Germany’s Adidas-Salomon acquired Reebok International for US$3.78billion. This price translated into a 34 percent premium over the going stock price of Reebok at US$43.95. Furthermore, after the merger announcement the stock prices of both brands closed higher than before – Reeboks’ increased by 30% and Adidas’ increased by 7 percent. Why did Adidas pay a 34 percent premium to Reebok? How did Adidas estimate this premium? Why does a brand command a premium beyond its stated market value and more importantly what are the components or a brand’s market capitalization?
These are some of the most pressing issues in the marketing/branding domain today. Given the nature of marketing activities where most activities are targeted at the unpredictable nature of human beings, it is only natural to have a higher degree of ambiguity in terms of quantifiability of results. This article addresses this issue of measuring a brand’s value and proposes a comprehensive model which would allow companies to understand the concept of brand equity in its totality and quantify the value generated by a resonating brand.
The primary objective of boardrooms is to build and sustain shareholder value, and deliver competitive returns to shareholders. At the same time, branding is a very effective catalyst for better leadership and helps the boardroom to drive a shared vision throughout the organization. The boardroom must manage by metrics, and balance short- and long-term perspectives and performance.
There are several stakeholders concerned with brand equity, such as the firm, the customer, the distribution channels, media and other stakeholders like the financial markets and analysts, depending on the type of company ownership. But ultimately it is the customer who is the most critical component in defining brand equity as it is his/her choices that determine the success or failure of the company and the brand. Customer knowledge about the brand, the perceived differences and its effects on purchase behaviour and decisions lies at the heart of brand equity. The knowledge and associations attached to the brand result in choices which have a direct impact on the brand’s financial performance and shareholder value.
Brand equity is the combined measure of brand strength and consists of three sets of metrics: knowledge, preference and financial as has been explained in Asian Brand Strategy. Each of the measures under these three metrics is critical and the boardroom must ensure that the brand portfolio scores high in each of these parameters to optimize the financial outcome from strong brands.
Knowledge metrics: Measures a brand’s awareness and associations through the many stages of recognition, aided, unaided and top of mind recall. Similarly the functional and emotional associations of a brand are important drivers of brand equity. It is crucial for brands to score high on both awareness and association attributes to establish and sustain their presence in the market place.
Preference metrics: Measure a brand’s competitive position in the market and how it benchmarks to competing brands. Customers pass through various levels of preference towards the brand which ranges from mere awareness and familiarity to strong loyalty and recurrent revenues from the customer base. A strong brand has the brand equity to move its customers through the preference funnel towards loyalty.
Financial metrics: Measure a brand’s monetary value through the various parameters of market share, price premium a brand commands, the revenue generation capabilities of a brand, the transaction value, the lifetime value of a brand and the rate at which brands sustains growth. These measures facilitate a company to estimate an accurate financial value of brand equity linked to marketing metrics.
Market share: The metric quantifies the brands share of the market and can be divided into customer segments, product segments and geographical markets. It is an indication of the brands ability to retain and more importantly, attract new customers
Price premium: The financial advantage of a strong brand is its ability to command a price premium in the market. Measuring the differential price points between the brand and competing brands indicates the level of value-creation and the premium adds to the overall brand equity. Price elasticity measures can also be included.
Revenue: The average annual revenue per customer divided into segments, product segments and geographical markets. The trend of this metric illustrates whether the brand extracts more value from customers on an annual basis.
Transaction value: The average transaction value per customer divided into segments, product segments and geographical markets. The trend of this metric shows how well the brand develops its customers, e.g. in form of cross-selling and/or up-selling to other products and brands.
Lifetime value: The average lifetime value of customers divided into segments, product segments and geographical markets. The trend of this metric illustrates whether the brand extracts more value from customers throughout their entire lifecycle with the brand.
Growth rate: The level of brand strength and its equity in the market along with the level of loyalty among customers segments and the pipeline of prospective customers determines the growth opportunity of the brand. The ability of the brand to drive growth adds to its overall equity.
Financial metrics measures the overall value that a company generates from investments made in building and managing brands. Companies need to make sure business drivers and marketing metrics are aligned, so the impact of brand equity on the financial outcome is maximized.
A comprehensive evaluation of brand equity involves measuring all the above three metrics as it ensures that the brand and its strength is valued in totality. Based on the detailed analysis of brand equity, it should be quite clear that brand equity is not just about top line growth but also the bottom line.
Brand equity is an evolving concept. As branding evolves as a discipline, there will be many other aspects that provide input into the concept of brand equity. Therefore this model discussed above is very dynamic in nature in that it can include other metrics as they evolve in the process of calculation the brand value. A word of caution here is very important. Even though brand equity offers a good measure to quantify a brand’s value, it should be noted that marketing/ branding is conceptually different from other input-output disciplines where the ability to quantify is normal. Given the high proportion of intangible results in marketing, it is only natural for the ambiguity to exist. But the model proposed in this article is indeed a very important first step towards quantifying a brand’s value.
Measuring and managing brand equity is a crucial and integrated element of a successful business strategy for Asian boardrooms in their efforts to enhance shareholder value. Brand equity illustrates how well they are performing.
Print ed: 01/09