Models of Brand Equity

Brand Asset Valuator Model

This was developed by the ad agency Young & Rubicam. It
measures Brand Value by applying four broad factors:
Differentiation: It is the ability for the brand to stand
apart from its competitors. Brand health is built and
maintained by offering a set of differentiating promises
to consumers and delivering those promises to leverage
value.
Relevance: It is the actual and perceived importance of
the brand to a large consumer market segment. This
gauges the personal appropriateness of a brand to
consumers and is strongly tied to household penetration.
 Brand Asset Valuator Model
Esteem: It is the perceived quality and consumer perceptions
about the growing or declining popularity of a brand. The
consumers response to a marketers' brand building activity is
driven by his perception of two factors: quality and popularity,
both of which vary by country and culture.
Knowledge: It is the extent of the consumers awareness of
the brand and understanding of its identity. The awareness
levels of the brand and what it stands for shows the intimacy
that consumers share with the brand.

Differentiation and Relevance taken together determine a

brands growth potential (Brand Vitality), while Esteem and
Knowledge determine the current power of the brand (Brand
Stature).
 Brand Dynamics Pyramid Model
The Brand Pyramid illustrates the five key stages that
customers go through as they build loyalty to a
brand, product, or organization. The five stages are:
Presence.
Relevance.
Performance.
Advantage.
Bonding.
 Brand Dynamics Pyramid Model
This process model consists of five steps
(presence, relevance,performance, advantage
and bonding), with each stepup on the
pyramid denoting a greater level of brand
loyalty.
The width of a slice represents the number of
consumers that are loyal to the brand when it
has reached that level.
 Brand Dynamics Pyramid Model
The five steps to the top of the pyramid are, in
upward direction:
Presence: It is a kind of familiarity that also yields
brand loyalty. It involves instating active familiarity
based on trial, salience or knowledge of the brand
promise.
Relevance: At this stage, the brand promise has to be
relevant to the customer. If a customer does not feel
that a brand will at least meet a need, he will not
consider buying it. So apart from familiarity, added
value will have to be offered in terms of functionality
or image.
 Brand Dynamics Pyramid Model
Performance: This concerns the performance of the brand,
and whether it offers benefits in relation to the market
standard. In this phase, the brand will at least have to attain
the generally accepted quality benchmark for its market.
Advantage: This is where a brands competitive edge over
other brands comes in. This is when the brand has to
outperform the average quality standard of the market.
Bonding: The closest bond between brand and customer is
achieved when the customer will always buy the brand
product on the basis of stong rational or emotional belief in
its superiority. Consumers in this phase tend to be brand
ambassadors.
Financial Valuation of Brand Equity
Developing a financial measure of brand equity is crucial for
effective brand management.
Quantifying the dollar value of a brand would allow firms to
report brand asset values in financial statements, and
assign an objective value to a brand during sale or
acquisition.
Although the idea of a standard brand equity measure has
great appeal, there is much disagreement about what
brand equity means, and how it should be measured.
There exist three main perspectives on brand equity. These
include the notions of brand equity as: a set of cognitive
associations , a price or revenue premium compared to a
benchmark competitor, and a stock price premium
 The Perception Perspective
The underlying premise of the perception perspective is
twofold. First, it asserts that brand equity is a mental
representation in consumers minds. Second, it views brand
equity as an added value.
These are apparent in the words used in the perception
perspectives definitions of brand equity: awareness,
associations, attachment, beliefs, knowledge, and
perceived quality all refer to cognitive representations,
while added value, additional cash flow, and differential
effect refer to value that a brand name adds to a good.
In short, this perspective views brand equity as the
cognitive perceptions that consumers hold about a brand,
which yield value separable from the functional utility of
the good.
 Limitations of the Perception
Perspective
First, it offers a myriad of measures for brand
equity, failing to specify a single standard.
Second, most of these measures are non-
financial, failing to offer an objective dollar value
for a brand.
Third, the perspective believes that brand
