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Quantifying Brand Equity as a Measure of Marketing Effectiveness

Abstract:In recent years there has been increasing pressure on marketing managers to be more

accountable. In this study the authors explain the potential dimensions of marketing performanceand in doing so distinguish between the concepts of marketing efficiency and marketingeffectiveness. By defining effectiveness as the extent to which an organization tries to satisfy itscustomer’s needs, this paper will focus on the effectiveness aspects of marketing performancemeasurement. Based on the marketing value chain we propose that the link between marketingstrategy/activity and financial outputs are marketing intangible assets such as brand equity. Onthis basis the valuation of brand equity and the identification of the relationship betweenmarketing expenditures and brand equity on the one hand and brand equity and financialoutcomes on the other hand is an essential task of marketing management. Considering brandequity as one of the metrics for marketing effectiveness, we review the drivers and measures ofbrand equity. Finally, we suggest our approach to quantify brand equity and also the linkagebetween the intangible assets of marketing and financial assets.

Introduction

The evaluation of marketing performance is recognized as a key task for management(Llonch, Eusebio and Ambler, 2002). However, measuring the impact and the value of marketinghas been a long standing problem for senior marketing managers (Clark, 1999; Kokkinaki andAmbler, 1999; Marketing Week, 2001; Barwise and Farley, 2004). In response to this pressurethe Marketing Science Institute (MSI) placed accountability and return on investment ofmarketing expenditure at the top of its research priorities for 2008–10 (MSI 2008). According toChristodoulides and Chernatony (2010), financial measures such as sales and profit provide onlypartial indicators of marketing performance due to their historical orientation and typically short-term horizon (Mizik & Jacobson 2008).

Intangible, market-based assets, on the other hand, provide a richer understanding ofmarketing performance, reconciling short-and long-term performance (Ambler 2003) as well asbridging marketing and shareholder value (Srivastava et al. 1998). To this end we focus on brandequity as one of the major intangible marketing assets (Ambler, 2003). We argue that if we canformulate a generalizable measure of brand equity across all organizations we can then measurethe effectiveness of marketing strategies and actions over the years. Christodoulides andChernatony (2010) noted that previous research established the positive effect of brand equityon: consumer preference and purchase intention (Cobb-Walgren et al. 1995); market share(Agarwal & Rao 1996); shareholder value (Kerin & Sethuraman 1998); consumer priceinsensitivity (Erdem et al. 2002). Understanding the drivers and dimensions of brand equity willbe useful in measuring this marketing asset. This paper provides a brief review of methodologiesin measuring brand equity and also criticisms of current measurements and methodologies.Finally the authors will provide suggestions to develop a generalizable measure of brand equityacross all organizations.

Marketing Performance MeasurementOne of the first attempts to measuring marketing performance was Clark (1999). He

provided a review of the history of measuring the performance of marketing and suggested three

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shifts (Gao, 2010). That is, the move from use of financial to non-financial measures; from themeasurement of just the output to measuring the marketing input as well and finally from the useof one-dimensional to the use of multidimensional measures of performance.

Ambler et al. (2004) suggested five perspectives as theoretical background of metricselection containing control, agency, institutional, market orientation theory and brand equityApart from the background perspectives in measuring marketing performance mentioned above,there is a need to better distinguish some concepts relevant to measuring performance such asefficiency and effectiveness. In the marketing literature, marketing effectiveness is described asthe extent to which marketing actions have helped the company to achieve its business goals(Ambler et al, 2001). The majority of studies of marketing effectiveness have relied essentiallyon the use of one or more of three key approaches developed by Kotler (1977), Hooley andLynch (1985) and Carson (1990) which are Structure (a structure that reflects a strategy of beingcustomer-focused.), Culture (assess if the company's culture exhibits shared values, beliefs andcorporate commitment to the marketing concept), and Learning organization (examinemanagement receptivity to, and absorptive capacity for, organizational learning in its marketingenvironment) (Connor and Tynan, 1999; Gao, 2010).

The measurement of marketing efficiency is difficult because the diversity of marketingactions as inputs and the possible time gap between input and output and the indirect effects ofinputs also complicate the measurement of marketing efficiency. Nevertheless every singlemarketing activity such as an advertisement finally will result in an increase or decrease in someintermediate outcomes such as brand awareness which will affect financial results (Stewart,2009). Therefore in this research we will concentrate on marketing effectiveness and propose aframework for using brand equity as the measure of effectiveness.

