BRAND EQUITY: CAPITALIZING ON INTELLECTUAL CAPITAL

Chiranjeev Kohli
&
Lance Leuthesser

All correspondence should be directed to:

Chiranjeev Kohli
Professor of Marketing
California State University Fullerton
Fullerton, CA 92834
714.278.3796
[email protected]
 ABSTRACT

In this paper we address the key issues in managing brand equity. We discuss components that

form the foundation of brand equity – brand identity and brand vision – and how they

influence brand knowledge, as measured by indicators such as brand awareness and brand

image. We then focus on how brand knowledge affects brand performance, which is measured

by brand loyalty and the ability to command a premium price. The emphasis in the discussion

is on identifying and explaining factors that offer managers control over enhancing the equity of

their brands
 INTRODUCTION

For the year 2004, Coca Cola once again appeared at the top of Interbrand’s list of the “World’s

Most Valuable Brands,” with an estimated value of $67 billion. Closely behind in the number

two spot was Microsoft, with an estimated brand value of $61 billion. Old beside new, low-tech

beside high-tech, these two firms have an important characteristic in common – for each, its

brand is its most valuable asset. The Coca Cola brand is worth more than half the market value,

and a staggering ten times the book value of its parent company, while the value of the

Microsoft brand is about one-fifth of the company’s market value and over 150% of its book

value. Both estimates reflect the present value of the economic profits the brands are expected

to earn – the profit over and above “normal” profits, or over and above what an otherwise

equivalent product might achieve without the benefit of the brand. What do these brands have

in common that leads to such performance? What actions can managers take to create and

maintain such high performing brands? We address these questions in this paper.

DEFINING BRAND EQUITY

Brand equity is defined as “the differential effect of brand knowledge on customer response.” Three

elements of this definition need to be emphasized. The most critical element is differential

effect or “differentiation.” Without this, a brand is not different from the next one, and

therefore, can never seek a premium. In some instances, differentiation is easy to create (e.g.,

automobiles, breakfast cereal, etc.), whereas in other instances this can be much more

challenging (e.g., gasoline, bottled water). Regardless, however, it is equally important to strive

for differentiation. The next element is brand knowledge. Your customers should know about

the differentiation. They should be aware of it, and should appreciate that the differentiation is

meaningful for them. The last key element of this definition is customer response. Customers

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should respond favorably to this differentiation. This response should (hopefully) be reflected

in their desire to demonstrate some loyalty towards the product, and in their willingness to pay

a premium for their preference. These definitions underlie the model we present.

MANAGING BRAND EQUITY

The model shown in Figure 1 depicts the elements that we believe all high-performing brands

have in common. We don’t offer Figure 1 as a comprehensive model of brand equity, but rather

to highlight its essential elements. As Figure 1 shows, brand equity rests on a solid foundation

of brand vision and brand identity. Given a strong foundation, brand knowledge can be built.

Important dimensions of brand knowledge include brand awareness and brand image. Finally,

brand equity results in superior performance; that is, the ability to earn long-term economic

profits. Two key indicators of a brand’s ability to earn economic profits over the long run are

brand loyalty and the ability to command a price premium (i.e., a price-cost differential above

“normal”). We discuss each of these aspects of brand equity below.

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 Figure 1
Managing Brand Equity

Equity Foundations Brand Knowledge Brand Performance

! Brand Vision ! Brand Awareness ! Brand Loyalty
! Brand Identity ! Brand Image ! Price Premium

Brand Vision

Superior brands have a clear vision. They stand for something important and relevant to their

target audiences, and they do so consistently. This does not happen by accident; managers

should establish the leadership values for their brands with clarity and consistency.

Leadership Values – A brand’s core values and its tangible embodiment, the product, will diverge

if the product’s concept is static. But the strongest brands are innovative and capable of

constant self-renewal. They consistently meet customers’ expectations at the highest levels, and

have exceptional abilities to anticipate and exceed expectations. Brands like Coca Cola, Disney,

McDonald’s, Mercedes, and Budweiser present an aura that it unmatched by other brands.

