Branding has a dirty little secret. It doesn't know how to count.
Look at common branding goals. 'Awareness'. 'Visibility'. 'Impact'. 'Image'. These cannot be measured well, and no two measurements of the same goal will generate the same number. Without accurate measurement, there is no accountability. Without accountability, profitability is not assured. Without accountability, brand sustainability is threatened.
Marketers are painfully aware of this fact, especially when they are asked to justify budgets. As a result, they grasp at anything that can communicate solid 'measurement'. Unfortunately, these measurements have little relevance to CEOs and CFOs.
One of the most popular pseudo-measurements is 'brand equity.' After the recognition that brands have value emerged during the 1980s, brand equity emerged to answer the obvious question: how valuable? The concept was best outlined in the landmark book Managing Brand Equity: Capitalizing on the Value of a Brand Name by David Aaker.
The concept of 'brand equity,' which sought to overcome the inability of traditional accounting to measure intangible strategic assets like perceived quality, brand and channel resources, rose to PowerPoint fame in marketing for several reasons. It appeared to quantify intuitive recognition about the value of brands. It incorporated two brand strengths - its standing with purchasers and preception among prospects and customers. And it provided a means to rank winners and losers in branding wars.
But what exactly is brand equity, and how does it deliver accountability to CEOs and CFOs?
'Brand equity' definitions are as scattered as branding definitions. Building, Measuring and Managing Brand Equity by K.L. Keller lists nine definitions, some contradictory. BrandWeek magazine says brand equity is 'determined by a calculation of Familiarity, Quality and Purchase Intent'. According to BusinessWeek, consultancy Interbrand 'looks at how much of a boost each brand delivers, how stable that boost is likely to be in the future, and how much those future earnings are worth today'. Delve into any methodology from major consultancies regarding 'brand equity' calculation, and it is apparent that the effort has all the intellectual rigor of a voodoo spell - a dash of corporate history, a gaggle of retail numbers, an extra helping of distribution, a sampling of questionnaires.
Because of the lack of a common methodology, brand equity calculations result in pie-in-the-sky numbers. Look at this one definition: 'Essentially, a brand's value is derived by multiplying its annual net after-tax profits, adjusted to exclude the earnings expected for an equivalent generic product, by a discount rate that reflects the brand strength as defined as the brand's ability to influence the market, the stability of its consumer franchise, the ability to sustain demand in the face of technological change, and the strength of supporting communications.' Based on this definition, two people could not come up with the same number based on all the impossible-to-define variables. This imprecision - at a time when CEOs and CFOs are demanding measurement and accountability - means 'brand equity' lacks validity as a decision-making benchmark. How can strategies be executed when metrics lack consistency?
This imprecision causes other problems as well. Brand equity does not provide any insights about operational cause-and-effect. If brand equity increases by 10 per cent, what caused it? The latest campaign? A new product? Better service? 'Brand equity' will not tell you.
The measurement does not have any direct linkage to profitability. Thanks to its famous sock puppet, Pets.com had great brand equity, according to some calculations. Unfortunately, the firm was unprofitable, and ultimately kamikazeed out. Rumor has it that Pets.com sold more of its oh-so-cute mascot that it did pet supplies. Undoubtedly, Eastern Air Lines, Impana toothpaste, Heathkit (Daystrom), Atari, Marathon candy bars, Cellnet, Fostex soap, Oldsmobile and many, many more also had great brand equity, but it makes little difference now. They are all defunct.
Brand equity has other flaws as well. It excludes the most important component of any brand: the customer. If it is agreed that the value of a brand is derived -- either partly or completely -- from relationships with customers, then any branding measurement that excludes customers is suspect. Additionally, since brand equity derives from product value, using it as a guiding star leads companies to focus on products at a time when a customer focus is critical.
Finally, and most important, brand equity is irrelevant to customers. In the history of the world, only two things have never happened. No one has washed a rental car. And no one has bought anything based on brand equity. Customers buy on value, service, price or other issues, but never purchase based on the relative brand equity of two offerings. Why should companies pay attention to an issue that customers ignore? As a result, brand equity has as much value to those interested in profitability and accountability as leeches and bleeding have to those focused on medical efficacy. But there is one brand value calculation that the CEO and CFO can embrace - customer equity.
Do brands have value? Absolutely. But attempting to measure this value through brand equity provides little benefit and distracts a company away from the task of retaining profitable customers. Ultimately, it is loyal customers- not a fallible calculation - who are responsible for brand value and sustainability. And that requires measurement of customer equity. As Frederick Reichheld pointed out in his landmark book, The Loyalty Effect: "Customer equity effectively explains success and failure in business". The companies with the highest retention rates also earn the best profits. Relative retention explains profits better than market share, scale, cost position or any other variable associated with competitive advantage'.
About the author:
Nick Wreden, MA, MS
Branding profitability and accountability based on customer loyalty, evangelism and measurement. Author, FusionBranding: How To Forge Your Brand for the Future available at http://www.fusionbrand.com.
Skilled in multiple disciplines, Nick is a brand futurist and a 20-year veteran of branding wars in the technology and other marketplaces. He has been extensively published by Harvard Business School Publishing, InformationWeek and numerous other publications. An insightful consultant and dynamic speaker, Nick has an MA in journalism and an MS in technology management.
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