TRC

By Rajan Sambandam

Two companies offer consumers the same product at the same price and quality, yet one sells a lot better than the other. Why? The answer is the intangible value inherent in the brand name. It could manifest in the form of positive image, higher market share or even a price premium. But how can we measure the intangible value of a brand? Simple methods such as ratings of a brand’s attractiveness (either in the form of a single question or an index) will not distinguish the impact of tangible features and brand intangibles. What is required is an approach that can make this distinction and indicate the pure value of the brand in dollar terms. In this discussion we will take a look at how such brand value (often referred to as brand equity) can be reliably measured.

The basic problem in measuring the value of a brand is the degree to which one can control for the influence of various extraneous problems. The extent of these problems can vary by category. For example, if one were interested in understanding the brand value (or lack thereof) of private label brands (or store brands) compared to national brands in the breakfast cereal market, a simple experiment can be run. In this experiment one could switch the packaging but not the contents of the various cereal brands being tested, to measure the impact of the brand name. The problem becomes more difficult when we talk about complex services such as hotel chains or cell phone service. Simply switching packaging is no longer an option. What can we do in these situations?

The answer lies with a technique called discrete choice conjoint analysis. It is a trade-off based method that requires consumers to make choices based on the product combinations provided [for a more detailed explanation see the article Deriving Value from Research: The Use of Conjoint Analysis for Product Development]. The pattern of choices made provides us with enough information to identify the relative importance of the various features – brand included - being tested. Once we know this information it is relatively straightforward to hold the impact of the various features constant and identify the actual impact of the brand name on respondent choice. In essence, this is akin to switching the cereal boxes and holding the contents constant. This approach can be used as long as the product or service in question can be described using tangible features.

Example 1: Hotel Brand Value

The first example is from the hotel industry. Business travelers completed a discrete choice conjoint exercise where product bundles were described using seven features: hotel brand name, proximity to destination, restaurant location, presence or absence of a gym, internet access, rewards points and room rate. Importance scores were calculated for each of these features based on the choices made by the respondents and are given in Table 1. Note that brand is not the most important feature on which choice decisions are being made.

Table 1 - What drives hotel choice?

Next, a simulation was run to calculate the value of the brand. All five products were specified in exactly the same way except for the brand name. So effectively, it mirrors a market where there is no product differentiation whatsoever except for the brand name. This resulted in each brand having a different share of preference, but the differences in preference are now based solely on brand name. This is how we control for the effect of other features. In essence, holding the contents of the cereal box constant and varying the box itself.

Next we need to translate this difference in preference to difference in price premium. To do that, we change the prices for each brand in such a way that the shares are made equal. Once the shares of preference are equalized by varying the room rates, we are able to identify the different room rates that each brand could charge for exactly the same product. This information is given in Table 2 and shows the price premium enjoyed by the Brand B in this market place.

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