Brand Equity

There are many different definitions of brand equity. For example, brand equity hascommonly been defined as a set of assets (and liabilities) linked to a brand’s name and symbolthat adds to (or subtracts from) the value provided by a product or service to a firm and/or thatfirm’s customers (Aaker 1996). Four prominent dimensions for brand equity include loyalty,perceived quality, associations, and awareness (Aaker 1996). Keller (1993) suggested anotherdefinition for brand equity from a consumer psychology perspective and defined this customerbased brand equity as ‘the differential effect of brand knowledge on consumer response to themarketing of the brand’. Kotler (2003) also defined brand equity as “the positive differentialeffect that knowing the brand name has on customer response to the product or service”.

The measurement approaches used with respect to brand equity have also followeddifferent approaches. For example, Keller and Lehmann (2005) identified functionally basedapproaches to the measurement of brand equity: Consumer-based measures: brand value isderived from the mindsets and actions of consumers. These measures rely on brand knowledgestructures in the minds of consumers, and this brand equity can be largely captured by ahierarchy of aspects: from awareness, to association; Product-Market Level outcomes: theseinclude measures of price premiums, increased advertising elasticity, and decreased sensitivity tocompetitors’ prices; Financial-Market level: is based on financial market performance, such asthe component of market value unexplained by financial assets and results.

Abratt and Bick (2003) listed five common brand valuation approaches:Cost-basedapproach: typically the accumulated costs associated with creating the brand; Market-basedapproaches: the amount for which a brand can be sold on the open market; Economic-use or

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income-based approaches: the valuation of future net earnings; Formulary approaches:popularized by organisations such as Interbrand, and Brand Finance, and utilize multiple brand,market, and risk criteria; Special situation approaches: from strategic purchases at a premium,liquidation sales at a discount or special purposes such as tax.

Most scholars, who have tried to measure marketing performance, have used brand equityas one of the dimensions of marketing performance (Table 1).

Table 1: Examples of marketing performance measurement metric categories

Author/s Findings/contributionsAmbler et al (2004) The authors mentioned 19 items as primary general marketing metrics with

regard to six categories of metrics. They classified awareness and brand/ productknowledge in the customer attitudes category.

Peterson et al (2009) Proposed seven distinct categories of metrics which included brand value metricsO’Sullivan andAbela (2007)

Tried to assess marketing performance measurement ability using a 15-item scaleincluded ability to measure Branding

Llonch, Eusebio andAmbler (2002)

Defined 6 different categories of metrics including measures of consumerintermediate. In this category they considered Brand recognition as one of themeasuring metrics.

Seggie et al (2007) Introduced 5 approaches to measurement in marketing. They mentioned BrandEquity as one of the approaches.

Cronholdt andMartensen (2006)

Presenting the value chain of marketing, categorized metrics based on thismarketing value chain. In mental consumer result, they posited some brandrelated metrics such as brand awareness, image, reputation....

Critique of Brand Equity Measurement

Marketing performance measurement (MPM) systems are suffering from an inability tocalculate the short term versus the long term effects of marketing initiatives on concepts such asbrand equity. In fact one of the reasons that chief marketing officers are under pressure toproduce quantitative measures is their inability to effectively explore the outcomes of theirspending. For example we don’t know if we spend one dollar on marketing now, how muchshould be for long term and how much should be for short term. For a marketer finding out theconnection between a dollar spent today and the return three years hence (i.e. forward looking)or the connection between a dollar today and the level of expenditure three years ago (backwardlooking) is everything about quantitative marketing.

Moreover one of the most confusing or conflicting issues in brand equity measurement isthe question of whether brand equity is a long term output of marketing initiatives or a short termoutput. Identifying the weighting applied to short term versus long term marketing investment isalso complicated by different industry and different product life cycle contexts. On the one hand,companies attempt to develop an innovative, unique, and superior marketing mix to retain andacquire more customers so that the long term effect of these different marketing activities couldresult in increases in brand equity or customer equity. On the other hand a bad experience ofcustomers using a specific brand will negatively affect brand image and equity in a short periodof time. So we build brand equity over the years and suddenly damage it in maybe less than ayear.