perceptions are wholly separable from a goods
functional utility. The perception perspective
assumes that a brand name can be removed from
a product without changing the evaluation of the
products performance attributes.
 The Premium Perspective
Following from the perception perspectives notion of added
value, this view suggests that a brand names added value is
reflected in a price or revenue premium.
The concept is that brand equity can be observed in the difference
in unit price or total revenue between the branded good and a
benchmark good (generic or store brand).
Without contradicting the perception perspectives concept that
brand equity is rooted in consumers cognitive associations of brand
image, the premium perspective proposes that these associations
affect consumer behavior, which is reflected in the price paid and
volume purchased in the marketplace.
As a result, the premium perspective hints at a process by which
brands capture financial value stemming from favorable brand
imagery.
 Limitations of the Premium
Perspective
The premium perspectives proposed benchmarks for
determining price and revenue premiums are
problematic. Store brands differ by retailer and
geographic location.
Comparing a brand against an unnamed good is
impractical, as well. There are very few examples of
truly unnamed goods in the marketplace.
Because premiums calculated against store brands are
inconsistent and those computed against unnamed
brands are impossible, the premium perspective fails to
provide practical guidance.
 The Portfolio Perspective
A third perspective on brand equity is the financial markets view,
which will be referred to as the portfolio perspective.
This perspective views brand equity as a stock price premium that
investors grant to a firm, based on its portfolio of brand assets.
That is, after subtracting the tangible asset value from the firms
market capitalization, the excess equity is the value of intangible
brand portfolio assets.
The portfolio perspective introduces several notions about brand
equity. First, it is a dollar value that is reflected in a firms stock
prices.
Second, the portfolio perspective acknowledges that brands have a
future value. Brand equity is not simply a present-period value
based on current cognitive associations. Rather, it is a net present
value of future cash flows resulting from brand sales.
Limitations of the Portfolio Perspective
By using the firm as the level of analysis, the portfolio perspective is
unable to compute the value of individual product-level brands or
brand exemplars.
While this may not be a problem for a branded house like Dell, it
would be a fatal flaw for a house of brands such as Procter and
Gamble.
Additionally, the portfolio perspective is unable to differentiate
brand assets from other intangible assets.
Finally, this perspective places brand equity at the mercy of
macroeconomic influences.
Rather than changing with consumers attitudes and competitive
forces, brand equity would also fluctuate due to oil shocks, military
conflicts, interest rates, and other factors that influence stock prices
but have no effect on brand image associations.
 Brand Valuation Approaches
Brand Valuation can be defined as the process
used to calculate the value of a brand or the
amount of money another party is willing to
pay for it or the financial value of the brand.
While brand equity deals with a consumer
based perspective, brand value is more of a
company based perspective.
There are four major brand valuation
approaches:
 Cost Based Approach
It is the approach more often used by Aaker
and Keller and is primarily concerned with the
cost in creating or replacing the brand.
It can be further divided into the following
methods:
Accumulated or Historical Cost Method
Replacement Cost Method
Use of Conversion Model
Customer Preference Model
 Accumulated cost method: It aggregates all
the historical marketing costs as the value. In
other words, the method involves historical
cost of creating the brand as the actual brand
value.
Replacement cost method: This method
values the brand considering the expenditures
and investments necessary to replace the
brand with a new one that has an equivalent
utility to the company. Aaker proposes that
the cost of launching a new brand is divided
by its probability of success.
 Use of conversion model: This method estimates the
amount of awareness that needs to be generated in order to
achieve the current level of sales. This approach would be
based on conversion models, i.e., taking the level of
awareness that induces trial that further induces regular
repurchase. The output so generated can be used for two
purposes: to determine the cost of acquiring new customers
and would be the replacement cost of brand equity.

