The Theoretical Separation of Brand Equity and Brand Value : Managerial Implications for Strategic Planning

During the past 15 years, brand equity has been a priority topic for both practitioners and academics. In this article, the authors propose a new framework for conceptualizing brand equity that distinguishes between brand equity, conceived of as an intrapersonal construct that moderates the impact of marketing activities, and brand value, which is the sale or replacement value of a brand. Such a distinction is important because, from a managerial perspective, the ultimate goal of brand management and brand equity research should be to understand how to leverage equity to create value. Separating Equity and Value 3 THE THEORETICAL SEPARATION OF BRAND EQUITY AND BRAND VALUE Brand Equity versus Brand Value In this paper we present a new conceptual model that establishes brand equity and brand value as two distinct constructs. Brand equity moderates the impact of marketing activities on consumers’ actions, implies a consumer-based focus, and represents one of many factors that contribute to brand value, which we define as the sale or replacement value of a brand, and which implies a company-based perspective. We believe that one of the primary reasons no generally accepted measure of brand equity has surfaced in the past 15 years is that brand equity and brand value frequently are treated as the same construct (e.g., Keller and Lehmann 2002, p. 1; Krishnan 1996, p. 390; Rust, Zeithaml, and Lemon 2004b, p. 118; Simon and Sullivan 1993, p. 29). We suggest that the first step required to understand “true” brand equity is to develop a conceptual framework that clearly separates the concepts of brand equity and brand value. In making this distinction, we argue that most of the outcome measures used in previous brand equity research have focused more on brand value than on brand equity. We subsequently provide more precise definitions, but for conceptual purposes at this point, we suggest that brand equity represents what the brand means to the consumer, whereas brand value represents what the brand means to a focal company (Srivastava and Shocker 1991). Therefore, each represents not only a distinct construct but a unique perspective as well. Separating the two constructs opens a discussion about the ways that brand equity contributes to brand value (cf. Keller and Lehmann 2002; Rust, Zeithaml, and Lemon 2004) and how both can be increased, which should be the focus of both researchers and practitioners. Separating Equity and Value 4 We note that our focus is on customeror consumer-based brand equity throughout the paper, but the concepts could easily be extended to consider other constituencies (e.g., suppliers, partners, distribution, etc.). In their award-winning paper, Ailawadi, Lehmann and Neslin (2003) basically argue that brand equity is when more people line up to pay more for a branded versus nonor otherbranded offering. We allow that this is one potential outcome of brand equity, but this outcome is not necessary to establish brand equity’s existence, since it presupposes and requires competition, as well as purchase. We suggest that it is possible for a pioneering brand that has established a new category to build brand equity during the time when competitors do not yet exist. Consider Apple’s iPod. Introduced in October, 2001, we suggest that its continued leadership more than five years after introduction is due to the positive equity built during the time before it faced competition. Likewise, it should also be possible for a brand that has a legal monopoly and faces no competition, to build brand equity, just as it should be possible for a store brand or “value” brand to build equity without the manifestation of large sales numbers or price premiums. Consider the Rolex brand. A small sample of Ph.D. students at a large Midwestern U.S. university all agreed that Rolex has brand equity. But when asked who has or would purchase a Rolex watch, not one of the students said they own or plan to purchase a Rolex. The fact that a person decides to not purchase a brand is not proof that brand equity does not exist. In the same fashion, the fact that a person does purchase a brand – even at a price premium – cannot be conclusive proof that brand equity does exist. Purchase may indicate only that the brand is just objectively good (Keller 1993) and that a nonlinear relationship exists between the amount of “goodness” that the brand possesses (over competitors) and price. Therefore, while large market Separating Equity and Value 5 share or price premium may be outcomes of brand equity, these outcomes by themselves, are neither necessary nor sufficient to establish equity. As Keller (2003a, p. 597) asserts, “Any potential encounter with a brand—marketing initiated or not—has the opportunity to change the mental representation of the brand and the kinds of information that can appear in consumer memory.” Such an encounter may occur when a consumer views only the