9. Customer-based brand equity (Part 1) - Toledo.pptx

# Understanding customer-based brand equity Customer-based brand equity represents the value a brand accrues from consumer knowledge, feelings, and perceptions, leading to more favorable reactions towards branded products over unbranded alternatives. ### 1.1 The fundamental concept of customer-based brand equity * **Definition:** A brand possesses positive customer-based brand equity when consumers react more favorably to the product, price, promotion, or distribution of the brand compared to a fictitiously named or unnamed version of the same product or service. Essentially, the brand itself adds value. * **Economic Advantage:** This positive equity translates into a tangible economic advantage for the firm. ### 1.2 Factors influencing brand equity and market share * **Stability of Brand Shares:** Market shares for brands tend to be quite stable over time and vary significantly by region. * **Persistence of Early Entry:** Brands that entered a market early often maintain a long-term advantage. * **Distribution's Role:** Strong brands secure better in-store placement, which in turn reinforces and strengthens the brand. * **Past Experiences:** Previous consumer experiences with a brand have a lasting impact on preferences. ### 1.3 The role of brand knowledge in memory * **Associative Networks:** Consumer memory operates through associative networks where ideas are interconnected. The strength of these connections varies. * **Tip:** Stronger links between a brand and its associations mean those associations are more readily activated. * **Limited Attention:** Due to limited cognitive capacity, consumers tend to remember only a few key associations per brand. This is a key area that branding efforts target. ### 1.4 Key components of brand knowledge: Brand awareness * **Brand Recognition:** The ability of consumers to identify a brand when presented with it. * **Brand Recall:** The ability of consumers to spontaneously retrieve a brand from memory. * **Situational Recall (Recall Width):** Understanding *when* a brand comes to mind, i.e., the cues or situations that trigger its retrieval. This is critical because consumers typically choose from a very small "consideration set." #### 1.4.1 The importance of the consideration set * The consideration set, from which consumers make their final choice, is often a fraction of the total available brands. * Being included in the consideration set significantly increases the probability of a sale. For instance, in some categories, knowing a consumer's consideration set can resolve a large percentage of the uncertainty in predicting their choice. ### 1.5 Key components of brand knowledge: Brand image * **Brand Associations:** These are all the things consumers associate with a brand. They can be: * **Functional attributes:** Product features, quality, taste, etc. * **Non-functional attributes:** Feelings, values, social meanings, identity, and emotions. * **Elaboration Questions:** To understand brand image, marketers explore: * What product attributes come to mind? * What feelings does the brand evoke? * What type of people are associated with the brand? * What would the brand's personality be if it were a person? * What types of groups do consumers aspire to, reject, or belong to in relation to the brand (reference groups)? #### 1.5.1 The functional benefit trap * A common pitfall for companies is to focus excessively on functional product benefits. * Consumers often purchase brands for their meaning, identity, and emotional connections, not solely for superior product features. * **Tip:** It is often more effective to move beyond purely functional benefits and consider higher-order experiential and symbolic benefits to build stronger brand equity. #### 1.5.2 Image versus product-related attributes * While product attributes are important, non-product-related associations (like feelings, values, and social meanings) can be equally, if not more, influential in shaping consumer perceptions and behavior. * **Example:** A medicine might be chosen not just because it contains the active ingredient paracetamol that treats a headache, but because the brand name "Dafalgan" has acquired associations of reliability or care, making consumers feel more confident in its efficacy. * **Balance is Key:** Brands should not become too reliant on functional benefits alone, as consumers may find alternative, non-brand-specific solutions. A good balance between functional and non-functional associations is crucial. ### 1.6 The challenge of private labels (store brands) * **Dominance:** Private labels are highly dominant in some markets, particularly in Europe. * **Competitive Dynamics:** Retailers are simultaneously competitors and partners to national brands, as they control the point of sale and offer their own brands. * **Strategic Options for National Brands:** * **Reduce Price:** This often requires an unrealistically large increase in sales volume to achieve break-even. * **Break-Even Analysis:** A significant price reduction (e.g., ten percent) can necessitate a disproportionately large increase in sales volume (e.g., over seventy percent) to cover costs, making this strategy risky. * **Produce Private Labels:** This can offer benefits like market share, retailer relationships, and utilization of spare capacity, but may conflict with brand reputation, be difficult to execute well, and potentially reach saturation. * **Differentiate as a Brand:** This is often the most sustainable