How brand equity metrics drive brand strategy

On Friday 2 April 1993, Philip Morris cut the price of Marlboro cigarettes by 20%, to compete with generic cigarette manufacturers selling budget and supermarket own-label brands at low prices. The marketing and financial media immediately ran hysterical headlines announcing the death of the Marlboro brand specifically, and premium branding generally.

Philip Morris' share price went into freefall, dropping by 26% in one day and cutting $10 billion off the Philip Morris market cap. Investment analysts slashed the share price of Coca-Cola, Tambrands and many other branded manufacturers.

But 'Marlboro Friday' was not the death of either the Marlboro brand or premium branding. Marlboro's action stopped a price war that had begun in the early 1990s recession, leading to significant US market share erosion for Marlboro. Marlboro brand managers had wrongly believed that the brand's absolute price was sacrosanct. As its competitors increasingly cut price Marlboro's relative price premium grew, putting the brand out of reach for many hard-pressed consumers. By cutting its price Marlboro restored the relative premium over generic brands.

As a result Marlboro rapidly recovered its lost market share and Philip Morris recovered its share price within two years. Some 16 years later, the Marlboro brand commands a global volume of 467 billion 'sticks' out of a global total market of 1,420 billion 'sticks' (The Times, August 2007), an awesome 33% global market share. This drives multi-billion-dollar sales at the Altria Group, the holding company of Philip Morris. Marlboro's brand value currently stands at $5.2 billion (BrandFinance500, 2009).

Not bad for a 'dead' brand. But all Philip Morris did was to rebalance Marlboro's price:value equation in the minds of consumers. Marlboro provides a salutary lesson for brand managers who have not yet lived through a major recession. The fact is that managers of premium brands are often slow to realise that drivers of consumer preference have changed. Price is not the only demand driver that needs to be adjusted in recession, and brand managers need to learn how to finesse them all.

FINESSING THE DRIVERS OF CONSUMER CHOICE

The crucial issue is interpreting the utility of different brand equity attributes to better predict changes in consumer preference and demand. Brand equity attributes, or drivers of consumer demand, can be categorised into three distinct groups: functional, emotional and conduct. Brand preference affects consumer behaviour in the form of trial, repeat, recommendation and willingness to pay a price premium.

PEPSI VS COKE

• Taking a brand like Coca-Cola, the three brand equity categories driving demand are:

• functional drivers, e.g. taste, aroma, bottle design, availability, price

• emotional drivers, e.g. innovation, popularity, activity, optimism, aspiration, sociability

conduct drivers, e.g. responsible production, employment practices, honesty and transparency, corporate social responsibility, energy policy. Each of these macro-drivers can be further sub-analysed into numerous micro-drivers to gain a deeper understanding of which macro and micro drivers are driving consumer choice at a given point in time. It is possible to statistically model and predict the effect of changing performance on each driver.

It has been shown that when consumers rate Coke and Pepsi in blind tests, the preference is for Pepsi. However, when the brands are named and consumers asked to rate all other attributes in addition to taste, Pepsi still wins on taste but Coke is preferred overall (see Figure 1).

Every consumer has a mental map of the attributes and sub-attributes that matter most to him or her, when selecting brands in each product or service area. It is possible to map the performance of each brand against each attribute and then compare this with the consumer's perceptual map of what really matters in the selection of a brand. By understanding what matters to a consumer at a given point in time and understanding how that consumer rates the performance of each brand in the marketplace, brand managers are able to explain and predict brand preference and demand.

Over the last decade Pepsi has done a good job of investing in image attributes (through music and sports sponsorship, improved advertising and new packaging). The results speak for themselves (see Figure 2).

This effect applies to all stakeholder groups. It is interesting to note that, in the same period that Pepsi outperformed Coke among consumers, the relative share price to net earnings ratio (price:earnings ratio or P:E ratio) reversed for PepsiCo and Coke, indicating a growing preference among investors for the Pepsi branded business (see Figure 3).

