Sample text for Managing brand equity : capitalizing on the value of a brand name / David A. Aaker.


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Chapter 1: What Is Brand Equity?

A product is something that is made in a factory a brand is something that is bought by a customer. A product can be copied by a competitor a brand is unique. A product can be quickly outdated a successful brand is timeless.
Stephen King
WPP Group, London

THE IVORY STORY

One Sunday in 1879 Harley Procter, one of the founders of the candle and soap firm Procter & Gamble (P&G), heard a sermon based on the Forty-fifth Psalm, "All thy garments smell of myrrh, and aloes, and cassia, out of ivory palaces." The word "ivory" stuck in his mind -- and became the name of the firm's white soap.

In December, 1881, P&G ran their first Ivory ad in a religious weekly, stating that the soap "floated" and that it was "99 44/100% pure," a dual claim which has become one of the most famous ad slogans ever. That ad is shown in Figure 1-1. Figure 1-2 shows a 1920 Ivory ad illustrating the consistency of the positioning over time. Note the imagery created by the forest, the barefoot girl, and the clear water.

The purity claim was supported by a chemist, who had tested Ivory and found that only 56/100% contained impurities. The flotation property, first created by a production mistake which fed air into the soap mixture, was discovered by customers -- who attempted to reorder the "floating" soap.

Ivory was a remarkable product in a time in which most soaps were yellow or brown, irritated skin, and damaged clothes. The fact that it floated had practical value to those used to being frustrated by trying to find their soap in the bath water. It was thus well positioned -- a soap that was pure, was mild, and floated. From the outset, the fact that it was mild enough for babies was stressed, and babies were often featured in the advertising. The claims of purity and mildness were supported by the white color, the name Ivory, the twin slogans, and the association with babies. The soap's brand name, along with its distinctive wrapping, gave customers confidence that they were getting the mild, gentle soap they wanted. The "aggressive" 1882 national advertising budget of $11,000 provided a start toward high brand awareness, and customer confidence that the manufacturer was backing the product and would stand behind it.

Ivory, now over 110 years old, is a prime example of the value of creating and sustaining brand equity. Brand equity will be carefully defined and detailed later in this chapter. Briefly, it is a set of assets such as name awareness, loyal customers, perceived quality, and associations (e.g. being "pure" and "it floats") that are linked to the brand (its name and symbol) and add (or subtract) value to the product or service being offered.

Curiously, in 1885 a yellow soap named Sunlight, when introduced to dreary, sun-starved England, became the start of Unilever, now one of the largest firms in the world. Unlike Ivory, however, Sunlight gave way to other brands, such as Lifebuoy, Lux, and Rinso.

Nearly thirty years later, in 1911, P&G introduced Crisco, the first all-vegetable shortening, using an ad showing a woman in her kitchen admiring a freshly baked rhubarb pie. The ad was the precursor of the "slice of life" type of advertising (linking brands to people's life contexts) that was to be a P&G staple over the years. By 1933 the firm had added Chipso, a washing-machine soap Dreft, a synthetic detergent Ivory Flakes Ivory Snow and Camay, a competitor to Ivory.

P&G demonstrated its commitment to Ivory's brand equity during the depression. In the face of tremendous economic hardships, P&G resisted pressures to reduce advertising. In fact, in part by sponsoring "The O'Neills," a radio "soap opera," Ivory doubled its sales between 1933 and 1939.

The loyalty and market presence that Ivory had built was challenged in 1941 by an Ivory clone called Swan from Lever Brothers. It was billed as "The first really new floating soap since the Gay Nineties." P&G reacted with aggressive advertising to protect Ivory. Without any clear product difference, Lever could not dislodge Ivory, and ultimately withdrew from the market.

In May of 1931 a memo by Neil McElroy, then working on P&G's Camay account and frustrated by being in the shadow of Ivory, put forth the idea of developing a brand management team. He argued that there were not enough people caring about Camay. The marketing effort (and the effort to create and maintain equity) was diffused and uncoordinated, and lacked a budget commitment. The solution, creating a brand management team responsible for the marketing program and its coordination with sales and manufacturing, was a key event in the history of branding.

