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«HOW MUCH OF BRAND EQUITY IS EXPLAINED BY TRUST? Tim Ambler PAN’AGRA Working Paper No. 96-905 December 1996 Tim Ambler is Grand Metropolitan Senior ...»

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Centre for Marketing

HOW MUCH OF BRAND EQUITY IS EXPLAINED

BY TRUST?

Tim Ambler

PAN’AGRA Working Paper

No. 96-905

December 1996

Tim Ambler is Grand Metropolitan Senior Fellow at London Business School. Thanks are due to

David Ballantyne, Kent Grayson, Devon Johnson, Chris Styles and participants in a World Wide

Web Conference in Spring 1996 for their helpful comments on drafts.

London Business School, Regent's Park, London NW1 4SA, U.K.

Tel: +44 (0)171 262-5050 Fax: +44 (0)171 724-1145 TAMBLER@lbs.lon.ac.uk http://www.lbs.lon.ac.uk Copyright © London Business School 1996.

How much of Brand Equity is explained by Trust?

Abstract Brand equity, key to the evaluation of marketing performance, exists in the minds and, figuratively, hearts of consumers, and other market place players; but is largely assessed on the basis of their observed behaviours. Such indirect measures are typically relative (to other brands), e.g. market share and relative price, whereas direct measures such as. awareness and attitudes, are conventionally expressed in absolute terms. The correlation between the two types has been poor. Expressing brand equity in relational terms opens a new line of research which may provide better performance prediction and assessment. Trust is the most popular measure for relationship assessment and may similarly prove to be the leading indicator for brand equity.

Some research proposals are made.

How much of Brand Equity is explained by Trust?

Marketers, and their senior and accounting colleagues, need to assess, annually at least, whether the expenditure is meeting the objectives the plan established. Short term profit contribution or other measures are, as will be shown, misleading without adjustment for the asset widely known as brand equity which may be expressed as a function of brand-customer relationships. Relationships are hard to measure and still harder to value financially. They can be expressed in both behavioral and attitudinal components, one of the most important may be “trust”. Definitions of brand equity, trust, neo-classical and relational paradigms are attached as an appendix.

This paper develops theory towards more relevant and predictive measures of brand equity. We may learn from comparing measures from a relational perspective with those from more traditional marketing analysis.

Brand equity is an asset, not the financial, or any other, measure of that asset. Clearly brand equity, like any other asset, will normally have a value which is realised when the brand is sold to a new owner. The asset should, however, be distinguished from its price. With those considerations as background, brand equity is presented as a function, largely, of brand-consumer relationships.

Depending on the characteristics of the particular market, other brand relationships may be even more crucial. If so, that customer group should be substituted but the argument, mutatis mutandis, would be unchanged. Introducing trust as a key relational variable brings together three perhaps diverse areas of scholarship (brands, relationship marketing and trust) but that synthesis forms the central thrust of this paper.

Marketing theory is, perhaps, fissioning when it should be fashioning. As Webster (1992), in particular, has advocated, marketing needs to supply cross-corporate cohesion, difficult if marketing thinking is itself splitting into separated paradigms. Paradigms determine measures: four specialists examining the same patient will each measure, and then diagnose, according to their own specialism. The patient, however, wants a single synthesised report taking the best knowledge from all quarters. This paper brings two ways of seeing marketing together: the neo-classical and the relational.

Gronroos (1994) discusses “the nature and sometimes damaging consequences of the dominant marketing paradigm of today, marketing mix management”. He is referring to what others, e.g.

Arndt (1983) call the “neo-classical paradigm”, namely the micro-economics based, analytic perspective where sales growth, or share, is seen primarily as a function of product, price, place and promotion (4 Ps, McCarthy 1960). This school of thinking supplies the basic MBA marketing course the world over. The underlying assumption is Cartesian: perfect rationality is the ideal towards which customers and marketers strive, bounded only by limits on information and computation. Objective information, analysis and calculation can, it is suggested, be combined to optimise marketing performance, i.e. profits over time. See O’Shaughnessy (1992, pp. 96-100) for a critique of rationality assumptions.

