BRAND EQUITY

MEASUREMENT
There are some like Arthur Anderson
Consultants who have developed an elaborate
methodology to define brand equity. To begin
with, we can divide all definitions available on
brand equity into the following categories:

(a) Cost based;

(b) Price-based; and

(c) Consumer-based.
 BRAND EQUITY

COST-BASED PRICE-BASED CONSUMER-BASED

• Historical cost Price premium Brand knowledge
• Replacement cost Equalisation price Attribute rating
• Market value method Indifferent price Blind test
• Discounted cash flow method
• Brand contribution method
• Interbrand method
 COST-BASED METHODS
1] HISTORICAL COST
This is the money that has been spent on the brand
till date. Suppose Rs.100 million have been spent so
far in creating a brand called ‘X’. The value at which
the brand can be sold to another org. should be
Rs.100 million.
This appeals intuitively though there are several
problems in using historical costs.
First, a prospective buyer is interested in the future
cash flows from a brand and the fact that 100 million
was spent on brand ‘X’ does not guarantee the
realization of even a fraction of that amount in future
sales.
 Costs incurred in brand are no measure of the
efficiency with which the money was spent.

 The R&D budgets of GM, Siemens, Philips,

Xerox and IBM are much more than their
respective Japanese competitors namely
Honda, Hitachi, Sony, Canon and NEC. Yet
the number of successful models produced by
the Japanese far outnumber the ones produced
by their western counterparts.
 2] REPLACEMENT COST
Consider a brand, say Colgate. How much would it
cost to create a brand with similar turnover,
profitability, distribution reach, brand loyalty, etc? This
cost is its brand equity.
To begin with, measuring each of the above costs is not
very easy.

 Colgate has a turnover of Rs.6810 million,

 A gross profit figure of Rs.146 crores,
 Reaches at least 3 lakh retailers directly (many times
this number indirectly) and finally
 Is probably the most popular brand in the country.
Thus, replacement cost can be calculated as
follows:
(launch cost + production & administrative costs
incurred over the years + brand premium acquired
over the years due to brand loyalty, distribution,
etc.)
It is better than historical cost because it considers
today’s costs.
But this suffers again from the same set-backs as
the previous method.
What is the guarantee that if a brand is created at
the cost of Rs.255 crores today it will obtain a
market share of about 17% as Close-Up did?
 3] MARKET VALUE METHOD

The brand value for a particular brand is obtained by

comparing it with the value that had been realized in a
comparable, current merger or acquisition.
EG: Cibaca for instance has been bought by Colgate for
a sum of Rs.1310 million.
• If Cibaca’s equity is Rs.1310 million, what is the equity
of Colgate?
• Perhaps since Colgate has about 17 times as much
turnover as Cibaca,
• If we multiply the equity of Cibaca with a factor 17 we
will arrive at Colgate’s. that puts it at Rs.22,270 million.
 4] DISCOUNTING CASH FLOW METHOD

This method consists of

(i) Estimating the cash flows that would accrue to a brand in
future,
(ii) Converting these present value using the time value of money.

To explain in detail, consider Usha fans. If the estimate of sales

for the next 10 years is S1, S2, … S10 and a discount of 15% is
applicable to these amounts the present value of cash flows is as
given below:
S1 S2 S3 S10
P= + + +
(1.15) (1.15)2 (1.15)3 ….. (1.15)10

Where P is the value at which the brand can be sold of to

another org. In other words, it is a measure of brand equity.
This is more reliable as an estimate compared to
the historical method.

But estimating the sales of a product several

years down the line is difficult. Competitors might
outperform Usha.

 In short, this method is useful when the

industry and the company’s turnovers are stable
and predictable.
 5] BRAND CONTRIBUTION
 This method tries to identify the value that is added by the
“BRAND” to the product.
Brand contribution compares the profits earned by the
brand with the profits earned by an unbranded of generic
product in the same category.
The difference between the two is treated as a measure of
brand value.
 This when multiplied by a suitable integer yields brand
equity.

