. It can also mean that your brand is the one that is most easily recalled, “What brand of laptop would I buy if I was looking to spend $1500?” Brand equity could mean that individuals would be willing to pay a premium price for your products. It also means that when someone refers a product to you it will be that well-known brand. All of these positive responses to the brand: readily recognizable, brand that is recalled quickly and easily, one that individuals are willing to pay a premium price to acquire, and a brand that is recommended to others. These are the main characteristics of a high equity brand.
It is also important to note that when your brand is well known, it has high brand awareness. It is easily recognizable and easily recalled when faced with that brand-related need. On the other hand, brand image is what is known about the brand. It is the information and association consumers have about your brand stored in their memory. Ultimately, it is both Brand Image and Brand Awareness that lead to your Brand Equity.
Brands on the balance sheet
Accounting for intangible assets became an issue in the late 1908s during a series of brand acquisitions, which resulted in large amounts of goodwill that accounting standards didn’t know how to justify on the balance sheet. Essentially companies were faced with questioning the social value of brands. Goodwill is defined as reflecting the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.
In order to find an approach to value intangible assets, two evaluation models have been developed: research-based brand equity evaluations, and financially driven approaches.
Research-based approaches
Research-based methods use consumer research to measure the relative performance of the brand. However, this method does not use any financial data to determine the relative value. Instead they assess consumer attitudes to decide the economic performance of said brand. Aspects such as market share and relative price are sometimes included also.
Financial-based approaches
There are several different types of financial-based approaches: cost-based approaches, comparables, premium price, and economic use. However, the only method that is commonly used is the economic use approach, which was developed in 1988. It is commonly used and has been used in more than 3,500 valuations of brands across the world.
This approach is based on several fundamental financial principles:
•Customer Demand: Brands generate customer demand, which eventually turns into revenue through the purchasing of products. Because brands are the source of customer loyalty, this ensures the repurchase of products.
•Future Expected Earnings: From a financial perspective, they will look at the net present value of the future expected earnings. Once the earnings are recognized, then they are discounted to the net present value with a discount rate.
Case Study: Coca-Cola Company & Google
Today some brands have demonstrated an amazing ability to last. The third most popular brand, as show in Fig. 2, is Coca-Cola. The brand has a special intangible that in many businesses is the most important asset. Coca-Cola is more than 124 years old and a majority of the world’s most valuable brands have been around for 60 years. Compare with this fact with an estimated average life span for corporations to be 25 years and we can see that there is something special about the brand name Coca-Cola.
Several studies have been done to estimate the contribution that brands make to shareholder value. A study that was done by Interbrand in association with JP Morgan concluded that on average brands account for more than one-third of shareholder value. The study reveals to us that brands create significant value either as a consumer, corporate brand, or a combination of both.
Currently, Coca-Cola spends more money on sport sponsorships around the world than any other company in the world, in excess of $1 billion per year. Their commitment to marketing their brand in the sporting sector reinforces their overall brand equity. Coca-Cola also distributes around 300 brands of drinks around the world including Fresca, Diet Coke, PowerAde, and Surge. Because Coke is so entrenched in the public consciousness, it would be hard to imagine a world where they have anything less than the second place in the market share battle.
Google has topped the list of most powerful brands. In 2008, Google’s estimate value was at $86 billion. Millward Brown’s annual BrandZ Top 100 Most Powerful Brands conducts a survey each year that determines the most significant brands through examining the portion of intangible earnings that can be attributed to the company’s most loyal customers. They take into account the market valuation, risk profile and potential for growth. In 2008, Google reached the number one position in the Millward Brown study for the second year in a row with a 30% year-on-year increase in value.
So what makes Google such a valuable brand? From a consumer’s point of view, the brand provides a few key elements: simplicity, ease of use, innovation, personalization, coherency between all Google products, and user focused. The combination of these factors lead users to want to go back to Google. However, the ultimate goal of customer loyalty and brand building is to get consumers to come back to try other Google products. Once a consumer has returned to Google for other products or services, the consumer has built confidence in the product, thereby establishing brand loyalty.
Additionally, it’s interesting to look at how companies have treated marketing and branding during the current economic downturn. Joanna Seddon, Chief Executive Officer of Millward Brown Optimor said that “A new trend has emerged in the wake of the recession as more companies realized the importance of maintaining and even increasing budgets to support brand loyalty and engagement.” Despite the poor economy over the past few years, the strong brands have established and re-established themselves as strong brands through increased marketing budgets and using innovation to maintain the same brand equity through the economic downturn.
If both Google and Coca-Cola Company maintain the same customer focused approach, Puzzle Group is confident that their brand equity will remain strong. Their current consumer confidence and brand value have landed them high spots, and their customers are excited to see what’s next.
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