MEASURING THE FINANCIAL VALUE OF BRAND EQUITY : THE PERPETUITY PERSPECTIVE

This paper introduces the perspective of a brand as a perpetual firm asset. From this perpetuity perspective, brand equity is defined as the financial value that a firm derives from customer response to the marketing of a brand. Rooted in this perpetuity perspective, brand perpetual value is developed as a financial measure of brand equity, where brand perpetual value is calculated as the value of a perpetuity. The relationship to previous perspectives on brand equity and the potential applications of the brand perpetual value measure are discussed. Introduction 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. A standard measure of brand equity that can be tracked longitudinally would also allow marketers to evaluate changes in a brand’s value over time, helping to evaluate the effects of changes in marketing strategies or tactics, competitive factors, or managerial impact. Developing a financial measure of brand equity would address MSI’s top priority of increasing accountability and measuring ROI of marketing expenditures (MSI 2008). 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 (Aaker 1991, Keller 1993, 2002), a price or revenue premium compared to a benchmark competitor (Aaker 1991, Ailawadi et al 2003), and a stock price premium (Simon and Sullivan 1993). These three perspectives on the meaning of brand equity have given rise to a multitude of proposed brand equity measures in the academic arena. Amid academia’s definitional and measurement variability, professionals have developed their own measures of brand equity. These measures depend on various assumptions, which differ between measures. As a result, brand equity estimates vary widely. For instance, the brand equity for Google in 2007 ranged from $17 billion to $66 billion – more than three times as much! – depending on the measurement scheme employed (Knowles 2008). Clearly, academia needs to develop a financial measure for brand equity that can gain credibility and acceptance by the professional community. The purpose of this article is to propose a definition and measure of brand equity that can accommodate the contributions of the various perspectives already proposed by academic researchers, and attain acceptance by the professional community. Doing so will require adopting the perspective that a brand is a perpetual firm asset – that is, one with potentially infinite life. Based on this perpetuity perspective, brand equity is defined as the financial value that a firm derives from customer response to the marketing of a brand. Brand perpetual value is MEASURING THE FINANCIAL VALUE OF BRAND EQUITY: Journal of Business Administration Online Vol. 10, No. 1, Spring 2011 2 developed as a financial measure of brand equity, which adopts the formula of a perpetuity as a measure of brand equity. This paper is intended to benefit both the study and management of brands. Academic researchers can benefit from the introduction of the perpetuity perspective of brand equity, which allows for the definition and measurement of a brand’s value. This objective financial measure can aid scholars in studying other aspects of brand management, such as exploring the perceptual and managerial antecedents that impact brand equity, the effects of brand extensions on family brand equity, or the effects of brand equity on firm performance. Marketers should also benefit from this paper, by acquiring a measure that allows them to assign a dollar value to their brands for the purposes of financial reporting, evaluating the effectiveness of brand management policies, or determining the effectiveness of managerial performance. The 4Ps of Brand Equity There exist three main perspectives on brand equity. The conceptual definitions of each will be explained. The contributions and limitations of each will also be examined. Finally, a fourth perspective – the perpetuity perspective – will be introduced. The Perception Perspective The first perspective on brand equity is the cognitive psychology view, which will be referred to as 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 (Aaker 1991, Feldwick 1996, Keller 1993). Second, it views brand equity as an added value (Aaker 1991, Biel 1992, Keller 1993). These are apparent in the words used in the perception perspective’s 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. The perception perspective offers several valuable insights about brand equity. Foremost, it identifies customers’ perceptions of a brand as paramount in creating brand equity. Because consumers retrieve their mental imagery for a brand when making a brand evaluation, it is vital that a perspective on brand equity acknowledge the importance of brand image. Additionally, the perspective asserts that consumers’ brand perceptions impact cash flow, in the sense that customers are willing to pay higher prices for brands with more favorable brand imagery. Finally, the perspective contributes the notion that brand perceptions (and behaviors) result from the firm’s marketing efforts. This is especially noted in the consumer-based brand equity model, which states that brand equity results from “customer response to the marketing of the brand” (Keller 1993, p. 2). Unfortunately, the perception perspective has several limitations. 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 good’s functional utility. The perception perspective assumes that a brand name can be removed from a product without MEASURING THE FINANCIAL VALUE OF BRAND EQUITY: Journal of Business Administration Online Vol. 10, No. 1, Spring 2011 3 changing the evaluation of the product’s performance attributes. However, this assumption is disproved by research demonstrating that brand names have an interactive effect with product features (Rangaswamy et al 1993). Removing a brand’s name or replacing it with another would not only change customers’ evaluations of the good directly, but also change their evaluations of the good’s non-brand attributes. Therefore, the brand name is not separable from the rest of the good. Rather, the name is merely one part of a holistic mental representation of the good, which interacts with other perceptions to generate an overall brand image in consumers’ minds. The Premium Perspective A second perspective on brand equity will be referred to as the “premium perspective. ” Following from the perception perspective’s notion of “added value,” this view suggests that a brand name’s added value is reflected in a price (Aaker 1991) or revenue premium (Ailawadi et al 2003). 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. The benchmark comparison is sometimes taken to be a generic or store brand, and other times thought of as a “white box,” or unbranded good. The premium perspective provides a valuable contribution to brand equity. Without contradicting the perception perspective’s 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. However, the premium perspective’s proposed benchmarks for determining price and revenue premiums are problematic. Store brands differ by retailer and geographic location. Therefore, a premium between a brand and store label calculated in a New York grocery store may yield a vastly different brand equity value than the premium calculated in a California convenience store. Comparing a brand against an unnamed good is impractical, as well. There are very few examples of truly unnamed goods in the marketplace, but perhaps a produce commodity would be the best example. However, even an unbranded banana in a grocery store holds certain cognitive associations that transfer from the retailer’s brand image. 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 firm’s market capitalization, the excess equity is the value of intangible brand portfolio assets (Simon and Sullivan 1993). The portfolio perspective introduces several notions about brand equity. First, it is a dollar value t