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Critique of CBBE Model and Inter-Brand Approach

Brand Management
Ronald Riju.R

Customer-Based Brand Equity

Customer-Based Brand Equity is formally defined as the differential effect that brand knowledge has on consumer response to the marketing of that brand. A brand is said to have positive customer-based brand equity when consumers react more favorably to a product and the way it is marketed when the brand is identified than when it is not (e.g., when the product is attributed to a fictitious name or is unnamed). Thus, a brand with positive CBBE equity might result in the consumers acceptance of a new brand extension, less sensitiveness to price increases and withdrawal of advertising support, or willingness to seek the brand in a new distribution channel. On the other hand, a brand is said to have negative customer-based brand equity if consumers react less favorably to marketing activity for the brand compared with an unnamed or fictitiously named version of the product. The main ingredients of consumer based brand equity are

Differential effect Brand knowledge Consumer response in marketing.

Customer-based brand equity (CBBE) model incorporate recent theoretical advances and managerial practices in understanding and influencing consumer behavior. It helps answer the two most frequently asked questions: 1. What makes a brand strong? 2. How do you build a strong brand? CBBE model provides a unique point of view as to what brand equity is and how it should best be built, measured, and managed.

Determinants of Customer-Based Brand Equity :

Customer is aware of and familiar with the brand Customer holds some strong, favorable, and unique brand associations in memory o Points-of-parity o Points-of-difference

Benefits of Customer-Based Brand Equity:

Enjoy greater brand loyalty & be less vulnerable to competitive marketing actions Command larger margins & have more inelastic responses to price increases and elastic responses to price decreases

Receive greater trade cooperation & support Increase marketing communication effectiveness Yield licensing opportunities Support brand extensions

Representative Customer-Based Brand Equity Tools:

To help guide brand planning & measurement, three models of increasing scope are helpful: Brand Positioning Model Points-of-Parity Points-of-Difference

Brand Mantras

Brand Resonance Model Salience, Performance, Imagery, Judgments, Feelings, & Resonance Brand Value Chain Model Marketing Program Investment Customer Mindset, Market Performance Shareholder Value These models can be used Qualitatively to guide & interpret possible marketing actions Quantitatively to measure marketing effects


Revolves around 4 basic steps Brand Identity, Brand Meaning, Brand Responses and Brand Relationships CBBE Pyramid that relies on 6 building blocks, namely Brand Salience, Brand Imagery, Brand Performance, Consumer Judgment, Consumer Feelings and Consumer Brand Resonance

Takes into factor the customers feelings towards the brand under study It uses qualitative metrics

Critique :
The advantage of this study is that it investigates a real brand with real potential B2B buyers, however there is a risk that the results may represent context-specific factors that are not representative of all industrial markets.

Nevertheless, some interesting insights and challenges have been identified in applying Kellers CBBE model in an organisational environment.

It is suggested that an adaptation of the model is necessary for industrial marketers to effectively use it in building, measuring and managing brand equity. While this research has highlighted modifications required for the building blocks and some new sub-dimensions, further research is needed. Knowledge gained from this investigation and future studies will assist industrial marketers in their ability to develop more effective marketing strategies, and to make better investments in their brands

A brand strategy agency, draws upon financial results and projections in its own model for brand valuation. This model reviews a company's financial statements, analyzes its market dynamics and the role of brand in income generation, and separates those earnings attributable to tangible assets (capital, product, packaging, and so on) from the residual that can be ascribed to a brand. It then forecasts future earnings and discounts these on the basis of brand strength and risk. This model estimates brand value on this basis and tabulates a yearly list of the 100 most valuable global brands

Interbrand Approach
The Interbrand approach is a variation on the Brand Earnings approach. Interbrand determines the earnings from the brand and capitalizes them after making suitable adjustments

Interbrand takes the forecast profit and deducts a capital charge in order to determine the economic profit (EVA). Interbrand then attempts to determine the brands earnings by using the brand index. The brand index is based on seven factors. The factors as well as their weights are: 1. Market (10%) Whether the market is stable, growing and has strong barriers to entry 2. Stability (15%) Brands that have been established for a long time that constantly command customer loyalty 3. Leadership (25%) A brand that leads the sector that it competes in 4. Trend (10%) Gives an indication where the brand is moving 5. Support (10%) The support that the brand has received 6. Internationalization/Geography (25%) The strength of the brand in the international arena 7. Protection (5%) The ability of the company to protect the brand

Algebraically this is determined as

Brand Value = (Profit Per the Income Statement - Capital Charge) x Branding Index x Implied Multiplier .