Clarity and Consistency – Clarity implies communicating a true sense of what makes the values

distinctive and relevant; it implies knowing that the brand’s promise is a goal, never completely

attainable, and knowing that the trust of those faithful to the brand is never completely earned.

McDonald’s clear image is in sharp contrast to Burger King’s diffused image. Consistency in its

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communication is equally important. It is important to understand that there is a difference

between consistency in a product sense, and consistency of vision. Products may, and often

must, change, but a product’s relevance to its target audience and the values it represents must

remain constant. Strong brands, like trusted friends, are consistent in the strength and quality

of the relationships that they have with their customers. Xerox, once an icon of corporate vision,

appears to have lost sight of its value to customers at a level higher than product, as

information technology evolved. Now, the company is attempting to reinvent itself as the

“document” company, but that vision seems blurred.

Brand Identity

Brand identity includes all elements by which the brand communicates with the world around

it. Our discussion focuses on the three integral components of brand identity – brand name,

logo, and slogan. The hoped-for result of a brand identity program is a brand image that is

consistent with the brand’s vision and aspirations.

Name – A brand name is an anchor for a product’s identity – it carries with it essentially all of

the brand equity. While corporate names can be changed, brand names cannot be changed

without a significant risk of losing all equity. Brand names should therefore be viewed as long-

term commitments. They must wear well, and in an increasingly global marketplace, travel

well. So, what are the desirable attributes of a good brand name? A nationwide survey of

companies in the United States, conducted by one of the authors, found that the most desirable

attributes of a successful name are (in decreasing order of importance) relevance to product

category, connotations, overall liking, ease of recognition and recall, distinctiveness, and

consistency with company and existing product line.

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We also believe that the blanket application of simplistic guidelines like “brand names should

be short, simple, distinctive,” etc. are misguided. Clearly, a threshold of distinctiveness is

required to differentiate the brand and, at a minimum, satisfy trademark requirements. But

beyond that, we believe the naming field is much wider than conventional wisdom would

suggest. Evidence comes in the form of the many successful brands that violate the simplistic

naming rules. Consider “I Can’t Believe It’s Not Butter” (it isn’t, but it sure looks and tastes like

it, and the name spells it out for you!) or “Smucker’s” (with a name like Smucker’s, it better be

good!). Again, we recommend that managers be daring. That’s more likely to create strong

differentiation – the key to building brand equity – than the relatively safe strategies of going

with conventional wisdom or duplicating what others have done.

Logo – Logos can support brand names. Because consumers are more adept at processing visual

information, logos help marketers penetrate the ever-increasing level of marketing clutter. This

is especially advantageous in situations where consumers make purchase decisions at the point

of sale, where the brand’s logo can be displayed prominently on packaging or point-of-sale

displays.

What makes a logo effective? The most widely held theory about how logos work is the

“familiarity” or “mere exposure” theory first advanced to explain the effectiveness of repetitive

television advertising. This theory holds that with repetition comes familiarity, and eventually,

liking. Thus, even in low-risk buying situations, consumers are attracted to brands with which

they are familiar, and they tend to shy away from brands they view as “strangers.” Although

there is some academic research suggesting that logo “boredom” may set in with overexposure,

the preponderance of evidence suggests that familiarity is positively related to liking. The

obvious conclusion, therefore, is to seek to achieve widespread and frequent exposure to logos.

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Because graphic information is processed more quickly and more holistically than textual

information, logos should be distinctive; otherwise they may be confused with others. A logo

should help in differentiating the brand.

Logos may be purely abstract designs, or they may convey a clearer meaning. In the latter case,

effective logos generally identify, or relate to, the product category or product benefits or

attributes. As a rule, logos that convey meaning will be more readily remembered and

recognized than will abstract logos. Thus, it is generally advisable to use meaningful logos.

However, an abstract logo may be desirable, and even necessary, for multi-product companies

that develop family or umbrella brands.

Logos need not be as durable as brand names. They may (need to) be updated. However,

when considering a change to a logo, it’s best to assume that consumers may tolerate the change,

but they won’t necessarily embrace it. It’s the old, familiar face that has earned their trust.

