organizational and customer brand equity, with their sub-components. ... From the organization's perspective, the value of any business (i.e. the sum of its ...
ORGANIZATIONAL AND CUSTOMER PERSPECTIVES ON BRAND EQUITY: ISSUES FOR MANAGERS AND RESEARCHERS Pierre R. Berthon Bentley College Noel Capon and James M. Hulbert, Columbia University Marie Murgolo-Poore, Julie Napoli , Leyland Pitt and Sharon Keating Curtin University of Technology
Abstract Marketers have long been concerned with the issue of brand equity. This paper argues that most common notions of brand equity are at worst flawed and at best limited by a failure to view the concept in its widest context. The paper introduces the separate but related ideas of organizational and customer brand equity, with their sub-components. It is argued that when both managers and academics alike begin to understand these wider dimensions of brand equity, they will gain insights into the management of brands and the researching thereof that were previously unattainable under the more restrictive notions of brand equity currently employed
Introduction The notion of brand equity has captured the attention of accountants, marketers and senior managers for a number of years. Perhaps the only thing that has not been reached with regard to brand equity is a conclusion. In this brief article we attempt to shed light on why brand equity is such a thorny problem for managers, researchers and academics alike. We offer some perspectives, chiefly in the form of the concepts of organizational and customer brand equity, that should give direction to further debate and research. Brand equity is a difficult concept to grasp in part, because of considerable definitional problems. A currently accepted definition of brand equity, drawn from Aaker’s pioneering book, is: “... a set of brand assets and liabilities linked to a brand, its name and symbol, that add to (or subtract from) the value provided by a product or service to a firm and/or that firm’s customers.” (Aaker 1996) The assets and liabilities discussed by Aaker include brand awareness, brand loyalty, perceived quality, brand associations and image (brand personality), use satisfaction and other proprietary assets such as patents, trademarks and channel relationships. The problem with this definition is that it confuses the beneficiaries of the value of “the set of assets and liabilities” inasmuch as it states that the value is provided “to a firm,” “and/or,” “to that firm’s customers.” We might question the usefulness, and validity of a definition that envisages value that may be provided both to the firm and its customers; provided to the firm but not its customers; or provided to customers but not to the firm. Assets and liabilities seem generally to represent values for the firm rather than to customers. It is clearly valuable for the firm that a customer is brand loyal; but not at all clear that brand loyalty is particularly valuable to an individual customer. The value to the customer is related to the brand’s ability to fulfil
fundamental branding functions: reduction of search cost and expectations of securing functional, psychological and/or economic benefits (Berthon, Hulbert and Pitt, 1999). From the customer’s point of view, brand loyalty itself may even have a negative connotation to the extent that it impedes search for other more attractive options. We should clearly differentiate value to the organization from value to the customer. Rather than focus on a single notion of brand equity, the concept should be bifurcated into two related concepts: organizational brand equity and customer brand equity.
Organizational and Customer Brand Equity From the organization’s perspective, the value of any business (i.e. the sum of its discounted future cash flows) should be greater than the disposal value of its assets (tangible and intangible) to justify its continued existence. Since customers are the sole source of positive cash inflows (other than borrowings or new equity), without them a business has no value. Therefore, that the value of any business is primarily dependent on its ability to acquire, continue to acquire, and retain customers. The simplest way to conceptualize organizational brand equity, then, is as a summary measure of the entity’s ability to perform these roles of acquisition and retention. This perspective does not constrain the entity to its currently offered portfolio of products and services. Indeed, one of the major contributions of the brand equity concept is that it both admits and endorses the notion that the brand may have customer-attracting properties in its own right, over and above any particular product or set of products to which it is currently attached. Organizational brand equity is related to the receipt by the firm of a series of cash flows resulting from its ability to acquire and retain, customers. This view is not constrained by current products, product lines or even current customers. Indeed, for many organizations, a large proportion of brand equity may be attributed to the expectation of future products and future customers, as in the case of Internet firms such as Amazon.com. Organizational brand equity, across all brands, can be viewed as the difference between the brand’s market value and the book value of assets directly supporting the brand. Likewise, organizational brand equity is a function of the difference between the price paid for the branded product and the price of an identical generic product. Customer brand equity, by contrast, relates to the value received by individual customers from a branded product or service, over and above the value received from an unbranded version of the same product or service. Since this value may sometimes be greater than the price of the product, inasmuch as some customers would be willing to pay more than the asking price, clearly customer brand equity is a separate and distinct, though related, concept to organizational brand equity. To the extent that customer brand equity is high for substantial numbers of customers, organizational brand equity may be expected to be high also. In 1983, Toyota and General Motors formed the joint venture, New United Motor Manufacturing Inc. (NUMMI). NUMMI manufactured two identical cars: the Toyota Corolla and the Geo Prism. In 1989, the Toyota Corolla sold at around $9,000, 10% more than its twin; it also depreciated more slowly - by 1994 its second-hand value exceeded the Prism by almost 18%. The effect of brand strength on profit was substantial. Between 1990-1994, both cars cost the same to produce, namely $10,300. Toyota's annual sales averaged 200,000 units, priced to dealers at $11,100; GM averaged 80,000 units annually, priced at $10,700. Toyota made $128 million more operating profits from NUMMI than GM, and Toyota dealers made $107 million more than GM dealers.
