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AEM 4550: Economics of Advertising Prof. Jura Liaukonyte LECTURE 12: Brand Equity AEM 4550: Economics of Advertising Prof. Jura Liaukonyte

Lecture Plan HW3, HW 4 Brand Equity Measuring Brand Equity Example How to calculate Brand Value

Brand Equity Definition Brand Equity is a set of brand assets and liabilities linked to a brand, its name and symbol, that add to the value provided by a product or service to a firm and/or to that firm’s customers. Assets and liabilities underlying brand equity must be linked to the name and/or symbol of the brand.

Brand Equity: Why it matters Outcomes Greater loyalty Less vulnerability to competitive marketing actions Less vulnerability to marketing crises More inelastic consumer response to price increases Possible licensing opportunities Additional brand extension opportunities Larger margins: on average, prices of strongest brands are 19% higher than weakest brands in category Simplifies choice process Enhances confidence in choice Reduces perceived risk – recognition of consistency of quality Provides emotional benefits – signal of status, taste, or affiliation Benefits Research Identify the effectiveness of individual brand assets Identify the barriers to achieving a brand’s full potential Identify consumer relationships with the brand Identify the status of the brand in a competitive context

BrandZ Top 100 Brands 2011 2014

Interbrand 2011

Interbrand 2014

One approach to Brand valuation calculation A systematic approach to brand valuation was jointly developed by Interbrand and the London Business School in 1988. The method was partially revised in 1993. Since then, Interbrand has evaluated some 3500 brands for nearly 400 companies.

One approach to Brand valuation calculation The purpose of evaluations of brand equity: Evaluations for financial transactions in connection with mergers & acquisitions, internal licensing and fiscal issues. Evaluations to optimize brand investments, advertising expenditures, monitor an manage future changes in brand value.

Brand Equity/Value create cost synergies, Brand value is defined as the NPV of future earnings generated by the brand alone. One approach (Interbrand) is based on the following three economic functions: create cost synergies, generate demand for the products and services, and secure future demand and thus reduce operative and financial risks.

Calculating Brand Equity The method employed to evaluate brands comprises five steps: Segmentation, Financial analysis, Demand analysis, Brand strength analysis, Calculation of the net present value of brand earnings.

Segmentation Consumers’ purchasing behavior and attitudes towards brands differ from one market sector to another. The value of a brand can only be determined precisely through the separate assessment of individual segments that represent a certain customer group.

Financial Analysis Start with an assessment of the company's value and then determine the value contributed by the brand. Isolate brand earnings from other forms of income is to determine the Economic Value Added (EVA) which tells whether a company is able to generate returns that exceed the costs of capital employed. The analysis is based on a five-year forecast of future revenues.

Demand Analysis Analyze the brand’s value chain and identify the position of the brand in the minds of customers. To determine the brand’s share of EVA: Evaluate the factors that influence demand and motivate customers to purchase. These factors are weighted in terms of their bearing on demand The sum of these brand contributions on the demand drivers is expressed as the Role of Brand Index (RBI) RBI multiplied with the EVA, yields the brand earnings.

Demand Analysis

Brand Strength Analysis The stronger a brand, the lower is its risk, and thus the more certain are future brand earnings. Assess the competitive position and infer the risk by analyzing the strength of a brand compared with its competitors on the basis of seven factors market, stability, brand leadership, trend, brand support, diversification, protection This step results in the Brand Strength Score (BSS).

Brand Strength Score

Net Present Value Calculation The economic value of future brand earnings is inversely correlated with the brand’s estimated risk This risk is directly linked to brand strength. The procedure reflects the dynamism of the market: extreme ends of the scale brands react differently from brands in the middle range.

Net Present Value Calculation Strongest brands are discounted with the risk-free rate of the total market while average-strength brands are discounted with the industry WACC (cost of equity in the financial service industry). Discounting the forecast period (present value) and the calculation of an annuity (terminal value) results in the total value of the brand. The transformation of brand strength into brand risk (or into discount rate) is completed using an S-curve.

Net Present Value Calculation

Total Brand Equity Since this procedure focuses on value creation, it is independent of potential and probable changes in organizational structure. The total value of the brand is calculated as the sum of its segment values (sum-of-the-parts).

Example: Dell

Example Let’s Calculate Brand equity of DELL INC. This will be just a rough approximation since we will be making some assumptions along the way

Example Similar to the one in HW4 Critical assumptions: Assume that we are T-5 years from the latest available financial statement. E.g. If the latest financial statement is in 2009 assume we are in year 2004. Normal analysis requires forecasting 5 years in advance. We will assume that the actual financial performance for the years 2005, 2006, 2007, 2008, and 2009 (obtained from financial statements) is the forecast as of 2004.

Example Assume that Brand Strength analysis revealed that the appropriate discount rate is 9% Just above WACC = 10% Role of Brand Index (RBI) = 40% Get the financial data from: Go to Mann library website Click on Find->Databases Social Sciences->Business and Management Mergent ONLINE Click on “COMPANY FINANCIALS”

Mergent Online STEPS: Click on “COMPANY FINANCIALS” ANNUALS + BALANCE SHEET will be default From here you need to take TOTAL CURRENT ASSETS (in this case it is line 12) of data for 5 years. Can be different line for other companies. Next, switch to ANNUALS + INCOME STATEMENT From here you need to take NET INCOME (LOSS) (in this case it is line 11 from the bottom) of data for 5 years These 2 sets of numbers should be enough to calculate brand equity. (choose only if net income>0)

DELL