During the late 1940s and 1950s the firm added Spic & Span cleaner, Tide detergent, Prell shampoo, Lilt home permanent, Joy dishwashing detergent, Blue Cheer, Crest toothpaste, Dash low-sudsing detergent, Comet cleanser with bleach, Duz soap, Secret cream deodorant, Jif peanut spread, Duncan Hines, Charmin, and Ivory Liquid. The sixties and seventies saw the addition of Pampers disposable diapers, Folger's coffee, Scope mouthwash, Bounty paper towels, Pringles potato chips, Bounce fabric softener, Rely tampons, and Luv disposable diapers.

In the late 1980s, P&G had 83 advertised brands and annual sales of nearly $20 billion. In the U.S. it had the No. 1 brand in 19 of the 39 categories in which it competed, and one of the top three brands in all but five. In these 39 categories, P&G commanded an average market share close to 25%.

Most firms will focus efforts upon one brand, protecting its position by pursuing a given positioning strategy. New segments are usually therefore uncovered by competitors who are attempting to gain a position in the market. One striking aspect of P&G has been its willingness to develop competing brands in order to serve new segments, even if the new brands pressure (or even threaten) existing brands. The mature, fragmented laundry detergent category is an excellent example of how a set of brands can combine to reach a variety of segments and result in a dominant position: P&G holds a 50%-plus share of the market.

P&G's ten brands use different associations to target different market segments. Thus:

Ivory Snow -- "Ninety-nine and forty-four one-hundredths percent pure," the "Mild, gentle soap for diapers and baby clothes"

Tide -- For extra-tough family laundry jobs -- "Tide's in, dirt's out"

Cheer -- Works in cold, warm, or hot water -- "All-temperature Cheer"

Gain -- Originally an "enzyme" detergent but now a detergent with a fragrance -- "Bursting with freshness"

Bold 3 -- Includes fabric softener -- "Cleans, softens, and controls static"

Dash -- Concentrated power, less suds to avoid clogging washing machines

Dreft -- With "Borax, nature's natural sweetener" for baby's clothes Oxydol -- Contains bleach -- for "Sparkling whites -- with color-safe bleach"

Era -- Concentrated liquid detergent -- with proteins to clean stains

Solo -- Heavy-duty, with a fabric softener

In few other companies is the power of branding so apparent. Without question the key to the success of P&G is its commitment to the development of brand equity, the brand management system that supports it, and the ongoing investment in marketing that sustains it.

There are a few publicly available numbers that allow a crude estimate of the profits that the Ivory brand name has provided to P&G over the past century. We know that just over $300 million was spent on U.S. measured media during the 10-year period from 1977 to 1987. It is estimated that during this period measured media was about 75% of total advertising at P&G. If similar ratios hold for Ivory products, the total Ivory advertising expenditures would be around $400 million.

Assuming an ad-to-sales ratio of 7% (the ratio for P&G as a firm ranged from 6% to 8% during this period), worldwide sales of Ivory products would have been $5.7 billion. Assuming an exponential sales-growth curve since 1887, the total sales of Ivory products since Ivory was first introduced would be around $25 billion. Assuming an average profitability of 10% (the average profitability for laundry and cleaning products from 1987 to 1989 was 10%), a reasonable estimate of total Ivory profits would be $2 to $3 billion.

Interestingly and not coincidentally, P&G is known on Wall Street as a firm which takes a long-term view of its brand profitability. Although this can be frustrating and risky in the short term for an investor, P&G is patient with brands even when they absorb losses over a long time period. Their persistence with Pringles chips, Duncan Hines ready-toeat soft cookies, and Citrus Hill orange juice in the face of substantial losses are examples. The long-term perspective of P&G may in part be due to the fact that it is 20% owned by its employees.

In this book we shall explore brand equity. As the P&G example illustrates, the development of brand equity can create associations that can drive market positions, persist over long time periods, and be capable of resisting aggressive competitors. However, it can also involve an initial and ongoing investment which can be substantial and will not necessarily result in short-term profits. Payoffs, when they come, can involve decades. Thus, management of brand equity is difficult, requiring patience and vision.