strategy, focusing on non-functional benefits. #### 1.6.1 Why private labels are weaker in some markets * **Supply-Side Factors:** In markets where national brands have stronger marketing support, independent stores are more prevalent, and national brand manufacturers are the primary source of private labels, private label growth can be slower. * **Demand-Side Factors:** In emerging markets, the price-quality heuristic might be stronger, and brands may play a more significant role in reducing perceived risk and fulfilling social impression functions for consumers. In North America, larger retailers account for a smaller proportion of overall sales, and the quality gap between national brands and private labels can be larger. ### 1.7 Conclusion on brand strategy * Purely competing on functionality or price is a risky strategy, especially in low-margin categories. * Strong brands build value by cultivating meaning, emotion, and identity, ensuring that consumers perceive more than just product characteristics. This is the essence of customer-based brand equity. --- # Brand awareness and memory associations This section explores how brands are remembered through associative memory networks, focusing on brand awareness via recognition and recall, and the strategic use of distinct memory associations given consumers' limited attention. ### 2.1 Understanding brand equity through memory Customer-based brand equity is built on what consumers know and feel about a brand. A brand possesses positive brand equity when consumers react more favorably to its associated product, price, promotion, or distribution compared to an unbranded or fictitiously named version. This indicates that the brand itself contributes economic value. ### 2.2 Stability and persistence of brand shares Brand market shares tend to be remarkably stable over time and vary significantly by region. Brands that establish an early presence in a market often maintain a long-term advantage. Distribution also plays a crucial role, with strong brands securing better in-store placements, which in turn reinforces their brand strength. Past consumer experiences also exert a lasting influence on brand preferences. ### 2.3 Associative memory networks and brand knowledge Consumer memory functions through associative networks where ideas are interconnected by links of varying strengths. Due to limited attentional capacity, individuals tend to remember only a few distinct associations for each brand. Branding strategies leverage this by aiming to create strong, unique associations in consumers' minds. #### 2.3.1 Brand awareness: Recognition and recall Brand awareness is a fundamental aspect of how brands are remembered and is assessed through two primary mechanisms: * **Recognition:** This refers to a consumer's ability to identify a brand when exposed to it. For instance, recognizing a brand of chocolate when shown its packaging. * **Recall:** This measures a consumer's ability to spontaneously retrieve a brand from memory. It can be further broken down by: * **Recall Depth (Who):** The percentage of people who can recall the brand. * **Recall Width (When):** The cues or situations that trigger brand recall. This includes remembering a brand in specific contexts, such as places, times, associated people, attributes, or emotions. > **Tip:** Understanding *when* a brand comes to mind is as critical as knowing *if* it can be recalled, as it directly impacts its inclusion in a consumer's consideration set. #### 2.3.2 The consideration set The set of brands consumers actively consider when making a purchase decision (the consideration set) is typically very small compared to the total number of available brands. Being included in this set significantly increases a brand's chances of being purchased. For example, in categories like deodorants, knowing a consumer's consideration set can resolve up to 80% of the uncertainty in predicting their choice. > **Example:** If a product category has 40 available brands, and a consumer's consideration set is reduced to just 4 brands, the odds of a sale for a brand within that set increase dramatically, assuming all other factors are equal. #### 2.3.3 Brand image and associations Brand image encompasses the associations consumers hold with a brand, which can be functional (e.g., quality, taste) or non-functional (e.g., feelings, values, social meanings). Non-functional associations are often as important, if not more so, than functional ones. > **Example:** For Tony's Chocolonely, associations might include "child labour" (ethical concern), "expensive" (price), "caramel" and "tasty" (functional attributes), and "happy children" (emotional/social benefit). Companies should be mindful of the "functional benefit trap," which occurs when businesses overemphasize product features and overlook the emotional, symbolic, and experiential benefits that consumers often seek. > **Tip:** Building strong, meaningful associations that go beyond mere product characteristics is key to establishing customer-based brand equity. ### 2.4 The role of brand image versus functional attributes While functional product attributes are important, brands often gain value through non-product-related associations. For instance, consumers might purchase a headache remedy not just because of its active ingredient (e.g., paracetamol) but because they associate it with relief and well-being. This highlights the need for a balance between product-related and non-product-related associations to avoid consumers