Brand equity = K * (profits from the brand – profits

for an unbranded product in the same category)
 6] INTER-BRAND METHOD
This method aims at arriving at a value at which a brand
can be sold by one company to another. The steps used in
this method are described below.
(a) The weighted average of the last three years’ profits
of the brand is computed.
(b) This figure when multiplied with a number gives the
value of brand equity. The number is arrived at by
multiplying the P/E of the company or industry in which
the company operates and a factor called brand strength.
(c) Brand strength is dependent on certain variables like
leadership, stability, internationality, etc. of the brand.
Brand equity = (weighted average of brand profits * P/E
of the industry * brand strength)
Consider a brand X, whose profits are shown below:
Years Profits (Rs. In million) Weightage
1993 15 1
1994 20 2
1995 30 3

Average profit = (15 * 1) + (20 * 2) + (30 * 3)

1+2+3
= Rs. 24.2 million.
 “Brand Strength” depends upon the variables given below. The
implication of the variables is also explained.

Factors Implication Maximum Score Score of Brand

“X”
Leadership Is the brand a leader in 25 13
market share, pricing.

Is there brand loyalty? 15 7

Stability Does the brand have stable
market share?

What is the brand’s

Internationality acceptance level
15 1
internationally?
Is the brand actively
Support promoted and supported by
15 8
the company.

Is it adequately protected 5 2
Protection by trademark?

Market Is the market in which the

brand operates stable?
5 2

Trend What is the long-term

future for the brand?
20 10

TOTAL 100 43
Brand strength score = 43/100 = 0.43
Suppose the P/E value of the industry is 15, then multiple =
brand strength score * P/E.
= 0.43 * 15 = 6.45

brand equity = 6.45 * 24.2 = Rs. 156.09 million.

 PRICE-BASED METHODS
There are some methods which measure brand equity
with the retail price of the brand as the basis.
PRICE PREMIUM METHOD
 This is done by comparing the difference between the
retail price of the “brand” and the retail price of an
unbranded product in the same category.
 Here again, the difference will give and indication of
brand equity.
 This measure will also give us as indication of “Brand
strength” only. That is, higher the retailer premium that a
brand can charge, greater is its equity in the mind of the
customer.
 MARKET SHARE EQUALISATION METHOD

This method uses and ingenious way of tackling the brand

equity problem.
Let us suppose that there are totally hundred consumers of
toothpastes in the country. we also assume that there are only 4
toothpastes in the market.

BRAND PRICES (Rs. Per 100 gm) NO. OF PEOPLE

USING
Colgate 17.40 65
Close-up 22.50 20
Promise 17.40 5
Babool 14-60 10
What are the prices at which the market share for each of
these brands is equal?
It is obvious that Colgate is the most popular brand. But when
its price is raised beyond a point, people will switch from
Colgate to other brands. What is the point at which 40 people
switch from Colgate and distribute themselves among the other
brands equitably. This situation is shown in the following
table:
BRAND PRICES NO.OF PEOPLE
Colgate 24-50 25
Close-Up 23-00 25
Promise 17-50 25
Babool 14-60 25
At this point, we have forced a situation where the market shares are
equal.
The prices here straight away give an indication of brand equity. If
we divide the prices in paise by ten we get the numbers in the brand
equity map.
In other words, the brand equity of Colgate is equal to 245 while that
of Babool is 146.
245 ----- Colgate

235 ---- Close-Up

175 ---- Promise

146 ----- Babool

 PRICE-PREMIUM AT INDIFFERENCE
This method tries to compare the free prices of brands at the
point of indifference. Take two brands say, again Colgate and
Promise. Repeat the same experiment that we performed in
the market share equalization method. Keep increasing the
price of Colgate. Let us say on an average. A customer jumps
from Colgate to Promise at Rs. 25.

Brand equity of Colgate = {revised price of Colgate - 1} * 100

{Price of Promise}

= { 25 - 1 } * 100
17.4
= 43.7
A similar method can be extended to calculate the brand
equity of other toothpaste brands in the market.this
method uses one of the brands as an anchor point to
define brand equity.
Some brands may have negative equity.
For instance, if an average customer jumps from Babool
to Promise at Rs.15, the equity of Babool will be as
shown below:

Brand equity of Babool = { 15 - 1 } * 100

17.4

= -13.8
This will lead to negative brand equity. Nevertheless since
equity is relative, it should not matter. Adjusting the origin of
Babool to ‘0’, we get the figure on the right hand side.