In the following pages we will define brand equity and suggest that it is based on a set of dimensions each of which potentially needs to be managed. Several perspectives on how to place a value on a brand will then be detailed. First, however, several basic questions must be addressed. For example: What exactly is a brand? Have brand equities been eroding? How do price promotions affect brands? What is behind the pressures for short-run financial results? Can a focus on brand equity provide a counterpoint to the tyranny of short-term financials?

THE ROLE OF BRANDS

A brand is a distinguishing name and/or symbol (such as a logo, trademark, or package design) intended to identify the goods or services of either one seller or a group of sellers, and to differentiate those goods or services from those of competitors. A brand thus signals to the customer the source of the product, and protects both the customer and the producer from competitors who would attempt to provide products that appear to be identical.

There is evidence that even in ancient history names were put on such goods as bricks in order to identify their maker. And it is known that trade guilds in medieval Europe used trademarks to assure the customer and provide legal protection to the producer. In the early sixteenth century, whiskey distillers shipped their products in wooden barrels with the name of the producer burned into the barrel. The name showed the consumer who the maker was and prevented the substitution of cheaper products. In 1835 a brand of Scotch called "Old Smuggler" was introduced in order to capitalize on the quality reputation developed by bootleggers who used a special distilling process.

Although brands have long had a role in commerce, it was not until the twentieth century that branding and brand associations became so central to competitors. In fact, a distinguishing characteristic of modern marketing has been its focus upon the creation of differentiated brands. Market research has been used to help identify and develop bases of brand differentiation. Unique brand associations have been established using product attributes, names, packages, distribution strategies, and advertising. The idea has been to move beyond commodities to branded products -- to reduce the primacy of price upon the purchase decision, and accentuate the bases of differentiation.

The power of brands, and the difficulty and expense of establishing them, is indicated by what firms are willing to pay for them. For example, Kraft was purchased for nearly $13 billion, more than 600% over its book value, and the collection of brands under the RJR Nabisco umbrella brought over $25 billion. These values are far beyond the worth of any balance sheet item representing bricks and mortar.

An even clearer example of the value of a brand name is licensing. For example, Sunkist in 1988 received $10.3 million in royalties by licensing its name for use on hundreds of products such as Sunkist Fruit Gems (Ben Myerson candy), Sunkist orange soda (Cadbury Schweppes), Sunkist juice drinks (Lipton), Sunkist Vitamin C (Ciba-Geigy), and Sunkist fruit snacks (Lipton). Lipton used the name Sunkist Fun Fruits to overcome an established Fruit Corner line of fruit snacks from General Mills. The Fruit Corner tag line, "Real fruit and fun rolled up in one," was overshadowed by Sunkist Fun Fruits, a name that said it all.

The value of an established brand is in part due to the reality that it is more difficult to build brands today than it was only a few decades ago. First, the cost of advertising and distribution is much higher: One minute commercials and sometimes even half-minute commercials are now considered too expensive to be practical, for example. Second, the number of brands is proliferating: Approximately 3,000 brands are introduced each year into supermarkets. There were at this writing 750 nameplates of cars, over 150 brands of lipstick, and 93 cat-food brands. All this meant, and continues to mean, increased competition for the customer's mind as well as for access to the distribution channel. It also means that a brand often is relegated to a niche market, and so will lack the sales to support expensive marketing programs.

BRAND-BUILDING NEGLECT

Despite the often obvious value of a brand, there are signs that the brand-building process is eroding, loyalty levels are falling, and price is becoming more salient. The accompanying insert suggests a series of indicators of a lack of attention to brands which most firms will find familiar.

Indicators of an Underemphasis on Brand-Building

* Managers cannot identify with confidence the brand associations and the strength of those associations. Further, there is little knowledge about how those associations differ across segments and through time.

* Knowledge of levels of brand awareness is lacking. There is no feel for whether a recognition problem exists among any segment. Knowledge is lacking as to top-of-mind recall that the brand is getting, and how that has been changing.

* There is no systematic, reliable, sensitive, and valid measure of customer satisfaction and loyalty -- nor any diagnostic model that guides an ongoing understanding of why such measures may be changing.

* There are no indicators of the brand tied to long-term success of the business that are used to evaluate the brand's marketing effort.