becoming overly reliant on the active ingredient and potentially switching to alternatives. ### 2.5 The challenge of private labels Private labels, or store brands, have a significant presence, particularly in Europe. Retailers can be both competitors and partners to national brands, as their own brands are prominently displayed. Strategies for national brands facing private label competition include: * **Reducing price:** This often requires substantial increases in sales volume to achieve break-even, which can be unrealistic. A break-even analysis for a price reduction might reveal that a 10% price cut could necessitate a 71% increase in sales volume. * **Producing their own private label:** This can offer benefits like gaining a share of the private label market and improving retailer relationships, but it may conflict with brand reputation and create operational complexities. * **Differentiating as a brand:** This involves building strong brand image and associations that extend beyond functional benefits. > **Example:** Renova, a toilet paper brand, faces the strategic choice of how to compete with private labels. Simply reducing its price could be detrimental due to the high volume increase needed to break even. Purely competing on functionality or price is risky, especially in low-margin categories. Building meaning, emotion, and identity allows brands to offer consumers more than just product features, thereby cultivating customer-based brand equity. --- # Brand image and the functional benefit trap This topic explores how brand image, encompassing associations beyond functional attributes, is crucial for brand equity, warning against an overemphasis on product features at the expense of emotional and symbolic benefits. ### 3.1 Understanding brand equity Brand equity refers to the value a brand holds due to the knowledge, feelings, and expectations consumers associate with it. A brand possesses positive brand equity when consumers react more favorably to its product, price, promotion, or distribution compared to a similar product marketed under a fictitious or no name. This indicates that the brand itself contributes economic advantage. ### 3.2 Determinants of brand equity * **Market share stability:** Brand shares tend to be stable over time and vary by region. * **Early entry advantage:** Brands that enter a market early often maintain a long-term advantage. * **Distribution:** Strong brands secure better shelf placement in retail stores, which in turn reinforces the brand's strength. * **Past experiences:** Previous consumer experiences have lasting effects on brand preferences. ### 3.3 Brand knowledge and memory Consumer knowledge about a brand is stored in associative networks within memory, where ideas are interconnected with varying strengths. Due to limited attention spans, consumers typically remember only a few distinct associations per brand, a phenomenon that branding strategically leverages. ### 3.4 Brand awareness Brand awareness is a key component of branding, encompassing two aspects: * **Brand recognition:** The ability to identify a brand when presented with it. * **Brand recall:** The ability to spontaneously retrieve a brand from memory. Beyond simply remembering a brand, it's also critical to understand *when* a brand comes to mind, i.e., the situational cues that trigger its recall. This is vital because the set of brands consumers actively consider making a purchase from (the consideration set) is often very small relative to the total market offering. > **Tip:** The consideration set for consumer packaged goods can be as small as one-tenth of the total number of available brands. Inclusion in this set significantly increases the likelihood of a sale. ### 3.5 Brand image Brand image refers to the associations consumers hold with a brand, which can be: * **Functional attributes:** Such as taste, quality, or performance. * **Non-functional attributes:** Including emotions, values, and social meanings. Non-functional associations are often as, if not more, important than functional ones. Brand image can be explored through questions like: * What comes to mind when you think of this brand? * What product attributes are associated with this brand? * What emotions does this brand evoke? * What type of people are associated with this brand? * If this brand were a person, what would its personality be like? #### 3.5.1 Image versus recall While recall focuses on whether consumers remember a brand, image delves into *what* they remember and associate with it. It's important to distinguish between product-related attributes (e.g., "Paracetamol makes my headache go away") and non-product-related attributes (e.g., "Dafalgan makes my headache go away"). While product-related attributes are direct, non-product-related associations can build deeper meaning and differentiate a brand, but companies must ensure these associations don't entirely overshadow the core functional benefits. > **Example:** A brand like Dafalgan may be associated with headache relief due to its paracetamol content (product-related), but it can also build an image around making one feel better or providing a sense of well-being (non-product-related). The goal is to create a balance where the brand adds value beyond just the active ingredient. ### 3.6 The functional benefit trap The functional benefit trap occurs when companies overly focus on product features and functional benefits, assuming these will sway consumers. However, consumers often seek more than just product