43.6 ----- Colgate 57.4 --------Colgate

| |
| |
| |
0 --|-- Promise 13.8 -- |--Promise
| |
-13.8 ----- Babool 0 ----Babool

The plot shows that Colgate has much higher equity than
Promise or Babool. Between Promise and Babool, the former
has greater equity.
 CUSTOMER-BASED BRAND EQUITY
BRAND KNOWLEDGE METHOD

Another approach of measuring brand equity is

making the customer’s knowledge of the brand the
focus.
Brand knowledge can be expressed as a sum of
brand awareness and brand image.
Each of the parameters (i.e. brand recall/strength of
brand associations/attitudes/user image) can be
measured on a 1 to 10 scale. A weighted sum of these
parameters will be the measure of brand equity.
Brand recall Here is an illustration to measure brand recall.
Suppose you want the consumer to recall, let us say,
“NIRMA,” the following set of questions can be asked:
a) What brand comes to your mind when I say ‘detergent
powder’? (This is called top-of-mind-awareness.)
b) Which detergent brand comes to your mind when I say
“Low price?” (The answer could be “Wheel”/ “Nirma”/ or a
regional brand.)
c) Which brand comes to your mind when I say “white/cream
detergent cake?”
d) The advertisement for which brand says “Do you now
understand why I buy this?” (This is an allusion to the
housewife in the Nirma advertisement mentioning she buys
Nirma because it saves money.)
The results of brand equity computed in this manner by a
group of students from Indian Institute of Management,
Bangalore is shown below. These values represent the
equity of a few brands of toilet soaps and toothpastes in the
minds of a few consumers in Bangalore.
SOAPS

Lux international - 7.57 Dettol - 5.71

Liril - 7.16 Rexona - 5.65
Cinthol - 7.03 Hamam 5.48
Camay - 6.88 Ganga - 5.21
Pears - 6.85 Lifebuoy - 5.15
Lux - 6.51 Margo - 4.99
Mysore Sandal - 6.17 Nirma - 4.77
Santoor - 5.97 Nirma Bath - 4.53
 TOOTHPASTES

Colgate Gel - 7.40 Promise - 5.81

Close-ups - 6.98 Cibaca Top - 5.46
Pepsodent - 6.44 Neem - 5.00
Colgate Dental Cream- 6.29 Babool - 4.81

The above figures show that

among soaps, Lux International has the highest
equity while Nirma Bath has the lowest. Similarly,
among toothpastes, Colgate Gel has the highest equity
while Babool has the lowest.
 ATTRIBUTE-ORIENTED APPROACH
ATTRIBUTE-ORIENTED APPROACH
The approach in this method is as follows:
 Take a particular brand. List all its attributes.
Get ratings for each of these attributes on a 0-10 scale from consumers.
Sum up the scores. This represents the equity of the brand scale.
 Repeat a similar exercise on competing brands and we have the brand
equity for all the brands.
Suppose one gets the following hypothetical scores for 4 talcum
powder brands:

PONDS CINTHOL LIRIL GOKUL

Freshness 8 7 8 6
Fragrance 7 7 7 8
Long-lasting 9 9 8 6
Appearance 8 7 6 5
Desirability 8 6 7 6
40 36 36 31
If the scores are converted to a scale of 100, the
total score for

Ponds is 80,
Cinthol 72,
 Liril 72, and
Gokul 62.

This score represents the ‘Brand Equity.’ However,

brand equity usually is more than what the
attributes bestow on the brand. This becomes the
limitation of the method.
 BLIND TEST
A variant of the blind test is recommended by
researchers for measuring equity.

Here a distinction is sought to be drawn between

subjective and objective attributes.

Brand equity in this case is defined as the difference

between the overall performance of a brand and the sum
of the scores it obtains on the objective parameters.

Consider 100 c.c. vehicle brands: Yamaha RX, TVS Star

and Hero Honda-Splendour.
Suppose the following ratings (on an average) are obtained from a sample of
250 respondents for each of the objective attributes on a 0 to 10 scale:

TVS STAR SPLENDOUR YAMAHA

Fuel efficiency 6 9 8
Pick-up 6 6 7
Load carrying 7 6 6
19 21 21

Out of 30 19 21 21
Out of 100 19*100 21*100 21*100
30 30 30
=63 =70 =70
Convert these scores to the scale of 100:
The aggregate score on all three attributes is:
STAR SPLENDOUR YAMAHA
63 70 70

For E.g., : out 100 Score given to

( PREFERENCE LEVEL)

YAMAHA = 78
SHEOLIN TVS = 82
SPLENDOR = 85
BRAND EQUITY

Brand equity for Star = 82-63 = 19

Brand equity for Splendour = 85-70 = 15
Brand equity for Yamaha = 78-70 = 08

The results based on subjective, inexplicable parameters

show that the subjective and objective parameters. In a 2-
wheeler’s case, it might be easy whereas in a talcum
powder’s case it is not.