VODAFONE VS PARTNER BRANDS

Just as one brand can outperform another, in a competitive context it is also possible for one brand to enhance the performance of another by improving its performance on key consumer attributes. This is the basis of all master or endorsement branding strategies.

A good example of this is the effect the Vodafone brand has on the performance of smaller, less well-known, partner brands (licensees of Vodafone technology and branding).

The anonymous example over the page illustrates the effect Vodafone has on the performance of one potential partner brand against certain key performance attributes – (notably innovative designs, network quality, international network etc. (see Figure 4 over the page).

THE COSTS AND BENEFITS OF CHANGING BRAND ATTRIBUTES

It is also possible to analyse the cost of changing a brand's performance on each macro- or micro-driver, and then to compare the uplift value of increased demand, with the cost of delivering that improvement. Improving performance on the price driver is expensive because there is a one-to-one relationship between price cuts and the bottom line. Improved performance on other drivers may not be as costly to deliver, and brand managers need to understand this relationship as market conditions change.

For example, in recent years, many food companies have adopted fair trade, Rainforest Alliance, organic Soil Association, Carbon Trust or similar endorsements to strengthen conduct brand equity attributes, which drive consumer preference. This is generally inexpensive and, some might argue, rather cynical. But it has worked to date. Many of the certification marks have been shown to increase volume or demand and to create a price premium for minimal investment, though whether they will continue to do so in the current market is a moot point.

Tracking how consumer demand drivers change is the best way of finessing brand positioning from time to time, to maximise market share. It is by no means easy because each consumer's attribute utilities vary according to time of day or season of year, life stage, point in the economic cycle, disposable wealth profile, changing product alternatives, whether purchase is for own consumption, motive for purchase, place of consumption, peer pressure, prevailing social conventions, external events etc. The utilities attached to individual attributes are never fixed for individuals or consumer segments. We measure them in aggregate at points in time in order to predict demand. High-quality research is a must and brand managers have to fight the tendency to cut quantitative market research budgets in recession.

CHANGING CONSUMER NEEDS

The fact is that in recessions, there is often a sea change in the psychology of consumers that needs to be understood. Consumers' changing position on Maslow's hierarchy of needs directly affects brand strategy. Consumer needs move back down the pyramid during recessions.

In the last year, Wal-Mart has been transformed from an anti-hero of the consumer lobby to being the people's champion. Its revenues have grown rapidly as consumers have shown their loyalty through their wallets. Walmart's revenues and profits have grown rapidly. Its market capitalisation has increased from $200 billion to $270 billion in a year. Its brand has increased in value from $39.0 billion to $40.6 billion in a year, overtaking Coca-Cola to be the world's most valuable brand (Brand-Finance500, 2009). McDonald's and other everyday brands have followed the same pattern.

Meanwhile, brands like Louis Vuitton, BMW and L'Oréal have gone into reverse as consumers opt for function over image. Duchy Originals, an archetypal self-actualisation brand, has suffered. Its range was recently cut and prices reduced as consumers returned to basics. Innocent has suffered for the same reason and recently took the Coca-Cola shilling, to cut costs and go mass market.

Premium brands are not going to disappear overnight, but brand managers need to flex the drivers of demand to focus on consumers' changing needs. Strong brand leadership is needed to achieve what may require significant changes in brand strategy.

USING DEMAND DRIVERS ANALYSIS IN THE RESIDENTIAL ENERGY MARKET

In the current market environment it is important for energy brands to understand the relative importance of demand drivers and what they each cost to change. Basic commodity prices are important but should residential energy marketing strategies and budgets focus on improved service, customer information or image advertising?

Figure 5 illustrates the use of quantitative research to identify the relative importance of different macro and micro drivers on demand in the residential energy market.

Residential energy customers are driven primarily by functional drivers, above all supply quality and reliability and price. Billing and ease of payment, meter reading and proactivity (on cost) are of equal importance. Energy brands need to ensure that they are perceived as proactive in helping customers reduce energy bills in the face of rising prices. This is an area of high importance to customers, which can be influenced regardless of actual price increases.