Gronroos suggests (p. 22) that relationship marketing is one of a number of paradigms that will increasingly supplement the marketing mix perspective but the literature (see special issue of The Journal of the Academy of Marketing Science, Fall 1995) is confused by two separate meanings.

The narrower one is the sub-branch of marketing dealing with personal business connections, especially in distribution channels. The wider one portrays the marketplace, and perhaps all business, as “a network of value-laden relationships” (Kotler 1991). To distinguish between the two, “relationship marketing” is used here for the former and the “relational paradigm” for the latter. Brands are, in the relational paradigm, anthropomorphised to the extent that people have “relationships” with them.





Thus the underlying discipline of the marketing mix, or neo-classical, paradigm is micro-economics whereas the relational paradigm is about people and draws its substance from political economy (Arndt 1983) and the “ologies” (e.g. psychology, social psychology, sociology, and anthropology).

Separating paradigms sacrifices the opportunity from cross-fertilisation. We should compare brand equity measures from both neo-classical and relational paradigms and establish how predictive they are of future profit performance. In particular, how much future profit performance variation can be explained by trust?

What is brand equity?

Marketing performance can only be determined in the light of the objectives the organisation sets itself. In this sense, success is subjective. Nevertheless, for most commercial organisations profit is

an important goal and this aspect of performance can be expressed as the combination of:

• Short term financial results, being the excess of profits, or cash flow, over the resources

–  –  –

• The increase in brand equity, which is an asset equivalent to the store of future profits, or cash flow, represented by customer habits and attitudes towards the brand and those of other influencers in the value-laden network that forms the "market". For convenience, this paper will term all members of the buyers/suppliers network "customers" whether they are distribution channel members, end users or "influencers", i.e. those that do not buy or sell but whose brand attitudes affect those that do.

–  –  –

where π is profit and BE is brand equity.

Until recently, companies were vaguely aware of an intangible asset comprising the uncashed results of their marketing efforts to date but measures were informal. Aaker (1996) proposes twelve1 brand equity measures most of which have long been used by marketers but only now being combined as a single vector measurement of the intangible asset which, in accounting terms, is brought forward at the start of the period and carried forward to the next. To assess marketing performance solely on by short-term profit makes as much sense as assessing sales using production volume without allowing for inventories at the start and end of the period.

If the asset, in either case, is high at the start of the period, no marketing/production activity may be needed at all to produce high sales. The business would be living off the past. Conversely, brilliant marketing activity may achieve a poor profit response in the same period but produce a leap in brand equity which will pay back in future periods.

The importance of the concept of brand equity becomes apparent in assessing how (well) advertising works. The world spends US $243Bn on advertising (Zenith 1995), about $130Bn of which is wasted (Abraham and Lodish 1990, Jones 1995). Direct response advertising aside, where does advertising go between the time the consumer sees/hears it and the next purchasing opportunity? Either advertising has some mental effect or it does nothing. This simple storage property of brand equity may be overlooked when managers look for immediate sales response.

Sales response may happen later than the end of the measurement period. For some categories, the Numbered 1 - 10: Price premium, user satisfaction/loyalty, perceived quality, leadership/popularity, perceived value, personality, organization (trust/admiration/proud to do business with), awareness, market share and price/distribution indices. Also: esteem and differentiation. (Figure 10-7) main advertising effect may be price support but this too will be delayed at least until the customer next purchases. Advertising must affect our hearts (figuratively) and minds before it can affect the marketing variables.

Direct response advertising may be effective without permanent memory effects since the consumer response can be almost contemporary with the advertising. Thus, the immediate objective of all other consumer brand advertising is to increase brand equity. Direct response advertising may well have a longer lasting, brand equity, effect as well. Effective advertising does not just grow sales, indeed it may not grow sales at all. It may protect existing sales (maintenance) though reinforcing habits or it may allow the brand to charge more or it may gain the respect of non-users.