The Toyota Corolla not only had more customer brand equity than the Geo Prism, it also provided more organizational brand equity. However, there is not necessarily a direct relationship between high customer brand equity and high organizational brand equity. The latter is heavily dependent upon assumptions about the number of present and future customers and their frequency of purchase, which in turn affects revenue expectations. The distinction between customer and organizational equity was well illustrated in a simple Internet search experiment (Berthon, 1999). Internet sites for six brands of automobiles (Ford, BMW, Lotus, Toyota, Morgan, Volvo) were identified and classified as either official (manufacturer, distributor, reseller) or enthusiast (clubs, individuals). The development of enthusiast sites may be viewed as a proxy for high customer brand equity, and so the consideration of a ratio of enthusiast to official websites is possible. Across the brands, Ford and Toyota had a high percent of official sites and a very low number of enthusiast; Lotus and Morgan had a high number of enthusiast sites and a low number of official; Volvo and BMW fell in-between. Clearly, the level of customer brand equity differs markedly across automobile brands. Customer brand equity focuses on the individual customer’s willingness to pay a price more than some benchmark for the branded product; total organizational brand equity is concerned with the number of customers willing to pay that price. In many categories, one product may have high customer brand equity but low total organizational brand equity whereas another product may have low customer brand equity but high total organizational brand equity. A bottle of fine French wine can be said to have high customer brand equity (sufficient customers are willing to pay at least the high offering price) but low total organizational brand equity (relatively low volume). Conversely, a supermarket wine has low customer brand equity (consumers are unwilling to pay more than the low price) but high total organizational brand equity (extremely high volume). This example brings an important related concept termed unit organizational brand equity to the fore. The French vineyard has less total organizational brand equity than the supermarket wine, but it has much greater organizational brand equity per unit. Unit organizational brand equity is thus very different from total organizational brand equity - closer in spirit to customer brand equity. However, unit organizational brand equity is not the same as customer brand equity. For a particular brand/product combination, individuals’ perceived value ranges from low (even negative) to high. The average customer brand equity may be lower, equal or higher than unit organizational brand equity, depending on how the brand/product is priced. One thing is certain: the customer brand equity of those who purchase the brand/product must be equal to, or greater than, unit organizational brand equity otherwise they would not purchase. As a result, the average customer brand equity of purchasers is always greater than unit organizational brand equity. “Marlboro Friday” illustrated the distinction between total organizational brand equity and customer brand equity very vividly (Philip Morris, Marlboro Friday, 1996). Philip Morris, the world’s largest cigarette marketer cut prices on its premium cigarette brands (Marlboro was the leader and best-known) by 20% in a successful effort to stem the market share loss to discounted brands. Although, previously, many consumers were buying premium cigarette brands, believing they were receiving sufficient value (in basic product benefits and customer brand equity), the loss of customers was reducing Philip Morris’ organizational brand equity. Thus, the firm was prepared to reduce the price customers had to pay for customer brand equity. Sales of premium brands increased substantially and the erosion of organizational brand equity was stemmed. The rational economic decision for a brand with negative
organizational brand equity should be to cease operations. However, brands may possess negative customer brand equity for some segments yet still prove to be viable business propositions because of sufficient customers for which the customer brand equity is positive. While the Czech auto manufacturer Skoda’s products are the butt of jokes across Western Europe, brand owner Volkswagen AG of Germany continues to market the cars because they do have a small but intensely loyal customer base, who report incredibly high satisfaction levels in surveys.
