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AEM 4550: Economics of Advertising Prof.: Jura Liaukonyte Lecture 11 Brand Equity

AEM 4550: Economics of Advertising Prof.: Jura Liaukonyte Lecture 11 Brand Equity. Lecture Plan. HW 3 HW 4 Brand Equity Measuring Brand Equity Example How to calculate Brand Value. Brand Equity.

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AEM 4550: Economics of Advertising Prof.: Jura Liaukonyte Lecture 11 Brand Equity

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  1. AEM 4550: Economics of AdvertisingProf.: Jura LiaukonyteLecture 11 Brand Equity

  2. Lecture Plan • HW 3 • HW 4 • Brand Equity • Measuring Brand Equity • Example • How to calculate Brand Value

  3. Brand Equity • 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.

  4. Brand Equity

  5. Brand Equity: Why it matters • Outcomes of brand equity • 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

  6. Benefits of Brands to Consumers • Simplifies choice process • Enhances confidence in choice • Reduces perceived risk – recognition of consistency of quality • Provides emotional benefits – signal of status, taste, or affiliation

  7. Brand Equity Research Objectives • 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

  8. Business Week Top 10 Brand Equity

  9. BrandZ Top 100 Brands 2011

  10. Interbrand 2011

  11. 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.

  12. 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.

  13. Brand Equity/Value • 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: • the brand’s function to create cost synergies, • the brand’s function to generate demand for the products and services, and • the brand‘s function to secure future demand and thus reduce operative and financial risks.

  14. 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.

  15. 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 homogenous customer group.

  16. 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.

  17. 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.

  18. Demand Analysis

  19. 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).

  20. Brand Strength Score

  21. 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.

  22. 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.

  23. Net Present Value Calculation

  24. 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).

  25. 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

  26. 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 2008 assume we are in year 2003. • Normal analysis requires forecasting 5 years in advance. • We will assume that the actual financial performance for the years 2004, 2005, 2006, 2007, and 2008 (obtained from financial statements) is the forecast as of 2003.

  27. 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”

  28. 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 13) 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 13 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)

  29. DELL

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