Accordingly, logos should be changed only when it is necessary. This is likely to occur when

the product has been repositioned significantly or when the logo is clearly dated (for example,

the “Betty Crocker” and “Aunt Jemima” logos have both required “modernizing”).

Slogan – If the brand name is the anchor of a product’s identity, and the logo enhances recall,

what role does a slogan play? A slogan plays a prominent role in advertisements. It captures

the essence of a brand’s positioning, summarizes the theme of advertisements, and provides

continuity when copy is changed both within and across advertising campaigns. In essence,

slogans form a link between long-term brand identity and day-to-day marketing activities.

Slogans can be so powerful they can become a rallying cry for any cause. The vastly successful

Nike’s “Just Do It” campaign has motivated people to pursue not just personal fitness goals but

also worthy social goals. More than just a part of Nike’s communication strategy, it has become

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a ‘90s anthem. Another highly successful slogan is DeBeers’, “A Diamond is Forever.” This

widely recognized line was coined in 1948 to reverse a trend of declining diamond sales. It

achieved its goals, and has gone on to become part of American culture. The key to a successful

slogan is a strong linkage to the brand name. Towards this end, combining music or jingles

with slogans can be particularly effective, especially with young people who tend to exhibit

better recall of music (versus brand name) than older people.

Brand Awareness

So far we’ve talked about brand identity and factors relating to name, logo and slogan that

influence brand recognition and recall. Brand awareness is connecting a brand with its product

category. If consumers are unable to place a brand in its appropriate purchasing context, then

the advantages of recognition and recall are greatly diminished. The surge of dot-com

advertising in 1999-2000 illustrates this point to an almost absurd level, where many of the ads

made no attempt to connect brand to product category.

At the lowest level, brand awareness is a consumer’s ability to identify a brand as a member of

the product category when provided with a list (aided recall). Although this is a minimal level

of brand awareness, it can still make a difference, particularly in low-involvement purchase

situations where brand choice is made at the point of sale. Much stronger brand awareness is

indicated where a consumer is able, without assistance, to name the brand as a member of the

product category (unaided recall). Leading marketers such as Procter and Gamble strive for

“top of the mind” status, where a majority of consumers identify their brand first in an unaided

recall test. Taking this top of the mind idea to the extreme, dominant brands are often the only

brand recalled for a significant number of consumers. Consider “Arm & Hammer” baking

soda, “Scotch” cellophane tape, “Jell-O” gelatin, and “Morton” salt. Having a dominant brand

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provides the strongest possible competitive advantage because in many purchase situations no

other brand will even be considered.

Conventional wisdom dictates that brand awareness (and therefore, brand equity) can be built

only through repetitive advertising. However, promotions such as contests and sweepstakes

provide frequent exposure with the added benefit of higher consumer involvement that

traditional advertising. Publishers Clearinghouse, for example, has been particularly effective

with its consumer promotions. Increasingly, event sponsorship is also seen as an effective high-

exposure vehicle. Nearly all of the major college sports events have prominent commercial

sponsors and the NASCAR auto racing circuit is now an $8 billion annual enterprise. What

makes event sponsorships so effective is the ability to connect the brand directly with lifestyle

values that are held dearly by the target audience. It’s virtually impossible to achieve this close

connection through conventional advertising, no matter how creative, or frequent, the exposure.

Finally, many firms are finding that the returns from contributions to high profile charities are

far greater than when those same funds are spread over diffused corporate-run initiatives.

Increasingly, these contributions are being allocated at the brand level, where the psychological

ties to the market are closer and stronger.

Brand Image

Brands have many associations linked in memory. A brand’s image is a set of associations that

is organized in such a way as to produce a global impression. In other words, brand image isn’t

simply an enumeration of all of the brand associations that an individual may hold, but is

instead a highly generalized synthesis of, typically, a subset of them. The associations

underlying brand image will be stronger the larger the number of brand related experiences or

exposures to communications. They will also tend to be stronger where they are consistent

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with, and reinforce, each other. Inconsistent associations will work to tear down brand equity.

This underscores the importance of consistency of vision in establishing a strong foundation for

the brand, and the discipline to adhere to that vision.