Another problem associated with the measurement of brand equity is the subjectivedefinition of factors affecting brand equity such as awareness, perceived quality and so on. Thesedrivers are useful when you are designing a marketing strategy or action however they are not

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that useful when trying to measure the financial impact of such measures on brand equity. Thereis a need to convert these subjective concepts to objective concepts (the behavioral metrics) andthen measure them. Brand equity research often falls short in determining the combined linkagesbetween marketing program investments, the changes in customer mindset, and the marketperformance which drives shareholder value (Bick 2009). The measurements used for brandequity are often based on the changes of perceptions, rather than quantifiable financial drivers ofshareholder value.

Suggested Approaches to Measuring Brand Equity

The Statistical approach (the only reason to buy a product is its name)From the statistical perspective, in order to measure the effect of a factor, we should

assess the influence of that treatment on our objects in terms that all other factors are constantand under control. In this case to find out the effect of brand on customer sale behavior (brandequity/sales relationship) we should evaluate how much of sales revenue is just determinedbecause of the brand name. For example if 10% of annual sales revenue for a given companycomes from just the brand name it means even if that company stops all marketing activities, theannual sales revenue will be stay at least on 10% and they don’t need any encouragement to buy.In another words, if a given brand launches a new product the percent of people who go and buythat product without caring about the price, quality, performance or other factors because of thebrand name is the equity of that brand. So we define the brand equity as the percent of customerswho will buy our new product of that brand over the time. So this definition is a combination ofcustomer equity and brand equity. In other word the customer life time value of customers whobuy our product just because of the brand name is the value of our brand.

The Long Term effect versus the Short Term effectWhen using financial ratios we have some constant rates such as the discount rate or

interest rate. In marketing, in order to measure the long term and short term effects of marketingexpenditures we should define some constant rates as the weights applied to long term and shortterm effects. For example we can measure the long term effects of a marketing investment onbrand equity using the assumptions below:

a. Define a five-year time period as the long term. So in 2010 our sale revenue or othermarketing spending outputs are the result of what we have done over the last fiveyears since 2005. (Fig. 1)

b. Let’s assume that the effect of each five year time period is 90%. For example, theeffect of time period from 2005 and 2009 on 2010 is 90% and the effect of timeperiod between 2000 and 2004 on 2010 is .9%. So that the cumulative effect from1995 to 2009 on 2010 is .999%.

c. The effect of each year inside the time period on a given year (2010) is twice that ofthe previous year. For instance the effect of a marketing investment on 2005 is 100%for 2005, 50% for 2006, 25% for 2007, 12.5% for 2008 and 6.25% for 2009

There are thus three items which play an important role: time, marketing spend andspending output. Consider that there is just one output (sales revenue). In order to calculate thechange in brand equity we define:

1. ∆BE= Where S=

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∆S= the percent of change in sales revenue and W= the weight of sales revenue Ti=the time period from 1 to 5

2. ∆S= Where ∆exp= the percent of change in marketingexpenditure

In practice the numbers of factors which affect brand equity are more than one and eachof those factors has more than one driver. So we can extend the equation 1 and 2 to 3 and 4.

3. ∆BE=

4. ∆X=

The tree diagram below (Fig.1) shows the relationship between behavioral reflections tobrand equity and the drivers of these behaviors.

Figure 1: tree diagram of behavioral drivers of Brand Equity

ConclusionIn this study the authors tried to review the brand equity concept and its measures as one of theintangible assets of marketing assets in order to measure the marketing performance. Althoughthere are many factors which affect the value of a given brand or any other intangible assets it isnot an excuse for inability to measure them. In this study we developed an easy simple equationto calculate the change in brand equity according to change in its drivers. We should valuatebrand within the industries. In accordance with Interbrand the Coca Cola is the most valuablebrand in the world. But what will happen if Coca Cola introduce a new laptop? Which percent ofits customers will buy it because of the brand name? By the way According to Stewart (2009)Marketing in 2008 is where quality was 50 years ago. Marketing lacked consistent metrics andstandardized processes. And just as we hear today that identifying standard processes that workacross many industries is difficult, so it was at the beginning of the quality movement whencritics suggested that applying the same metrics and processes to industries as different as jetengines, pharmaceuticals, hotel chains, and consumer package goods was impossible.

Brand Equity

Behaviouralreflective

X1

X2 X j

Y11Y12 Y1k

Y jkYJ2YJ1

Y21

Y22

W1

W2

W j

W jk

Drivers ofBehaviour

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