Revenue Premium as a Measure of Brand Equity

We’re now going to look at a third measure of brand equity, it’s called revenue premium as a measure of brand equity. The basic idea in this, is you’re going to look at the premium of brand earns over a private label in the market place. This is a newer measure of brand equity that was developed by researchers in Dartmouth and Columbia, and it kind of combines the measures of Interbrand brand ranking, and the Y&R Brand Asset Valuator. Because it gives you both a financial value of the brand and also some diagnostics. And it is more suitable for brands that are in the grocery store like your Colgate toothpaste or Snapple for example.

And it’s based on data that is collected, when you scan products in the grocery store during the check out, right. So there are companies like Information Resources Incorporated, IRI, and Nielsen, that collect this data whenever you scan the product in the check out counter. They know who you are. What brand you bought. What price you paid for the product. And what were the features of the brand and were there any marketing or display of feature surrounding the brand in the grocery store. This measure uses all that information to come up with a measure of brand equity. And there are some assumptions that this measure makes, right? The first assumption is that the brands make optimal marketing decisions.

In other words it means that brands make decisions that are best for themselves in order to maximize the brands profits. The demand phase by prior label is equal to the demand phase by the brand of product without the brand name. So the main difference between a prior label and the brand product is just a name and this is common in most grocery stores brand in fact. Right that the difference between the private label and the brand name ends up just being the brand. The product is for all practical purposes about the same. I have to warn you here though, this is a squash day, right?

This is a day where you’re going to look at some math, work through some numbers, but we are going to get through this together. We have to eat our vegetables, but it’s going to be good for us and we’re going to plow this through. Okay, so let’s look at this measure of equity, right? So equity is equal to revenue premium, how much more revenue the branded product makes over the private label. And any additional variable cost the branded product has to get over the private label. And then, it’s multiplied by something called a long term multiplier. So the equity is not just for this period, but for in the future also. And there are two terms here, d and r.

Let me explain them to you now. So d is equal to, Discount rate. So what is discount rate? Discount rate is something that we use a lot in finance and we’re going to use in marketing too. If I give you a dollar today and ask for the dollar back a year from now, my expectation is not that you give me a dollar, but you give me a dollar and 10 cents. The ten cents is the discount rate here, that is the amount of money I could have made without lending the dollar to you but investing it in the market or somewhere else.

So my expectation is that my return over a year is about 10% on the dollar and that is the discount rate. And whenever we make projections into the future, you want to include the discount rate when you are taking the future money to the present day’s terms. Now, r is = a stability factor.

So think of this as how stable a brand is down the road. Is this a risky brand or not a risky brand? If the sales of the brand is stable, you’re okay with getting the cash down the road versus today. If the brand is very risky, you want this money from the brand today. So how does this fit into the equity value here. So if r goes up, that is if r is stable, this value, 1 + d- r goes down if r goes up, all right? If that happens equity increases. So equity is higher for stable brands and lower for risky brands.