On Organizational Brand Equity Measurement of organizational brand equity can proceed from either a financial-market or product-market perspective. Financial-market methods are not simple to implement, for organizational brand equity should be “separated” from other assets; furthermore, valuation can be developed on several bases (e.g., potential earnings, market value, cost [historic, replacement]). Measures of financial market value less balance sheet assets provide a measure of organizational brand equity. Using these methods, useful measures of organizational brand equity can be developed. Balance sheet values of “goodwill” can be viewed as measures of brand equity. A second group of methods involve the use of “earnings.” London-based Interbrand plc, estimates organizational brand equity based on two factors: annual after tax profits less expected earnings for an equivalent unbranded product averaged over time, factored by a multiple purporting to measure “brand strength.” The resulting values are of more than academic interest. Initially, because of the problem of dealing with “goodwill” in acquisitions, several countries, including Australia and New Zealand, allowed companies to place brand values of acquired brands on balance sheets as “identifiable intangible assets.” However, more recently the practise of placing acquired brands on balance sheets has been extended to existing brands. Just as with any item of value for which there is no liquid market, and because the methods involve a mix of the objective and the subjective, brand valuations may be erroneous and problematic. In 1994, Quaker Oats purchased the Snapple fruit and tea soft drinks brand of for $1.7 billion. Just 27 months later it sold Snapple for $300 million. The loss of $1.4 billion (in addition to $160 million in operating losses) was more than 25% of Quaker’s 1996 sales of $5.2 billion (Snapple, 1999). A third method of measuring organizational brand equity is based on the extra price commanded by a brand over a generic, unbranded equivalent. This method has two severe problems. First, an unbranded equivalent may not exist. Second, it totally ignores volume; profits, after all, are a function of both price and volume, not price alone as illustrated in the wine example. Third, it gives no consideration to the value of the brand for potential brand extensions. Although these methods provide interesting information they are not useful for day-to-day management of organizational brand equity. More appropriate measures relate to the components of brand equity: brand awareness, brand loyalty, perceived quality, brand associations and image, use satisfaction and other proprietary assets such as patents, trademarks and channel relationships. For most ongoing management purposes, the changes in these measures are more important than their absolute value. This principle is reflected in the brand health check measurement systems (cf. Keller, 2000) that so many companies have put in place.
On Customer Brand Equity When customer brand equity is positive (assets outweigh liabilities) for substantial numbers of customers this reflects the nurturing of trust between the brand owner and customer. Customer brand equity seems generally to be built up slowly over time, is fragile and can be quickly dissipated by negative information generated by managerial mishaps. Many companies including Dow Corning (alleged adverse side effects from breast implants), Firestone (premature tyre failure), Intel (Pentium flaw), Perrier (product impurities) and Coca Cola (product defects in Belgium) became acutely aware of the consequences of deterioration in customers' perceptions. Properly managed, the impact on organizational brand equity of adequately nurtured customer brand equity can be extremely durable. In the international liquor industry, the one hundred leading brands have an average age of over one hundred years! That customer brand equity, while frequently slow to build up, can endow long term advantages to the brand owner raises questions about the management practices of many companies. Specific issues concern organization structure, job design, executive development, performance measurement, reward systems and promotion. High customer brand equity does not just happen; it must be fostered by active brand management over many years using a variety of brand building activities. However, just as some decisions can lead to enhanced brand equity, so other decisions may over-exploit brand equity and cause it to decline. Brand building activities include advertising and public relations, improved service, product improvement, channel support, customer reward systems and price maintenance. Customer brand equity reducers include inconsistent advertising, poor service, price-cutting, promotions, lower price component substitution, and channel downsizing and proliferation. Management may be tempted to use brand equity reducing tools, especially in recession. They may build volume, market share and even profit temporarily but can also destroy customer brand equity. Waterford Crystal, manufacturers of fine crystal decided in 1993 not to sell "seconds" or "rejects" at discounted prices, thus devaluing the brand. They actively sought opportunities to demonstrate this philosophy. When senior executives addressed audiences, they would have a fine crystal piece on display. While presenting, the executive would note with feigned surprise that the piece was flawed. A great show would then be made of smashing the creation before the audience's very eyes - a dramatic reaffirmation of the firm's refusal to tolerate "seconds". Several approaches have been developed to measure customer brand equity, incorporating inclusion in customers’ consideration sets, customer-based perceived quality, and preference and/or satisfaction comparisons of the branded product with a similar generic product. A particularly popular method is the “dollar-metric” approach in which customers are asked how much they would pay for both the branded product and a similar generic product. The difference is then a financial measure of customer brand equity.
Conclusion Brand equity is a critical outcome, not only of marketing strategy, but also of overall corporate performance. By focusing only on what brand equity means to the organization however, managers may indeed be selling the concept short. In this article we have argued that there are two sides to brand equity – organizational, and customer. A solid understanding of both terms, a measurement and a management thereof, will enable executives to drive brands to greater heights. What the brand means to the organization is rather obvious – what is perhaps more important today is for marketers to practice what they have always preached: A
focus on the customer. Understanding brand equity from the customer’s perspective as well as the organization’s is becoming paramount.
References Aaker, D.A. (1996) Managing Brand Equity: Capitalizing on the Value of the Brand Name, New York, NY: The Free Press. Berthon, P.R. (1999) Identifying Enacted Brands, Unpublished Working Paper, Department of Marketing, School of Management, University of Bath, Bath, UK (used with the author’s permission) Berthon, P.R., Hulbert, J, and Pitt, L.F. (1999) Brand Management Prognostications, Sloan Management Review, 40, 2 (Winter), 53 - 65 Keller, K.L. (2000) The Brand Report Card, Harvard Business Review, Jan-Feb, 18-26 Philip Morris: Marlboro Friday (A) (1996) Harvard Business School Case no. 9-596-001, Boston MA: Harvard Business School Publishing Snapple (1999) Harvard Business School Case Study, 9-599-126, Boston MA: Harvard Business School Publishing
