So how do you calculate brand equity anyway?

Brand equity is probably the most important measure of the success of your branding activity, indeed your company activity, because it informs you about the full extent of your reach as a brand. As you know, everything flows from brand, which is like a reservoir of potential future cash flows. This blog article explains how to properly measure this critically important marketing construct.


The challenge for marketing is that it increasingly needs to be able to prove that it creates value (future cash flows) for the expenditure it incurs. Given this eternal challenge, I wrote a blog article briefly outlining the end-to-end process of doing so, entitled Budget cuts? Best you measure the shareholder value created by your corporate marketing!.


The above article puts this one into perspective. It is based on a methodology I created to measure the full impact of marketing spend, from branding to shareholder value, in a language shareholders and investors would understand. This is important because marketing spend is one of those constantly under fire from the board and other governance mechanisms when times are tough. The methodology was successfully presented at a global marketing peer reviewed conference through the Academy of Marketing at the University of Birmingham in the UK in 2008. This article considers the arrowhead of the marketing value chain, brand.


Before we start though, it is important that we are clear not only on what is meant by brand equity, but also on how it differs from customer equity. I have been to far too many meetings where supposed experts either confuse the two, or don't even really know what each construct actually is. That's normally the point where I walk out.


However, as is generally true of conceptual constructs that have no official definition (I wrote many, many pages trying to distill a reasonable definition for brand equity in a PhD I was reading for, having reviewed hundreds of journal articles on this topic alone), there is bound to be argument about what the definition is. Even worse, as there is no generally accepted definition of brand equity, there is also no generally accepted measure of brand equity. However, I can objectively support the following everyday description of brand equity, with the support of reams of contemporary academic research:

Brand equity is a measure of both potential and actual value. Firstly, it is a measure of the future value your current customers and brand advocates can generate as a result of your products or services fulfilling their needs. Secondly it is a measure of the potential value that could be created by customers that have not yet bought from you, but who would do so if they were in the market for your offering. 

In essence, it is a measure of all the future value you could possibly generate, given your brand positioning at this point in time. Your future brand initiatives will change this measure, which is why it's important to regularly review the assessment of your brand equity.

You may ask why future value. Well, what is done is done. You can't sustainably pay for tomorrow's salaries, expenses and capital with revenue you generated yesterday.  What you can sell tomorrow is all that matters in maintaining confidence in the sustainability and therefore the investment desirability of your business.


In essence,
Customer Equity = Brand Equity - the value that could be generated by customers that are not yet yours. I will write more on the fascinating topic of customer equity and customer lifetime value in a future blog article.


So how do you properly measure brand equity, in a shareholder value paradigm? Well, quite simply, it's expensive, and it takes time. While some components of it can be assessed by analysing your customer data, the propensity of potential customers can only be assessed by market research, focused market research, with the following goal:

To determine which customers would buy what products and services from you, and when they would buy them, should they expect to be in the market for the kinds of products and services you offer.

And that's just the start. While research project could potentially provide all sorts of secondary information as well, such as brand competitiveness and desirability, product and service competitiveness and desirability, in order to maximise the effectiveness of the research expense, the output of the appropriately designed market research project is just the first step to determining brand equity.


Note that the when in the objective above is critical, because all value is clearly not realised immediately, or at the same future time. So, while the market research helps answer who, by segment if you have them, would buy what from you in future, it does not yet quantify this value in a language shareholders understand. More work is required.

Figure 1: The number of customers in the entire market expected to take up your offering over time, from the market research.  The time horizon, here illustrated at 72 months, depends on the combination of products and services you offer, largely dictated by the lifespan of your current offerings. This is no easy matter either. 

To get to the next step, you need to take the segment values - the volumes of current and future customers who would make a contribution to the profitability of the enterprise at various points in time, and multiply those volumes over time with assessed inflation-adjusted AND competition-adjusted contribution distributions, per segment, per point in time, to determine the potential value of your brand in the market over the selected timeframe. It ought to be clear why the inflation and competition impact (depending on the nature of the industry and the uniqueness of the product or service) on pricing over time needs to be assessed at this point.


Now note that:

Contribution is a marginal revenue construct popular in economics and finance, which determines the additional income statement (not balance sheet) value created for a particular type of sale. It is a variable cost versus a fixed cost construct (fixed costs are taken as sunk costs) in cash flow modelling. 

A probability distribution rather than a fixed value assessment of the expected contribution per customer, per segment, over time, will give greater insight into the extent of the brand equity calculation. In other words, rather than simply say the brand equity is assessed as $8.287 billion, you would be able to say that the brand equity was likely to be between $6.392 billion and $10.543 billion. This is of critical importance in the context of assessing our customer equity, which we will get to in a later article. This figure is the value of your brand as a tradeable asset.

The following information can be derived from your existing customer data:

• The 'typical' portfolio of products of an existing customer, per segment
• The average (mean) contribution of an existing customer, per segment
• The spread factor (standard deviation) of the contribution of an existing customer, per segment
• The skew (shape of the probability distribution) of the contribution of an existing customer, per segment

Now why is the calculation of brand equity important? Well, it gives you an opportunity to express the value of your brand spend in terms shareholders and investors can understand. So, if you know exactly how much you spend on branding per annum and over the invest timeframe, you can determine the return on branding using existing corporate finance methodologies, which is of huge insight to shareholders to determine whether your brand investments are creating or destroying value. This could be good for you, enabling you to spend more on branding because you are creating value, or bad, showing that your brand expenditure is inefficient and that it needs corrective action. Either way, the lessons are critical in the interests of maintaining an efficient and sustainable business, especially in the current economic environment.


So in conclusion, there are three steps to calculating your brand equity

1. Market research to determine potential future 'consumption'
2. Monetary quantification of the potential
3. An assessment of the Present Value distribution of Brand Equity.

The additional value in knowing brand equity emerges once you have calculated your customer equity, because it enables you to determine the effectiveness of your brand in creating market potential. So if the ratio of customer equity to brand equity exceeds about 70%, you will probably have a very tough time expanding your market (depending on your offering), as it will never be possible to realise 100% of your brand equity as realised value. The lower the ratio, the higher the probability of realising increased income statement growth by means of directed marketing activities. 


However, since we have assessed brand equity as a distribution, being able to say that the customer equity to brand equity ratio is between 55% and say 85%, we know that it is as likely to be tough to grow our markets, as it might be easy to realise untapped potential. Only brutal honestly in the form of word from the streets (how often do you walk the streets as a strategic marketer?) will help you understand which end of the scale you are really performing at, but again, that is something that can be determined by means of market research.


The next blog will be on calculating customer equity, followed by one on customer equity optimisation using risk/return models from corporate finance, and closed by assessing the shareholder value created by your marketing efforts.


As you see, it's quite a technical process to calculate your brand equity. There is however sufficient detail here to get you started. However, if you wish to properly calculate your brand equity and don't quite know where to begin, you know where to find me!


PS By the way, why the 'equity' in 'brand equity'? Well, it's simply a word describing the measure of the value of the brand to the owners and/or investors! It describes the extent to which the investment in the brand can generate future revenue.