name, logo, or packaging of the brand and automatically generates perceptions about and/or associations with the brand. These perceptions and/or associations contribute to brand equity. Thus, we suggest it is not possible for a brand to have no brand equity. In other words, because it is hard to imagine a brand void of any associations, even if small, some level of brand equity must always exist. The distinction between equity and value becomes clear if we imagine two firms bidding to purchase a brand from a third firm. At a particular point in time, assuming an objective measure of brand equity exists and is used by all three firms, each firm should be looking at the same “number” for the brand’s equity. However, the different prospective owners might develop totally different brand valuations on the basis of their existing capabilities and resources, which would impact their ability to leverage that brand equity to generate value. Likewise, the value of the brand to a particular bidder may increase (decrease) if the new owner is (not) able to leverage existing brand equity. Different bid prices do not represent different assessments of brand equity calculated by the firms but rather different valuations based on their perceived abilities to leverage existing and build new brand equity. Moreover, if a purchase takes place, the purchaser’s valuation must have been higher than that of the current owner (Barwise et al. 1990), again suggesting the idiosyncratic nature of brand value. It should follow that because the prospective owner determines a valuation for a brand prior to purchase, brand equity does not immediately increase for consumers when ownership is transferred. Brand equity may increase Separating Equity and Value 6 when consumers become aware of the new ownership, but only if consumers hold positive associations for the new owner and these positive associations contribute to increased equity. Figure 1 presents a simplified version of the process a firm might follow to value a brand. Basically, the valuation process is approached from the perspective of the firm and involves “following the money” as it flows from the marketplace into the firm and then tracking how this activity impacts shareholder value. . Starting with marketplace activity, individual-level outcomes (e.g., purchase) are aggregated up to a brand level and these brand-level outcomes directly impact the value of the brand. Ultimately, the value of the brand impacts shareholder value. This is a reasonable process for valuation, but in much of the marketing literature, the first two boxes (individualand brand-level outcomes) have become accepted as measures of brand equity. We believe this is inappropriate and may produce an inaccurate measure of true brand equity. As demonstrated above, brand equity may account for the presence of some of these outcomes, but focusing on outcomes confounds objective goodness of products with equity, and does not account for equity that may exist among those who are not prospects for a brand. __________________ Figure 1 here __________________ What Figure 1 lacks is an explanation for where the individual-level outcomes come from. To understand the source of these outcomes, it is necessary to take the consumer’s perspective. Figure 2 shows how the environment, with all its information (marketing-related and not) contributes to brand knowledge, which Keller (1993) links with brand equity. Consumer-based brand equity then impacts the individual-level outcomes that are observable in the marketplace. Even if we have multiple observations for a single individual, it is still critical to control for alternative explanations (e.g., objectively good products) before concluding that Separating Equity and Value 7 marketplace actions are caused by brand equity, and we must be careful to not assume that measures of brand equity based on individual-level outcomes fully capture all of a brand’s brand equity. __________________ Figure 2 here __________________ A specific case that demonstrates the distinction between equity and value is the $1.7 billion purchase of Snapple by Quaker Oats in 1994. Quaker Oats’ distribution strength rested in supermarkets and drug stores, not the smaller convenience stores and gas stations that constituted more than half of Snapple’s sales at the time of purchase (Feder 1997). Because Quaker Oats was unable to increase supermarket and drug store sales enough to compensate for lost convenience and gas station sales, Quaker was forced to sell Snapple for a mere $300 million only three years later. In this case, Snapple’s brand value decreased enormously over the three years that Quaker Oats owned it, but this decrease may have had nothing to do with its brand equity, which could have stayed the same over this time period or even increased due to its new exposure in supermarkets and drug stores. In other words, neither a brand’s purchase price nor a dramatic change in its selling price provide information about the magnitude or movement of a