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Although brand equity is often used to calculate brand value, it has numerous shortcomings, including the lack of a common measurement methodology and value to customers. A well-known author and speaker argues that a better management tool is customer equity, or customer profitability.

-- As soon as it was understood that brands were valuable, the next question became obvious: How valuable? Unfortunately, the answer that emerged about 10 years ago is badly outdated today, and is even handicapping companies in their quest to increase the value of their brands.

    The answer that first emerged in 1991, based on the landmark book Managing Brand Equity: Capitalizing on the Value of a Brand Name by David Aaker, was “brand equity.” The concept of "brand equity," which sought to measure the intangible assets such as reputation or channel relationships ignored by traditional accounting systems, solved several problems. It appeared to quantify intuitive recognition about the value of brands and thus rationalize marketing expenditures. It was also shorthand for a brand's two key strengths – its relationship with purchasers and mental image among both prospects and customers. And it provided a means to rank winners and losers in branding wars.

    Despite its popularity, the concept of “brand equity” has numerous problems, especially in an age when customers are calling the shots, according to Nick Wreden, author of FusionBranding: How to Forge Your Brand for the Future. Indeed, the pursuit of brand equity can even warp executive decision-making and lead to lost profits and opportunities.

    First, although the term is widely used, no common definition exists. In fact, the book Building, Measuring and Managing Brand Equity by K.L. Keller lists nine definitions, some of which contradict one another. The lack of definition means that there is no universally agreed upon measure exists. "Delve into any methodology concerning 'brand equity' calculation, and it quickly becomes apparent that the effort has all the intellectual rigor of a voodoo spell – a dash of corporate history, a gaggle of retail outlet numbers, an extra helping of distribution sales, a sampling of questionnaires," says Wreden, who specializes in branding profitability and accountability based on customer loyalty, evangelism and measurement.

    As a result of the lack of a common methodology, two experts examining the same brand can come up with widely divergent calculations. Additionally, it is impossible to compare brands across different industries or perspectives. This imprecision – at a time when executives are demanding both sophisticated measurement and accountability – means "brand equity" lacks validity as a benchmark for executive decision-making. "How can executives make effective decisions when it’s impossible to understand – and agree upon – consistent numbers?" Wreden asks.

    The imprecision causes other problems as well. If “brand equity” increases by 10%, what caused it? The latest campaign? A new product? Better service? “Brand equity” does not provide any insights about operational cause-and-effect.

    Second, "brand equity" does not indicate market or financial success. Look at all the companies with great "brand equity" – K-Mart, Samsonite, Oldsmobile – that have either disappeared or face financial difficulties. Indeed, "brand equity" as a guiding star leads companies to focus on product maximization at a time when leading companies recognize that a focus on customers is critical to success.

    Finally, and most important, “brand equity” is irrelevant to customers. Customers buy on value, service, price or other issues, but never make a purchase decision based on the relative “brand equity” of two offerings. Why should companies pay attention to an issue that customers ignore?

    So what’s better? Wreden says it is Customer equity. Customer equity has one universally recognized definition – the lifetime value of customers. This value results from the current and future customer profitability as well as such intangible benefits as testimonials and word-of-mouth sales. Customer equity incorporates customer loyalty to buy again and again, the faith to recommend a brand and the willingness to forgive the inevitable mistakes that every firm makes.

    While "brand equity" is impossible to calculate consistently, customer equity can be easily calculated on the back of an envelope. All that’s required are numbers that every company already is – or should be – calculating. These include revenue, customer acquisition (or marketing) costs, costs of goods/services and retention rates. Ideally, companies should also track leads and referrals, and be able to determine the profitability of specific products or services. By adding up revenue (or profits), subtracting relevant costs and incorporating retention rates, companies can determine the current – and future – profitability of every customer.

    Because it's so easy to calculate, customer equity can be understood by everyone from the boardroom to the mailroom. This makes it much easier to unify a company behind a brand and ensure customer responsiveness.

    "Brand equity" is all about a product or an organization. But, ultimately, success depends on profitable customers. Customer equity supports and measures the activities that encourage customers to buy more, more often. Wreden argues that increasing "brand equity" does little for a firm, but increased customer equity reflects increased retention, profitability and word-of-mouth sales.

    Customer equity has other advantages as well. Because retention and customer profitability are tracked, it’s easy to make a direct link between marketing, service and other programs to increases (or declines) in customer equity. Customer equity also enables the segmentation of highly profitable, profitable and unprofitable customers. Knowing the relative profitability of customers not only helps promote retention of the best customers but also substantially improves marketing. "Brand equity" may be good for CEO egos, but the figure provides no tools for those responsible for attracting and keeping satisfied customers.

    The consulting firm Bain & Co. extensively studied customer equity. In The Loyalty Effect, a book about the study, Frederick Reichheld wrote, “Customer equity effectively explains success and failure in business…. The companies with the highest retention rates also earn the best profits. Relative retention explains profits better than market share, scale, cost position or any other variable associated with competitive advantage."

         "Do brands have value? Absolutely. But attempting to measure this value provides little benefit and distracts a company away from the critical task of retaining profitable customers. Ultimately, it’s these customers– not a fallible calculation of a dated concept – who are responsible for brand value and long-term corporate success," concludes Wreden.

    FusionBranding: How to Forge Your Brand for the Future is available at and leading bookstores. For additional information, contact Wreden at nick(at)

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Nick Wreden