utility; they desire meaning, identity, and emotional connection. * **Higher-order benefits:** Companies should consider experiential and symbolic benefits, such as how using a brand makes them feel, the types of people they relate to, or what it says about their identity. * **Reference groups:** Brands can leverage associations with aspirational (groups we admire), dissociative (groups we reject), and associative (groups we belong to) reference groups. > **Tip:** In advertising, the shift has moved from purely product-centric messaging to incorporating emotions, family, and lifestyle, reflecting the importance of higher-order benefits. ### 3.7 The role of private labels Private labels, or store brands, have a significant presence, particularly in European markets. Retailers with private labels act as both competitors to national brands and collaborators, as their own brands share shelf space with national brands. #### 3.7.1 Strategic options against private labels When competing against private labels, national brands have several strategic options: * **Reduce price:** This can be risky as it often requires an unrealistically large increase in sales volume to achieve break-even. * A break-even analysis illustrates that a modest price reduction (e.g., ten percent) can necessitate a substantial sales volume increase (e.g., seventy-one percent) to compensate for lower margins. * Reasons to reduce price include a majority of consumers citing price as important and checking prices before purchase. * Reasons not to reduce price include the unrealistic volume increase needed, potential dilution of brand equity, and harm to retailer relationships. * **Produce private labels:** This can allow a company to capture a share of the private label market, potentially improve retailer relationships, and leverage economies of scale. However, it can also be inconsistent with the brand's reputation, difficult to manage alongside a core brand, and potentially saturate the market. * **Differentiate as a brand:** This is often the most sustainable strategy. #### 3.7.2 Why private labels are less dominant in some markets The dominance of private labels varies globally due to supply and demand factors: * **Supply-side factors:** In markets where national brands are strongly supported by marketing, retailers account for a smaller portion of sales, and there's a larger quality gap between national and private labels, private labels face more challenges. * **Demand-side factors:** In emerging markets, a stronger price-quality heuristic, a greater need for risk reduction through brands, and a more significant social impression function of brands make consumers more reliant on national brands. In North America, for instance, brands play a more critical role in consumers' lives, and private labels may be perceived as having lower quality. ### 3.8 The strategic dilemma for national brands National brands face a complex relationship with retailers, who are both gatekeepers to consumers and direct competitors through their private labels. Retailers often have control over the point of sale and are developing increasingly sophisticated brand portfolios. Ultimately, relying solely on functional benefits or price competition is risky, especially in low-margin product categories. Strong brands build meaning, emotion, and identity, enabling consumers to see beyond mere product characteristics, thereby cultivating customer-based brand equity. --- # The competitive landscape of private labels This section delves into the strategic positioning of national brands when faced with the growing influence of private labels (store brands), particularly in the European market. ### 4.1 The rise and impact of private labels Private labels have become a significant force in various markets, with their dominance being particularly pronounced in Europe. This market presence creates a complex dynamic where retailers act as both competitors and partners to national brands, as their own brands are showcased alongside established national offerings. #### 4.1.1 Market presence and regional differences The market share of brands tends to be stable over time but varies significantly by region. Early market entrants often maintain a long-term advantage. Distribution also plays a crucial role; strong brands secure better retail placement, which in turn reinforces brand strength. Furthermore, past consumer experiences have a lasting impact on brand preferences. #### 4.1.2 Understanding private label strength **Dominance in Europe:** Private labels are highly dominant in the European market. **Variations in other markets:** Their influence is less pronounced in other regions, attributable to both supply-side and demand-side factors. * **Supply-side factors contributing to weaker private label presence (e.g., in the US and emerging markets):** * Stronger marketing support for national brands. * A larger proportion of overall sales accounted for by major retailers. * A smaller quality gap between national brands and private labels. * Less consistent quality of private labels across different product categories. * National brand manufacturers often serve as the primary source for private labels. * **Demand-side factors contributing to weaker private label presence (e.g., in the US and emerging markets):** * A lower perceived quality of private labels. * Brands playing a more significant role in the lives of consumers. * The social impression function of brands being more important. * The risk reduction function of brands