COMM428A:

Lesson 2: Brands and Brand Equity

Brand Origins and Brand Equity

Origins of Modern Brands

The concept of branding can be traced to cattle ranching, when branding irons were used distinguish among herds. At the end of the 19^th century, mass production and mass distribution of goods to mass-educated consumers in a society with growing mass media led to the necessity of product branding.

Harley Proctor is often credited with implementing the first brand when he burned a moon symbol on crates of soap as an identifier.

Early brands were identifiers, not as symbols of much more. But before long, mass-produced goods were found to be highly consistent in terms of quality. Therefore, brands began to become symbols of consistency and quality. Early brands were often nothing more than family names or place names, but they began to symbolize desirable abstract ideas.

Over time, marketers and strategic communicators discovered that successful brand messaging could turn icons and logos into symbols of much more. David Ogilvy (2010), a famous figure from advertising history, said of brand:

[Brand] image means personality. Products, like people, have personalities, and they can make or break them in the marketplace. The personality of a product is an amalgam of many things—its name, its packaging, its price, the style of its advertising, and above all, the nature of the product itself.

Today, brands can symbolize a whole host of abstract (usually human) qualities. Take a look at the following logos and think about the personalities of each.

In the following lessons, we will take a closer look at the techniques strategic communicators use to turn their brands into symbols and why. For now, the focus is on the fact that brands have come to symbolize abstract qualities and personalities in the minds of consumers. And when it comes to strategic communications, perception is reality. If people believe your brand is longer-lasting, then it is. If people believe your brand makes them more rugged, then it does.

If a large number of people have a positive belief in their minds about your brand, if your brand has become a symbol of something more, that is brand equity.

Measuring Brand Equity

The concept of brand equity is not that much different from the concept of home equity, although (as we will see) it is quite a bit more difficult to measure. If your home is worth more than you owe on the mortgage, you have equity. If your brand is worth more than what you’ve invested into it, you have brand equity.

Home equity is calculated by getting an estimate for the current value of your home and subtracting what you owe on the mortgage. Getting an estimate for the current value of a brand, however, is much more difficult. Unlike houses, brands are all different. In addition, as we’ve learned, brands are not lined up along a street for all to see, they are hidden in the minds of millions of consumers. But the difficulty of measuring brand equity has not stopped people from trying. In the end, there is another significant similarity between home equity and brand equity—you don’t really know what it is worth until it is sold.

One way to place a value on a branded product is to compare it to a nonbranded (generic) product. How much more profit from future sales does the branded product represent than a nonbranded product? That would be a measure of brand equity. However, we would have to convert all those future profits to present dollars to make them comparable. The present value (PV) of future earnings is simply a method to discount those future earnings to reflect the fact that a dollar now is worth more than a dollar sometime in the future.

As you can see from this basic equation, there are a lot of hypotheticals. There would have to be an otherwise completely similar generic product with which to compare the branded product. And the present values would be based on profit forecasts that are best guesses.

There is strong market demand for more sophisticated measures of brand equity (we are talking about a multibillion-dollar industry), and a number of market research and consulting companies have developed their own measures and metrics. Among the most recognized is from Interbrand.

I am sure you agree this is an impressive group of companies. CEOs think so too and are very eager to make the list. But how exactly does Interbrand measure brand equity?

Visit their site to review their approach. You can also watch a brief overview of Interbrand’s equity measurement methodology in Video 2.2.

As you can see, Interbrand’s approach has even more moving parts and assumptions than the basic brand versus nonbrand analysis introduced earlier. They examine brands across three broad areas of strength, financial performance, and role of brand to come up with a value.

The demand for brand valuation data is so strong that multiple respectable agencies now publish annual rankings of the world's most valuable brands—including Interbrand and Kantar. Because methodologies for each agency differ, the valuations will differ. According to Kantar, brand valuation is a combination of science and judgment, and that’s why valuations differ. Millward-Brown (now part of Kantar) places more emphasis on consumer opinion and loyalty than Interbrand, which appears to favor brands in more stable and proven industries. Both companies must make judgments about future earnings growth—sometimes it is very difficult to predict what the future will bring, even when that future is a few weeks out. In the case of Apple, our valuation indicates that not only are the company’s earnings increasing rapidly, so too is the brand contribution based on feedback from consumers around the world.

When basing estimates on so many moving parts, and when dealing with something as intangible as a brand, differences and swings in evaluations are to be expected. This is not to be critical or Interbrand, Kantar, or any other company’s brand equity valuations. They are doing an excellent job on a difficult topic. (They have also done an excellent job promoting the Interbrand brand.)

In their second installment on branding Why Invest in Branding?, Hertioga and Christensen (2021) explore why entities need to invest in branding, and how it creates economic value. They recognize that branding is everything an entity does with the intention of being recognized, and recognition binds trust and affinity.