Calculating the Dollar Value of Brand Equity

Researchers develop a method for managers to figure out how much more a company will earn if it invests in certain branding initiatives.

February 01, 2006

| by Stanford GSB Staff


People view the artworks “Coca-Cola” (R) by Andy Warhol, and “Ice Cream Soda,” by Roy Lichtenstein, on display at the Sotheby’s Autumn Sales in Hong Kong.

When I upgraded my car from a Geo Prizm to a Toyota Corolla, I felt that I had upgraded my life. Here I was in a higher-quality vehicle that was more attractive—and no doubt safer. Wasn’t I surprised, then, to find out that the Corolla was exactly the same car as the Prizm, made by the same manufacturing facility in Fremont, Calif. Only the name—and the brand image—had been changed. Knocking my forehead in disgust, I realized that not only could I have had a V8, I could have saved myself money, too. And that, say the experts, is the beauty of branding.

“There are numerous such instances of ‘twins’ all around us—products that are identical except for the branding, where one brand sells much better than another,” says V. “Seenu” Srinivasan, the Adams Distinguished Professor in Management at the Graduate School of Business. Most managers would give five years’ worth of stock options to figure out just how much brand equity is worth in dollar terms. Now, thanks to the work of Srinivasan and his colleagues in Seoul, Korea, they just may have the magic market research method for doing so.

Srinivasan, along with Korea University Business School Professor Chan Su Park, Ph.D. ‘92, who was Srinivasan’s advisee as a student, and Yonsei Business School Professor Dae Ryun Chang, has come up with a mathematical model and a market research method that allows managers to figure out how much more the company will earn if it invests in various kinds of branding activities. This is a significant contribution in a field in which the best that most researchers and marketing wizards alike have been able to do is measure consumers’ brand image, but not its effects in dollars and cents.

Srinivasan and his colleagues first developed an operational definition of exactly what “brand equity” is. “Having a better product or a larger sales force is not brand equity,” he explains. “Brand equity is that incremental value that accrues to a product when it is branded.” Simple brand awareness is one source of brand equity. “If you can get your name to pop up in people’s minds when they think of the product category, you’ve won a big part of the battle,” he says.

Srinivasan and his colleagues also have identified two other sources of brand equity: a consumer’s perception that a brand is better than it really is (“attribute-based” equity), and nonattribute-based equity, for instance, a consumer’s preference for a brand based on the cachet of owning it. “If you’re successful in these three aspects, an added benefit is that stores will feel a customer pull to carry your product, and so your availability—and hence sales—will increase,” Srinivasan says.

In doing calculations on cellular phone brands in Korea, Srinivasan found that simple awareness—getting the brand’s name to pop up in consumers’ minds—generates the largest return, followed by consumers’ responding to the cachet of owning the brand (nonattribute-based equity). Attribute-based equity trails in third place. “This means that a brand’s ‘image’ provides a stronger incentive for buying even than the perception that it is a better product,” he explains. “But greater awareness of your brand is the major component driving brand equity.”

By taking into account the direct effects of these three sources of equity on customers’ choices, and also the indirect effects of enhanced brand availability, Srinivasan and his colleagues estimated that Samsung, for example, earned $127 million per year from brand equity, topping the chart of companies that compete in the cell phone market in Korea. “We don’t know how much they spent on advertising and other brand-building activities over the years, so at the end of the day we can’t say for sure whether investing in branding activities generated more money than it cost,” Srinivasan acknowledges.

Despite such limitations, Srinivasan’s model is helpful for understanding the sources of brand equity and doing “what-if” analyses to predict the likely impact of alternative strategies to enhance brand equity. “Say an ad agency guarantees that it can increase your company’s brand awareness by a certain percentage if you spend a certain amount of money. Our model can tell you what the effect will be on the bottom line,” Srinivasan says. “That’s new.”

Because the study is the first to develop a detailed model of how the different sources of brand equity contribute to the bottom line, it can be used to evaluate the impact of alternative brand-building strategies. For instance, in the Korean cell phone market, Samsung is perceived to be the best in terms of voice quality—a perception that goes beyond what objective comparisons actually reveal. Thus side-by-side product comparison tests could be used by one of Samsung’s competitors to persuade consumers through advertising that their product provides voice quality that is just as good as Samsung’s. The new method would allow managers to evaluate the bottom-line implications of such a strategy.

Coke may want to take note. In branded taste tests their diet elixir comes out on top, even though in blind taste tests Diet Pepsi takes the prize. The difference in revenues? Enterprising soda executives now have a method for finding out.

–Marguerite Rigoglioso

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