Advertising, like any other form of communication, can do many different things but all of them, for commercial consumer brands, increase the store of future profits. Measuring brand equity is thus necessary for assessing advertising effectiveness.

Thus, symbolically and where advertising is the only variable being manipulated, AdFX = ∆BE (AdFX are ad. effects which are the change in brand equity) and therefore

–  –  –

Clearly there are other ways of increasing brand equity, public relations for example, but for the purposes of this analysis they are being held constant. Since the accounting period end cuts arbitrarily into the time when advertising is having its effect, we have to distinguish short term gains in profit from residual brand equity carried forward, previously termed “adstock” (Broadbent 1984). In equation (2), the effects of advertising are likely to cross into a new accounting period whereas the costs all fall into the old one. This, and the sheer difficulty of measuring AdFX, or ∆BE, contributes to short-termist cutting of advertising budgets.

Brand equity is made up of memories of different kinds. Procedural, or reflexive, memory (Rose

1993) records how we do things. It includes programmed behaviour patterns (habits) and is largely unconscious leading to the alarms, which proved unfounded, about the possibility of subliminal advertising. Declarative memory takes two forms: semantic, which records meanings and associations, and episodic, which records facts and events. Declarative memory can be cognitive (thinking-related) and affective (feeling-related). Awareness is cognitive as is our knowledge of a brand’s functional performance characteristics and price. Attitudes towards the brand are primarily affective2. Most importantly, our usage experience frequently purchased brands is likely to be merely reinforced by advertising (Ehrenberg 1974, O’Shaughnessy 1992, p. 217). The perceived quality of the brand will be a mix of actual quality facts we may know, e.g. from consumer reports, image characteristics from advertising, packaging and word of mouth and usage experience. All these, technically, reside in affective and cognitive memory but, figuratively, we can say that brand “The concept of evaluation in emotion links emotion to ′attitude′ in that attitude measures reflect an evaluation” (O’Shaughnessy 1992). Cognitive (thinking) attitudes exist but can also be treated as forms of awareness. In this analysis, cognition (thinking and rationality) and affect (feeling and emotion) will interact but are otherwise separate.

equity exists in the hearts and minds of those in the marketplace. Hereafter, I will just consider the end user or consumer. Consumer brand equity is only part of the whole: there are other customers along the chain, the sellers have brand equity and so do outside influencers. As it is cumbersome to use the full term, I will just use “Brand Equity” on the understanding that, in practice, the measures should be applied to all marketplace players.

In summary, brand equity is the intangible asset created by marketing endeavour. The asset is not the same as the financial valuation, or any other measure, of that asset. Performance measurement needs to include the change in brand equity over the period being assessed.

Brand equity measurement Parsimony requires measurers of brand equity to use the fewest necessary constructs. In other words, if brand equity can be measured at all, then most of it should be explained by an ndimensional vector where n is a small number. For example, some believe that market share is a reasonably good proxy for brand equity (n = 1) (Ehrenberg 1993). Others believe that relative price needs to be taken into account (n = 2). Others again would require that brand penetration, perceived quality/esteem, familiarity/awareness....... (n = 3, 4, 5....) should be included. Marketers, and their market research budgets, would be helped by n being as small as possible. How many constructs do we need?

The neo-classical paradigm sanctions, in principle, the reduction of short term results and brand equity each to a single financial valuation, or number, which may then be added together, e.g.

shareholder economic value. That is because the neo-classical paradigm itself is a micro-economics framework. In the relational paradigm, such compression is not possible. The assessment of both short term results and brand equity need multiple measures which cannot yet feasibly, for the purpose of assessing brand performance, be translated into a financial value - see Ambler (1995) for coverage of these issues.



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