There are three key aspects that contribute to the assessment: the financial performance of the branded products or services, the role of brand in the purchase decision process and the strength of the band.

Financial performance measures an organizations raw financial return to the investors. For this reason, it is analyzed as economic profit, a concept akin to Economic Value Added (EVA).

To determine economic profit, we remove taxes from net operating profit to get to net operating profit after tax (NOPAT). From NOPAT, a capital charge is subtracted to account for the capital used to generate the brands revenues; this provides the economic profit for each analyzed year.

For purposes of the rankings, the capital charge rate is set by the industry weighted average cost of capital (WACC). The financial performance is analyzed for a five-year forecast and for a terminal value. The terminal value represents the brands expected performance beyond the forecast period. The economic profit that is calculated is then multiplied against the role of brand to determine the branded earnings that contribute to the valuation total as noted earlier

Role of brand measures the portion of the decision to purchase that is attributable to brandthis is exclusive of other aspects of the offer like price or feature. Conceptually, role of brand reflects the portion of demand for a branded product or service that exceeds what the demand would be for the same product or service if it were unbranded.

Role of brand determinations for this study derive, depending on the brand, from one of three methods: primary research, a review of historical roles of brand for companies in that industry, or expert panel assessment. The percentage for the role of brand is multiplied by the economic profit of the branded products or services to determine the amount of branded earnings that contribute to the valuation total.

Brand strength measures the ability of the brand to secure the delivery of expected future earnings. Brand strength is reported on a 0 to 100 scale, where 100 is perfect, based on an evaluation across 10 dimensions of brand activation. Performance in these dimensions is judged relative to other brands in the industry, and in the case of exceptional brands, relative to other world-class brands.

The brand strength inversely determines, through a proprietary algorithm, a discount rate. That rate is used to discount branded earnings back to a present value based on the likelihood that the brand will be able to withstand challenges and deliver the expected earnings.

Operating profits Taxes = NOPAT WACC = Economic profit Economic profit * Role of brand = Branded Earnings Brand Earnings * Brand strength = Discount Rate

Discount Rate, Growth Rate and Useful Life :

The discount rate, growth rate and the useful life of the brand are often the most neglected issues in brand valuation, yet they play an important role in the eventual valuation of the brand. Managers need to ask brand valuers pertinent questions regarding the assumptions made in determining these key variables. Most approaches make use of the discount rate and the growth rate in order to determine an appropriate multiplier that needs to be applied to the estimated annual value of brand earnings.

The perpetuity formula that is the basis for all these calculations is stated as:

Implied Multiplier = (1+ growth rate)/(Discount rate growth rate)

The discount rate is one of the most difficult variables to determine. In most Discounted Cash Flow analysis (DCF) the discount rate used is the firms weighted average cost of capital (WACC). This is shown as:

WACC = After tax cost of debt x target debt to total assets ratio + cost of equity x target equity to total assets ratio

Critiques over Interbrand:

Pros :
The advantages of this approach is that it is widely accepted and it takes all aspects of branding into account; by using the economic profit figure all additional costs and all marketing spend have been accounted for.

The major shortcoming of the model is that it compares apples with oranges. The international component should not be applied over the local brand earnings. If a company wants to bring the international aspect into play it must include potential international profits. Here two valuation

bases are muddled. On the one hand there is an in use basis and on the other hand, there is an open market valuation.

The appropriate discount rate is very difficult to determine as parts of the risks usually included in the discount rate have been factored into the Brand Index score. Even the appropriate rate for the capital charge is difficult to ascertain.

Aaker reveals that the Interbrand system does not consider the potential of the brand to support extensions into other product classes. Brand support may be ineffective; spending money on advertising does not necessarily indicate effective brand building. Trademark protection, although necessary, does not of itself create brand value.

1)With Interbrand it is quick to capitalize using this, but saying they have been evaluating "exactly how much brands are worth" seems to be little odd. Brand valuation is an opinion on the value of a brand, not mathematics, the concept of exactness is not applicable to valuation.

2) It is good that the standard requires to take into consideration financial, legal and behavioral science aspects, another matter is how you need to consider them 4) Interbrand states that "Brand valuation serves an important function in assessing a companys business potential. It is blatantly obvious that you can assess the business potential without resorting to brand valuation...

5) Interbrand states that "Previously it was difficult to compare the results of various brand valuation methods, as the lack of general standards for brand valuation resulted in highly divergent results. This will lead to insecurity on the part of companies, which were often reluctant to participate in brand valuation processes.