Customer preference model: Aaker proposed that the

value of the brand can be calculated by observing the increase
in awareness and comparing it to the corresponding increase
in the market share. But he had identified the problem with
this being how much of the increased market share is
attributable to the brands awareness increase and how much
to other factors.
 Market based approach
This approach basically deals with the amount at
which a brand is sold and is related to highest
value that a willing buyer & seller are prepared
to pay for an asset. This approach is most
commonly used when one wishes to sell the
brand and consists of methods herein stated:
Comparable approach or the brand sale comparison
method
Brand equity based on equity evaluation method
Residual method
 Comparable approach: This method involves valuation
of the brand by looking at recent transactions involving
similar brands in the same industry and referring to
comparable multiples. In other words, this method
takes the premium (or some other measure) that has
been paid for similar brands and applies this to brands
that the company owns.
The advantage of this approach is that it looks at a
third party perspective that is, what the third party is
willing to pay and is easy to calculate but the flaw in
this method is that the data for comparable brands is
rare and the price paid for a similar brand includes the
synergies and the specific objectives of the buyer and it
may not be applicable to the value of the brand at
issue.
 Brand Equity based on Equity
Evaluation Method
Simon and Sullivan believe that brand equity
can be divided into two parts:
The demand-enhancing component, which
includes advertising and results in price premium
profits,
The cost advantage component, which is obtained
due to the brand during new product
introductions and through economies of scale in
distribution.
Hence, they basically estimated the value of
brand equity using the financial market value.
 Residual Method
Keller has proposed the valuation of the brand
by means of residual value which would be
when the market capitalization is subtracted
from the net asset value. It would be the value
of the intangibles one of which is the brand.
Similar to portfolio perspective.
 Income Based Approaches
This approach is the valuation of future net earnings directly
attributable to the brand to determine the value of the brand in its
current use.
This method is extremely effective as it shows the future potential
of a brand that the owner currently enjoys and the value is useful
when compared to the open market valuation as the owner can
determine the benefit foregone by pursuing the current course of
action.
The methods used under this approach are:
Royalty relief method
Differential of price to sales ratios method
Price premium method
Brand equity based on discounted cash flow
Brand equity based on ROI, ROA and economic value added
 Royalty relief method: The Royalty Relief method is
the most popular in practice. It is premised on the
royalty that a company would have to pay for the use
of the trademark if they had to license it. he
methodology that needs to be followed here is that the
valuer must firstly determine the underlining base for
the calculation (percentage of turnover, net sales or
another base, or number of units), determine the
appropriate royalty rate and determine a growth rate,
expected life and discount rate for the brand.
The Differential of Price to Sale ratios Method: This
method calculates brand value as the difference
between the estimated price to sales ratio for a
branded company and the price to sales ratio for an
unbranded company and multiplies it by the sales of
the branded company.
 Price Premium Method: The premise of the price
premium approach is that a branded product
should sell for a premium over a generic
product. This method calculates the brand value
by multiplying the price differential of the
branded product with respect to a generic
product by the total volume of branded sales. It
assumes that the brand generates an additional
benefit for consumers, for which they are willing
to pay a little extra.
Brand equity based on discounted cash flows:
This method calculates the brand value by
determining the future cash flows (profit)
attributable to the brand and discounting it using
an appropriate discount factor.
 Brand equity based on ROI, ROA and
economic value added: These models are
based on the premise that branded products
deliver superior returns, therefore if we value
the excess returns into the future we would
derive a value for the brand. This method is
easy to apply and the information is readily
available, but there is no separation between
brand and other intangible assets and does
not adjust, by their volatility, the earnings of
the two companies compared, including
discount rate.
 Formulatory Approach
These approaches are those that are extensively used
commercially by consulting organizations.
This approach is similar to the income or economic use
approach differing in the magnitude of commercial
usage and employing multiple criteria to determine the
value of the brand.
Within formulary approaches are the following
approaches:
Interbrand Approach
Financial World Method
Brand Equity Ten
Brand Finance Ltd.
 Interbrand Approach
Interbrand is a brand consultancy firm, specializing in areas
such as brand strategy, brand analytics, brand valuation,
etc.
It determines the earning from the brand and capitalizes
them by making suitable adjustments.
The firm bases its brand valuation on financial analysis, role
of the brand and brand strength.
The firm attempts at determination of brand earnings by
means of using a brand index which is based on 7 factors
namely leadership, internationalization/geography,
stability, market, trend, support and protection in the
descending order of weightage.
 Financial World Method
The Financial World magazine method utilizes the
brand index, comprising the same seven factors
and weightings.
The premium profit attributable to the brand is
calculated differently. This premium is
determined by estimating the operating profit
attributable to a brand, and then deducting the
earnings of a comparable unbranded product
from this.
The resulting premium profit is adjusted for taxes,
and multiplied by the brand strength multiplier.
 Brand Equity Ten
As stated by Aaker, the Brand Equity Ten Method
measures brand equity through 5 dimensions
loyalty, perceived quality or leadership measures,
other customer oriented association or
differentiation measure like brand personality,
awareness measures and market behavior
measures like market share, market price and
distribution coverage.
Brand Equity ten, thus, looks at the customer
loyalty dimension of brand equity and the
measures to create a measurement instrument.
 Brand Finance Ltd. Method
Brand Finance Ltd. is a UK based consulting
organization which undertakes brand valuation by
means of identifying the position of the brand in
the competitive marketplace, the total business
earnings from the brand, the added value of total
earnings attributed specifically to the brand and
beta risk factor associated with the earnings.
On the value so obtained, it discounts the brand
added value after tax at a rate that reflects the
brand risk profile.