* There is no person in the firm who is really charged with protecting the brand equity. Those nominally in charge of the brand, perhaps termed brand managers or product marketing managers, are in fact evaluated on the basis of short-term measures.

* The measures of performance associated with a brand and its managers are quarterly and yearly. There are no longer-term objectives that are meaningful. Further, the managers involved do not realistically expect to stay long enough to think strategically, nor does ultimate brand performance follow them.

* There is no mechanism to measure and evaluate the impact of elements of the marketing program upon the brand. Sales promotions, for example, are selected without determining their associations and considering their impact upon the brand.

* There is no long-term strategy for the brand. The following questions about the brand environment five or ten years into the future are unanswered, and may have not been addressed: What associations should the brand have? In what product classes should the brand be competing? What mental image should the brand stimulate in the future?

There is evidence that loyalty levels for supermarket products have declined. Nielsen charted the market share for 50 selected major supermarket brands and found that it fell 7% from 1975 to 1987. The research firm NPD revealed that in a study of 20 supermarket product categories the average number of brands purchased in a six-month period increased by 9% from 1975 to 1983.

The ad agency BBDO found a surprising perception of brand parity among consumers throughout the world in 13 consumer product categories. They asked consumers whether they felt that the brands they had to choose from in a given product category were more or less the same. The percent who indicated brand parity ranged from 52% for cigarettes to 76% for credit cards. It was noticeably higher for such products as paper towels and dry soup, which emphasize performance benefits, than for products like cigarettes, coffee, and beer, for which imagery has been the norm.

One survey of department-store shoppers involving 11 product categories such as underwear, shoes, housewares, furniture, and appliances documented the erosion of price. Only 39% of a national probability sample of 400 randomly dialed adults indicated that they paid full price, while 41% waited for a sale and 16% more bought discounted merchandise not on sale. Interestingly, the study found a high negative correlation between media advertising in a product category and category sales at full price. Advertising, of course, creates strong brands which can hold share in the face of discounting.

The Use Of Sales Promotion

It is tempting to "milk" brand equity by cutting back on brand-building activities, such as advertising, which have little impact upon short-term performance. Further, declines in brand equity are not obvious. In contrast, sales promotions, whether they involve soda pop or automobiles, are effective -- they affect sales in an immediate and measurable way. During a week in which a promotion is run, dramatic sales increases are observed for many product classes: 443% for fruit drinks, 194% for frozen dinners, and 122% for laundry detergents.

Promotions provide a way to keep a third-or fourth-ranking brand on the shelf. They are also attractive to the Pepsis of the world that want to beat Coke and, not so incidentally, squeeze out the 7-Up's of the world.

There has been a dramatic increase in sales promotion during the past two decades or so, both customer-directed (such as couponing and rebates) and trade-directed (such as wholesale case discounts). Just over a decade ago there was a 40/60 relationship between expenditures in promotions and advertising. The ratio is now 60/40 and still changing. Coupon distributions grew at an annual rate of 11.8% through the 1980s. Even in categories such as automobiles, price promotions have been the norm.

Unlike brand-building activities, most sales promotions are easily copied. In fact, competitors must retaliate or suffer unacceptable losses. When a promotion/price-cutting cycle begins it is most difficult to stop because both the customer and the trade become used to it and begin planning their purchases around the promotion cycle. The inevitable result is a great increase in the role of price. There is pressure to reduce the quality, features, and services offered. At the extreme, the product class starts to resemble a commodity, since brand associations have less importance. At that point, promotions look even better with respect to short-term impact, but their value declines. One recent study of more than 1,000 promotions concluded that only 16% paid off when costs and forward-buying were factored in.

The enhanced role of promotions is in part driven by measurement. With the advent of the scanner-based databases in food and drug stores, the short-term measures of some marketing actions are better than ever. They show that price promotions affect sales. However, they are not well suited to measure long-term results, in part because such results are difficult to detect in a noisy marketplace, and also because experiments covering multiple years are very expensive to conduct. Because there are no easy, defensible ways to measure the long-term effects of marketing actions, short-term measures have added influence. The situation is a bit like that of the drunk who looks for car keys under a street light because the light is better than where the keys were actually lost.