A distinction needs to be made between brand image and brand positioning. They are similar

ideas, but the latter idea is necessarily tied to competition whereas brand image is not. The

strength and uniqueness of brand image is directly related to the ability to extend the brand,

and by doing so widening its scope of influence and potentially enhancing its equity. Here,

consistency is crucially important; otherwise, the web of associations runs the risk of becoming

a tangle. Powerful brands, like Coca Cola and Disney, have developed countless opportunities

to extend the brand into products and places that fit the family, fun, wholesome, and nostalgic

values these brands symbolize, while carefully avoiding places that run counter to these values.

Brand Loyalty

Brand loyalty is a measure of how often a customer is inclined to choose the same brand when

buying from the product class. If most customers are indifferent to brand names and buy

primarily on the basis of features, price, and convenience, then very little brand equity exists. If,

on the other hand, they continue to purchase a brand even in the face of competitors with

superior features, price, and convenience, substantial brand equity exists. Brand loyalty is not

simply present or absent, but is present in varying strengths. Nearly all customers, no matter

how loyal, have some propensity to at least “take a look” at other brands from time to time.

And even the most loyal customers will switch brands if their preferred brands fail them.

Brand switching is influenced not only by a customer’s brand loyalty, but also by the customer’s

switching costs (time, money and risk involved in switching brands – not a part of brand

loyalty). So, while measuring the occurrence of switching may not be an entirely valid indicator

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of brand loyalty, it is a good indicator in most instances. Accordingly, customer retention rates

and average customer lifetimes, particularly changes in these measures, are important indicators

of brand loyalty and should be watched carefully.

Brand loyalty is the most important indicator of brand equity. Without brand loyalty, there can

be no brand equity. Any brand that aspires to even second or third tier market status will

require significant brand loyalty. Brands that are market leaders almost always have the

highest brand loyalty. And, if we view niche brands as really being market leaders in narrowly

defined markets, the loyalty-leads-to-market-share rule is essentially absolute. If brand

awareness and brand image do not translate into brand loyalty, much of the effort and expense

that has gone into building awareness and image has been wasted.

Brand loyalty is built on positive experiences. However, in any relationship, a single negative

experience can offset a lifetime of positive experiences if trust and credibility are lost. In this

regard, customer satisfaction measures can be very misleading. A 99% customer satisfaction

rating means one thing if it means that only 1% of customers expressed dissatisfaction, and

quite a different thing if it means that 1% of customer interactions resulted in dissatisfaction.

Because problems tend to occur randomly, even a small number of problems can affect a large

number of customers. Ignored, any of these incidents could be one that breaks a relationship.

Strong brands are religious about follow-through and protecting every relationship.

Price Premium

Most brands that have positive equity should be able command a premium price. For the most

part, these brands should compete on dimensions other than price. If a brand doesn’t command

a price premium, the whole equity exercise would be futile. It is important to differentiate

between the ability to command a price premium versus a premium price. While the latter

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suggests following a high price strategy, the former implies being able to command a premium

over and above what an equivalent product would receive without the benefit of a brand name.

Superior brands with a value proposition would also fall under this category. Ray Ban

sunglasses would be an appropriate example. Interestingly, Microsoft, whose brand is the

second most valuable name, has used a low-price strategy throughout most of its history. In an

industry characterized by very high gross profit margins, and predominantly fixed costs, Bill

Gates became convinced that one of the keys to market dominance was to price aggressively

low. Thus, in the case of Microsoft, overwhelming market share and aggressively low pricing

has combined to produce a price premium resulting in significant economic profits.

CONCLUSIONS AND RECOMMENDATIONS

We began by asking two questions, (i) what characteristics do strong brands have in common,

and (ii) what actions can managers take to create and maintain high performing brands? We

now offer our recommendations, in response to these questions.

