actually, let's talk about brand equity.

Brand equity is an intriguing concept. Unlike “equity” in economics, finance, or in real estate, where it refers to ownership interest, equity in marketing refers to outcomes that “accrue to a product with its brand name compared with those that would accrue if the same product did not have a brand name.” Kevin Keller writes that a brand has “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.

The idea of brand equity is based on the premise that a brand promise adds “something” intangible to the sum of brand’s tangible assets. The reasoning goes that, if customers are aware of this promise when they are making choices among products, it reduces risk associated with their choice, saves their time, and provides reassurance in their decision. In exchange to this reassurance, customers are expected to display a durable brand loyalty and reduced price sensitivity. Standard indicators of brand equity have traditionally been the size of loyal customer base, customers’ frequency of product purchase, and lowered customer acquisition costs (as proportion of the total marketing efforts).

Another indicator of brand equity are consumer favorable responses to a brand, reflected as a combination of “recognition, associations and judgements.” Brand equity is here regarded as a consumer reaction to brand communication.

Marketing practitioners often talk today about brand equity as a collection of individual consumer reactions to a brand or, as a “collective representation.” Pauil Feldwick claims that “Brands are built in people’s heads. What the most skillful of marketing companies do, with great sensitivity and unceasing vigilance, is provide some raw material from which brands are built.” Branding consultancy Millward Brown Optimor similarly notes: “The only people who invent brands are people. Brand reputations exist only in the minds of their observers - and all observers are different. In theory, therefore, (and probably in practice) the reputation of a brand within a million people’s heads will have a million slightly different versions. But ... the strongest brands are those that enjoy what’s been called a (favorable) consensus of subjectivity."

In this view, brands’ products and services are not responsible for creation of brand equity. Some people say that a “real,” durable, brand equity springs only from a distinct set of brands’ purpose and beliefs: “Equity is more a factor of a brand’s ability to express a clear and honest sense of why they exist and what they believe about the world than simply the quality of what they do or make. What do you stand for? The clearer that belief, the more attractive the brand is to those with similar beliefs. If others believe what you believe, they will put up with all kinds of better offers to do business with you”

Perhaps unsurprisingly, brand equity has been, in practice, regularly estimated through people’s perceptions of the brand. A mere presence of brand perceptions has been considered a sufficient proof of existence of brand equity – or as Faris puts it, “a brand is a form of socially constructed reality that has attained an objective reality, which is why it can have a cash value that is dependent on the totality of perceptions held about it.” If the intangibles such as brand associations and perceptions are managed through brand communication in a satisfactory way, the reasoning goes, then they will result in some tangible economic effect on the brand.

The main challenge here is that the mechanism of connecting the two has been mostly asserted, rather than proven. Consider this example. A recent study titled “Rethinking Brand Contamination” (Richardson Goseline, 2009) has shown that immediate context - properties of the situation of exchange - shape consumers decisions more than their brand perceptions. The study explored the impact of counterfeited good on how people value the brand, and found that people can more accurately distinguish between a branded designer bag and a fake if given social clues, like if the individual carrying it wears expensive clothes or has a look of a rich person. When knock-off goods were displayed without any additional cues or context, observers were less likely to differentiate between authentic and counterfeit luxury products. Additionally, shoppers were willing to pay an average price of $786 for a real luxury bag, but that price declined to $403, when they saw the items out of context displayed against a neutral background. Another study, conducted by Nielsen’s Bases unit in 2009, found that in-store marketing has significant advantages over television as a leading medium for creating awareness of new products. These studies indicate that consumers’ decision-making resides more on the local and distributed context of their situation of purchase than on brand equity defined through consumers’ “favorable brand responses.” It turns out that slight manipulations in the design of this context can significantly change consumer purchasing behavior.

Then, a change in consumers’ economic circumstances also question the idea of brand equity. Traditionally, the main “proof” of brand equity has been consumers’ price insensitivity: their willingness to pay higher prices for branded products than for the same, but generic ones. Recent research shows that, in the situation when people cannot afford anymore high prices of a premium brand, they regularly “trade down” to a generic brand. For example, when P&G reported an 18 percent drop in its profits due to the decline in sales of its premium-priced brands, it rolled out a cheaper version of its flagship detergent product called Tide Basic in order to prevent its customers from switching to a lower cost alternative. What Tide has been afraid of is that people’s inability to pay premium for a brand would challenge their perception of differences in quality between its products and products of other, more generic, detergent brands. And with a reason: “After years of spending $17 on bottles of Matrix shampoo and conditioner, 28-year-old Ms. Ball recently bought $5 Pantene instead. ‘Buying the more expensive stuff just isn’t as exciting to me - it’s not as important,’ she says, ‘I don’t know that you can even tell the difference.’” Once people start asking what branded products are really worth, brands’ ability to command a price premium evaporates - and their brand equity goes to zero.

A way of questioning the asserted connection between consumers’ favorable brand response and brand equity is to correlate positive brand associations with product sales. It turns out that, even if a brand has a particular, well-defined, set of associations achieved through persistent brand communication, this still does not guarantee that people will buy its products. In other words, consumers can be aware of a brand, and respond favorably to it, but find it personally irrelevant.

This is tricky. Brand equity has been, for a long time, been correlated with product sales. Interbrand, the largest brand consultancy today, claims: “The understanding, interpretation, and measurement of brand equity indicators are crucial for assessing the financial value of brands. After all, they are key measures of consumers’ purchasing behavior upon which the success of brands depend.”

But, if brand associations do not translate into people’s purchasing behavior, then we cannot know that brand equity has an economic effect on brands. Some brand professionals have already noticed this challenge and they say that “there are always reasons people will do business with you that have nothing to do with you: timing, price, convenience, and habit are just a few. These things can help influence an initial sale, and they can influence repeat business, but they do not influence equity. Just because someone buys from you over and over does not mean there is equity.” Lou Carbone, founder of consultancy Experience Engineering, similarly says: “Just because I fly airlines doesn’t mean I love them. I hate airlines.”

Regardless, in the absence of alternatives, marketing professionals still largely consider  brand equity as a critical indicator of the causal relationship between brand communication and consumers decision-making in the situation of purchase. In other words, brands’ cultural relevance is still asserted to have a direct causal effect on their economic performance.

Go figure.