being more important. * A stronger price-quality heuristic, particularly in emerging markets. #### 4.1.3 Strategic choices for national brands facing private labels National brands like Renova must make strategic decisions when confronting the competitive pressure from private labels. The primary strategic options include: 1. **Reducing price:** This strategy can be appealing as a majority of consumers often cite price as the most important attribute and check prices before purchasing. However, lowering prices significantly requires a substantial increase in sales volume to achieve break-even. * **Break-even analysis:** A typical break-even analysis for a price reduction shows that a relatively small price cut can necessitate a disproportionately large increase in sales volume. For example, a 10% price reduction might require a 71% increase in sales volume to break even. * **Challenges of price reduction:** * The required increase in sales volume may be unrealistic. * Potential to dilute the national brand's image. * May harm relationships with retailers. * It may be necessary to reduce Cost of Goods Sold (COGS), decrease product size, engage in price discrimination, or reduce the perceived price through strategies like super-sized value packs. 2. **Producing their own private label:** This option allows national brands to capture a share of the growing private label market and potentially improve retailer relationships. It can also leverage economies of scale and utilize spare production capacity. However, potential drawbacks include inconsistency with the brand's reputation, the difficulty of excelling in two distinct business models, potential market saturation for private labels, and the ease with which private labels can be replicated. 3. **Differentiation:** This involves making the brand stand out from private labels and other competitors. * **Functional differentiation:** While quality is a significant factor for consumers, private labels are increasingly matching national brands in terms of quality. Pursuing purely functional differentiation can be costly in low-margin categories and is easily replicable. * **Moving beyond functional benefits:** The "functional benefit trap" highlights the risk of over-reliance on product features. It is often more effective to focus on higher-order experiential and symbolic benefits, such as the feelings a brand evokes, the type of people consumers relate to, and personal identity. This strategy builds stronger, more meaningful associations that ultimately drive consumer behavior. ### 4.2 The role of brand equity in competition Customer-based brand equity is the value a brand derives from consumers' knowledge, feelings, and expectations. A brand possesses positive brand equity when consumers react more favorably to its product, price, promotion, or distribution compared to an unbranded or fictitiously named version. The brand itself thus creates an economic advantage. #### 4.2.1 Components of brand equity * **Brand awareness:** This includes brand recognition (recalling a brand when seen) and brand recall (spontaneously recalling a brand). Crucially, it also encompasses the context of recall – in which situations the brand comes to mind. * **Consideration sets:** Consumers typically choose from a very small consideration set, which is a fraction of the total brands available. Being in the consideration set significantly increases the odds of a sale. * **Brand image:** This refers to the associations consumers have with a brand, which can be functional (e.g., quality) or non-functional (e.g., feelings, values, social meanings). Non-functional associations are often as important, if not more so, than functional ones. #### 4.2.2 The "functional benefit trap" Companies often fall into the trap of focusing too heavily on product features and functional benefits, neglecting the powerful influence of meaning, identity, and emotion that consumers seek. Strong brands build these deeper connections, enabling consumers to perceive more than just product characteristics. > **Tip:** When competing with private labels, a focus on differentiation beyond mere functional benefits is crucial for building sustainable brand equity. > **Example:** In the case of Renova toilet paper, simply reducing the price or focusing solely on product features like softness might not be enough. The brand needs to build strong emotional and symbolic associations to stand out from more generic private label offerings. --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Customer-based brand equity | The value a brand possesses due to consumers' specific knowledge, feelings, and expectations associated with it. A brand has positive equity when consumers react more favorably to a product with the brand name than to the identical product without it, indicating the brand itself creates an economic advantage. | | Brand image | The set of associations that consumers have with a brand, encompassing functional attributes like taste or quality, as well as feelings, values, and social meanings. Non-functional associations are often as important as functional ones for consumer purchasing decisions. | | Functional benefit trap | A situation where companies focus too heavily on the product's functional features and benefits, neglecting the emotional, symbolic, and experiential aspects that consumers often value more when making purchasing decisions. | | Private labels (house brands) | Products manufactured or owned by a retailer and sold under the retailer's