Make sure your brand’s vision is clear and consistent, and consistently communicated. Very strong

brands stand for something, and they stand for it consistently. There is a sense of underlying

values that goes well beyond product or product features. Marketers often speak of brand

personality in connection with a brand’s meaning. Although these ideas are somewhat abstract

and difficult, they are impossible to implement unless the vision is communicated forcefully

and frequently by the people involved in creating and nurturing the brand. Brand personality

takes a long time to build, and a longer time to change. Oldsmobile’s futile attempt to shed its

”old man” image underscores the importance of a well thought out long-term brand

personality, and the difficulty of changing an entrenched image.

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Craft your identity – brand name, logo, and slogan - with forethought and balance. Brand identity is

the core of a brand’s communication efforts. Over time, a substantial investment will be made

and much of the brand’s equity will be inextricably tied to this identity. A product name can

rarely be changed, so choose one with utmost care. Support it with a logo. Give the logo

meaning related to the product class, unless it will have to apply to diverse product classes.

Slogans can then be used to support advertising, and help position the brand, but consistency

among all of the elements of brand identity is key. The Jaguar brand with its “Jaguar” logo, and

the slogan, “The art of performance” epitomizes consistency between different branding

elements as it blends performance and style.

Brand names cannot be changed, logos may be changed, slogans can and should be changed. Brand

names cannot be changed without substantial risk and expense, so for planning purposes brand

names should be viewed as permanent decisions. Logos may be changed. The change may be

necessary to keep the logo’s meaning consistent with a change in brand strategy, or it may be

necessary to update a logo that has simply become out of date with respect to culture and

marketing environment. Slogans should be changed to reflect the brand’s positioning as the

competitive environment and marketing strategy change. Thus, the brand name and

(generally) the logo should serve as anchors that maintain continuity for the brand, while the

slogan should adapt it to competitive changes. The name Pepsi has remained unchanged since

its inception, and the logo, with some updating, has maintained its essential content. Pepsi’s

slogans, on the other hand, have evolved continuously to reflect the changing needs of the

market. It started with “Cures nervousness. Relieves exhaustion” (1902), and have since

included slogans like “Cost small! Liked by all! Bottle tall!” (1934), “ “More bounce to the

ounce” (1953), “You’ve got a lot to live; Pepsi’s got a lot to give” (1969), “Join the Pepsi People

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Feelin’ Free” (1973), “Pepsi – the choice of a new generation” (1980), and “Nothing else is a

Pepsi” (1995).

Look beyond advertising to build brand awareness. Brand recognition and recall are important

objectives, and advertising is central to achieving them. But there are other promotional

activities that can be instrumental in creating stronger associations between your brand and

your market. Promotions such as contests, sweepstakes, event sponsorships and publicity forge

stronger connections because they involve your brand in aspects of your customers’ lives that

are meaningful and important to them.

Image is (almost) everything. If you’re on your way to creating truly great brands, it’s likely that

along the way you’ll extend them to products, services and causes that, while diverse, all

complement and strengthen the brand’s image. Each successful extension of this kind widens

the brand’s scope of influence, strengthening it more, provided the image is consistent. For

example, the Coca Cola brand has successfully been extended to clothing, luggage, appliances,

toys, collectibles, business accessories, and more.

Brand loyalty is precious, and precarious. Brand loyalty is the sine qua non of brand equity, and it

grows from experience – the promises you make and the promises you keep. Don’t be

complacent with customer satisfaction measures that indicate a low incidence of customer

complaints, no matter how low. Customer relationships, even the best of them, can hinge on

the success or failure of a single incident.

Price premium doesn’t have to mean premium price. The most profitable brands are often not the

highest priced brands. Instead, focus on providing superior customer value. If this is done, a

brand may command a price premium without needing a premium price. For many high

equity brands, the primary strategy is rarely based on premium pricing.

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 Figure 2
Brand Performance Checklist
Make sure your brand’s vision is clear and consistent, and consistently
communicated
Follow the leaders
Craft your identity – brand name, logo and slogan - with forethought and
balance
Brand names cannot be changed, logos may be changed, slogans can and
should be changed
Avoid the flavor of the month – what works for others probably won’t work
for you
Rules of the road
Look beyond advertising to build brand awareness
Image is (almost) everything
Brand loyalty is precious, and precarious
Price premium doesn’t have to mean premium price

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