The visibility of the short-term success of price promotions and other potentially brand-debilitating activities is fed by the short-term orientation of many marketing organizations. Brand managers and other key people often are rotated regularly so that they can expect to stay in any one position for only two to five years. This then becomes their time horizon. Worse, during this time they are evaluated on the basis of short-term measures such as market share movements and short-term profitability. This is in part because such measures are available and reliable while indicators of long-term success are elusive, and, too, because the organization itself is concerned with short-term performance.

Pressures For Short-Term Results

Branding decisions take place in organizations experiencing extreme pressures to deliver short-term performance, particularly in the U.S.A myriad of diverse spokes people, including the chairman of Sony, a political scientist from Harvard, and the authors of the MIT Commission on Productivity, have forcefully concluded that U.S. managers have an excessive preoccupation with short-term profits at the expense of long-range strategy.

A prime reason why American managers might have a short-term focus is the prominence and acceptance of the maximization of stockholder value as the prime objective of U.S. firms. The problem is that shareholders are inordinately influenced by quarterly earnings. Their crude model is that future returns will be related to current performance. The resulting need for managers to demonstrate good quarterly earnings percolates into organizational objectives and brand-management evaluation. As a result, there is intense pressure throughout the firm to deliver good short-term financials.

A basic problem is that shareholders usually are incapable of understanding the strategic vision of a firm, in part because they are not privy to strategic decision-making, and also because they cannot interpret the uncertain strategic environment or the complexities of the organization. Further, there is an absence of credible alternative indicators of long-term performance.

After decades of effort, we have been markedly unsuccessful at modeling the long-term value of advertising in the absence of multiple-year field experiments. Measure of new-product effort is similarly difficult to quantify. Firms can keep track of new product research expenditures, the number of new products, the percent of business associated with products introduced within five years, and so on, but it is difficult to generate measures that are convincing surrogates for long-term performance. The long-term value of activities which will enhance or erode brand equity are similarly difficult to convincingly demonstrate. Without alternatives, short-term financials fill a vacuum and come to dominate performance measurement.

Managing with a long-term perspective is difficult in the face of the shareholder value emphasis, and other pressures, facing U.S. managers. What is to be done? Simply put, we need to find measures of long-term performance to supplement or replace short-term financials, measures that will be convincing enough to satisfy shareholders.

The Brand-Building Potential of Advertising

A rare effort to document the brand-building effect of advertising was made by the research firm IRI. An analysis of hundreds of heavy-up advertising experiments (where heavy advertising is compared to moderate or normal advertising) was conducted. On average over half of such heavy-up tests show no significant change in sales at all during the test period. IRI examined 15 of these experiments that did achieve significant sales gains during a test year. Sales averaged 22% over the base period. Sales in years 2 and 3, after the heavy advertising was withdrawn, were still above the base period, 17% and 6% respectively. Thus, the impact of advertising may be grossly underestimated if only a one year perspective is employed. Of course, advertising and promotion results are more often expected in months, or even weeks.

THE ROLE OF ASSETS AND SKILLS

One approach to introducing a strategic orientation is to change the primary focus from managing short-term financials to the development and maintenance of assets and skills. An asset is something a firm possesses, such as a brand name or retail location, which is superior to that of the competition. A skill is something a firm does better than its competitors do, such as advertising or efficient manufacturing.

Assets and skills provide the basis of a competitive advantage that is sustainable. What a business does (the way it competes and where it chooses to do so) usually is easily imitated. It is more difficult to respond to what a business is, since that involves acquiring or neutralizing specialized assets or skills. Anyone can decide to distribute cereal or detergent through supermarkets, but few have the clout to do it as effectively as, say, General Mills. The right assets and skills can provide the barriers to competitor thrusts that allow the competitive advantage to persist over time and thus lead to long-term profits. The challenges are to identify key assets and skills on which the firm should base its competitive advantage, to build upon and maintain them, and then to use them effectively.

The concept of an asset as a generator of a profit stream is familiar, especially when that asset is capitalized and appears on the balance sheet. A government bond is the prototypical example. A factory which houses plant, equipment, and people is another example. But of course a factory, unlike a government bond, requires active management and must be maintained.