brand name. These are very dominant in some markets, like Europe, and present a significant competitive challenge to national brands. | | Brand awareness | The extent to which consumers can recognize a brand when they encounter it (recognition) and spontaneously recall it in relevant situations (recall). It also includes understanding the cues or contexts in which the brand comes to mind. | | Recognition | A measure of brand awareness where consumers can identify a brand when presented with it, for example, by recognizing a brand logo or name. | | Recall | A measure of brand awareness where consumers can spontaneously bring a brand to mind when prompted by a product category or a specific need, without being shown the brand name or logo. | | Associative memory networks | Cognitive structures where information nodes (concepts, ideas, brands) are stored and interconnected by links of varying strengths. Activation spreads through this network, influencing which information is most likely to be accessed and influence behavior. | | Limited attention | The cognitive constraint that consumers have a finite capacity to process information. Marketers must ensure their brand's key associations are distinct and memorable to capture attention in a crowded marketplace. | | Consideration set | A small subset of brands within a product category that a consumer actively considers when making a purchase decision. Brands included in this set have a significantly higher chance of being selected. | | Brand recall width | The range of cues or contexts (e.g., product attributes, situations, emotions, people) that can trigger the recall of a specific brand. | | Brand recall depth | The percentage of people within a target audience who can recall a particular brand, indicating the overall penetration of brand memory. | | Non-product-related attributes | Brand associations that go beyond the functional features of the product, such as feelings evoked, the type of people associated with the brand, or the brand's personality. | | Product-related attributes | The functional features, characteristics, and performance aspects of a product that directly relate to its use and benefits. | | Reference groups | Groups of people that individuals look to for guidance in forming their attitudes, beliefs, and behaviors. These can be aspirational (groups to which one aspires), dissociative (groups to be avoided), or associative (groups one currently belongs to). | | Retailer's margin | The profit a retailer makes on a product, calculated as the difference between the wholesale price and the retail selling price. | | COGS (Cost of Goods Sold) | The direct costs attributable to the production or purchase of the goods sold by a company, including materials and direct labor. | | Break-even analysis | A financial calculation that determines the sales volume or revenue needed to cover all costs, both fixed and variable. It helps assess the impact of price changes on profitability. | | Price discrimination | The practice of selling the same product or service to different buyers at different prices, based on willingness to pay or other segmentation factors. | | Functional differentiation | A strategy where a brand distinguishes itself from competitors based on unique or superior product features and performance. | | Experiential benefits | The sensory experiences and emotional responses that consumers derive from using a product or service, contributing to brand value beyond its basic function. | | Symbolic benefits | The meanings and social significance that consumers associate with a brand, often related to self-expression, identity, or group affiliation. | | Aspirational group | A social group that an individual admires and wishes to emulate, often influencing their purchasing decisions to align with the perceived values or lifestyle of that group. | | Dissociative group | A social group that an individual actively rejects and seeks to distance themselves from. Their purchasing choices may be made to avoid association with this group. | | Associative group | A social group to which an individual currently belongs or identifies with. This group can influence their attitudes and behaviors, including consumption patterns. | | Competitor | An entity that offers similar products or services in the same market, vying for the same customer base. | | Collaborator | An entity that works together with another in a business context, even if they are also competitors, to achieve mutual benefits. Retailers and national brands can be both. | | Sales volume | The total number of units of a product sold over a specific period. | | Profit | The financial gain, calculated as total revenue minus total costs. | | Sales revenue | The total income generated from the sale of goods or services. | | Wholesale price | The price at which a manufacturer or wholesaler sells goods to retailers. | | Variable unit cost | The cost that varies in total directly with changes in the activity or volume of production, such as the cost of materials per unit. | | Fixed costs | Costs that do not change with the level of production or sales volume within a relevant range, such as rent or salaries. | | Price | The amount of money expected, required, or given in payment for something. | | Quality | The standard of something as measured against other things of a similar kind; the degree of excellence of something. | | Differentiate | To distinguish a brand or product from others in the market based on unique features, benefits, or positioning. |