Once brand managers have identified which attributes have the strongest correlation with brand preference, and changes in acquisition and lapse, it is possible to compare the cost of changing those attributes with the net present value of the customers saved or won for the brand.

STRONG BRAND LEADERSHIP

Some have argued that, in recession, branding is the last thing CEOs should be wasting their time on. However, branding is far more important now than it has ever been, precisely because it is about much more than logos and marketing communications. It is about having a unique personality, a point of view and a 'positioning' in the hearts and minds of consumers – which appeals in current depressed conditions.

Strong brands must have clear guiding principles, values, behaviour and culture, which they consistently maintain. Apple, BBC, Body Shop, Cooperative and Virgin are all brands that display these characteristics. They all stand for something genuine. As a result they are liked, respected and trusted by stakeholders.

Take Virgin. In 1968, Richard Branson, the idealistic college dropout, developed an enduring brand promise. In his own words:

'The Virgin brand promise is based on five key factors: value for money, quality, reliability, innovation and an indefinable, but nonetheless palpable, sense of fun.

'At Virgin, we know what the brand name means, and when we put our brand name on something, we're making a promise. It's a promise we've always kept and always will. It's harder work keeping promises than making them, but there is no secret formula. Virgin sticks to its principles and keeps its promises.'

Every customer who has been exposed to Virgin's 300 businesses will recognise what he means, and agree. Once Virgin Group stops delivering on its unique brand promise it will stop growing.

Virgin has a strong 'moral compass', which is as compelling today as it was 40 years ago. So strong that Branson now claims Virgin is a 'branded venture capitalist' investing its unique value system, trademarks, brand management expertise and funds only in compatible businesses. One man's vision has turned Virgin into a thriving empire through strong leadership and by sticking to its principles.

However, while the guiding principles need to remain constant, detailed delivery needs to adapt. Virgin is simplifying offers and cutting prices in many of its business lines.

With a strong CEO and a disciplined brand guardianship function brands can adapt to changing consumer needs without losing their guiding principles. Only a strong CEO with a strong brand management function has the combined authority to direct change and defend budgets.

ADAPTING TO THE NEEDS OF OTHER STAKEHOLDERS

While the most important audience for brands is consumers, it must never be forgotten that brands affect the attitude and behaviour of all stakeholder groups.

• Direct stakeholders include: consumer staff, suppliers, distributors, financiers.

• Indirect stakeholders include: communities, government, industry and professional groups, special interest groups, media.

The attitude of all stakeholders changes in recession. These groups need to be tracked and responded to as carefully as changes in consumer needs.

CONCLUSIONS

For those brands that follow these lessons recession is an opportunity not a threat. Many competitor brands will be wondering 'who moved my cheese', while well-managed brands go off to look for it.

Warren Buffet says that he only invests in companies whose management he likes, respects and trusts. He invests in strongly branded businesses like Johnson & Johnson, because he believes they understand their consumers' changing needs, respond to them and create long-term loyalty. He invests for the long term and asserts that strongly branded businesses produce the best returns. Such companies know where they are going and so do their consumers – even in recession.

A DEDICATED BRAND MANAGEMENT COMPANY

To ensure that the pressure for brand consistency can be reconciled with changing needs during recession, a strong brand guardianship function is required. The best approach is to create a dedicated brand management company that:

• defines brand vision and mission

• articulates brand behaviour and culture

• plans and executes visual identity and brand communications

• coordinates brand innovation and extension strategies

• registers, maintains and defends the brand's intellectual property

• develops design and customer service guidelines

• establishes training and quality controls

• values the brand and sets terms, conditions and royalties for its use

• manages brands licensing, joint venturing and partnerships

• exercises central control and discipline.

ABOUT THE AUTHOR

David Haigh is Founder and Chief Executive Officer of Brand Finance

[email protected]

Figure 1: Coke beats pepsi when other attributes revealed

Figure 2: Pepsico: 2002–2005 international volume growth

Figure 3: Brand effect on investor behaviour: Pepsi versus Coca-Cola. P:E ratio

Figure 4: Vodafone: impact on partner attributes

Figure 5: Driver importance – total market (energy)