The most important assets of a firm, however (such as the people in the organization and the brand names), are intangible in that they are not capitalized and thus do not appear on the balance sheet. Depreciation is not assessed, on "intangible assets," and thus maintenance must come directly out of cash flow and short-term profits. Everyone understands that even in bad times a factory must be maintained, in part because of the depreciation term in the income statement and also because maintenance needs are visible. An intangible asset, by contrast, is more vulnerable, and its "maintenance" is more easily neglected.

Managing The Brand Name

One such intangible asset is the equity represented by a brand name. For many businesses the brand name and what it represents are its most important asset -- the basis of competitive advantage and of future earnings streams. Yet, the brand name is seldom managed in a coordinated, coherent manner with a view that it must be maintained and strengthened.

Instead of focusing upon an asset such as a brand, too often American "fast-track" managers get caught up in day-to-day performance measures which are easily available. What caused the share drop in the Northeast? Would a promotion fight off a new product challenge? How can we combat a new entry? Can we put a name on another division's product and thus provide an interim solution? How can growth be sustained? Can a brand name be used to gain entry into a new product market?

A focus on short-run problems facing the brand can result in an operation that performs well, sometimes over a long time-period. However, the danger is that this performance is achieved by exploiting the brand and allowing it to deteriorate. The brand might be extended so far that its core associations are weakened. Its associations might be tarnished by expanding its market to include less-prestigious outlets and customers. Price promotions might be used to provide a perceived bargain for customers. The brand should be thought of as an asset, such as a timber reserve. Short-term profits can be substantial if the reserve is depleted without regard to the future but the asset can be destroyed in the process.

It is not enough to avoid damaging a brand -- it needs to be nurtured and maintained. A more subtle danger facing a brand is from a firm with a strong cost/efficiency culture. The focus is on improving the efficiency of operations including purchasing, product design, manufacturing, promotions, and logistics. A problem, however, is that in such a culture the brand may not be nurtured, and thus may slowly deteriorate. Further, efficiency pressures lead to difficult compromises between cost goals on the one hand and customer satisfaction on the other.

The value of brand-building activities on future performance is not easy to demonstrate. The challenge is to understand better the links between brand assets and future performance, so that brand-building activities can be justified. What are the assets that underlie brand equity? How do they relate to future performance? Which assets need to be developed, strengthened, or maintained? What exactly is the nature of the payoff/risk of such activities? What is the value of an improvement in perceived quality or brand awareness, for example? If answers to such questions would emerge, there would be more support for brand-building and more resistance to short-term expediency.

All brand-building activities require justification. However, the need is particularly acute in advertising because of the large expenditures involved that are often vulnerable to short-term pressures. Peter A. Georgescu, president of Young & Rubicam, captured the pressure on advertising by noting a need to learn how to measure, forecast, and manage the communication elements that go into the making of strong brands. He warned: "We have to find ways to measure and justify the megamillions our clients have to spend to build strong brands -- or else." The "or else" referred to brands becoming "faceless, lifeless" commodities.

The first step in identifying the value of brand equity is to understand what it is -- what really contributes to the value of a brand. Thus, we now turn to the definitional issue. Subsequently, we shall look at several methods of placing a value upon a brand which will provide additional insight regarding the brand concept. And, finally, some issues facing those who create or manage brands will be introduced.

WHAT IS BRAND EQUITY?

Brand equity is a set of brand assets and liabilities linked to a brand, its name and symbol, that add to or subtract from the value provided by a product or service to a firm and/or to that firm's customers. For assets or liabilities to underlie brand equity they must be linked to the name and/or symbol of the brand. If the brand's name or symbol should change, some or all of the assets or liabilities could be affected and even lost, although some might be shifted to a new name and symbol. The assets and liabilities on which brand equity is based will differ from context to context. However, they can be usefully grouped into five categories:

1. Brand loyalty
2. Name awareness
3. Perceived quality
4. Brand associations in addition to perceived quality
5. Other proprietary brand assets -- patents, trademarks, channel relationships, etc.

The concept of brand equity is summarized in Figure 1-3. The five categories of asset

Library of Congress subject headings for this publication: Brand name products Valuation United States Management, Intangible property Valuation United States Management