For What It's Worth

Mathematical Approach to Brand Equity Valuation

Brand equity has been spoken about for years now. Every brand manager, every marketing manager has tried to give his/her opinions on brand equity. What they think about it, what they feel, and most importantly how they use it to the benefit of the organisation. Brand equity, until recently had been measured only in terms of consumers' perceptions, what they think about the brand, the service it provides, and most importantly, the value proposition of the brand.

Every company has its own way of measuring brand equity, leading to different models being introduced. That appears to be a problem, because when valuating a company's worth based on its brand-asset portfolio, many elements differ from company to company. The very definition of "brands" and "branding" might mean different things to different companies. For instance, the definition of a brand may be very radical for an ad agency as compared to a corporate house.

One of the many models developed to measure brand equity effectively is "The Brand Relationship Model". This framework takes into account both the subjective and objective view to branding and what consumers and marketers feel towards it.

On a one-to-one basis, a consumer might feel differently towards a brand. For instance, take the instance of rare malt whiskey. Although there is a general agreement that it is refined, of rich quality and displays taste and style, on a subjective level the consumer may not feel "that good" towards the brand. This might be due to external factors such as communications, peer pressure or the general societal perception towards alcohol. The outcome towards the brand would result in the dilution of brand equity coming through brand meaning as understood by the consumer (either subjectively or objectively).

This is where the Brand Relationship Model helps brand managers to predict consumer behaviour to a certain extent, which could either hamper or leverage the brand's equity. This model also takes into account the standard measurements of valuing brand equity (Customer Loyalty Index, Customer Satisfaction, Customer Value, Customers' Motivation factors, factors leading to brand switching, behavioural and attitudinal factors) along with the integration of brand meaning. This helps brand managers to manage the appreciation portfolio of a brand.

The mathematical models for valuating brand equity are constructed around brand loyalty. The methods are:

1. Behavioural Indices of Brand Loyalty:
Li = 100[bi x {(k + 1-Si)/m} x {(n + 1-Pi)/n}](1/3)

Where:

• Li = loyalty index
  
• bi = fraction of budget for the product class allocated to the loyalty object during the loyalty period.
  
• Si = number of switchers
  
• Pi = number of stores patronised by consumers or brands purchased by the loyal consumer.
  
• m = number of intervals within the purchase period
  
• k = m-1 = number of opportunities to switch
  
• n = number of stores/brands available to the consumer during the interval time to switch brands
  

This approach takes into account the switching period involved in getting to the right value of a brand. The financial value of brand equity flows through the model of brand loyalty, which just goes to show the interdependency between marketing and finance. Understanding brand equity is another key challenge before they can decide which model to use to measure it.

2. Attitudinal Indices of Brand Loyalty:
Cognitive Loyalty = (RR/AR) x {1- (BA - RR - AR)/BA}

Where:

• RR = The number of brands in the rejection region
  
• AR = The number of brands in the acceptable region
  
• BA = The number of brands of which the consumer is aware

Cognitive loyalty towards a brand would be ascertained after deducting the brands that fall into the rejection region from the brands that the consumer is aware of and might use in the future.

However, in spite of the two models explained above, it is important to note that there is no fixed recipe or scorecard to measure brand equity. Consumers' tastes change every single minute based on which the equity either rises or falls. Loyalty nevertheless again comes full circle. This can be clearly seen by the second model where consumers' rejection of certain brands and awareness levels of others only leads them back to their old brands. The managers would then have to consider this framework and all the elements leading to loyalty, thus measuring brand equity.

Related Reading:

"Measuring brand equity"; Continuous Learning Project: Brands; 2001.