Many companies view the difference in price between a branded good and a generic substitute as a rough measure of brand equity. But that rule of thumb ignores the impact of price on sales volume. When you take volume into account, a product with a modest price premium may well have greater brand equity than one with a higher price premium.
“I can charge a very high price and sell very few units or a very low price and sell lots of units,” says Professor Donald Lehmann. “Those are strategic decisions a firm makes depending on the demand curve it faces.”
Based on that simple observation, revenue should give you a better sense of a product’s brand equity than price. To test that assumption, Lehmann and Kusum Ailawadi and Scott Neslin of Dartmouth studied the revenue premiums of grocery store products in 17 categories, using scanner-based data to compare revenues of the top branded goods in each category to those of a generic product.
The researchers included in their models advertising expenditures for the branded goods as well as data on the perceived quality of the generic goods. As expected, the results showed that when you advertise more, your brand equity — as measured by your revenue premium — gets bigger. And in categories where the generic product has a higher quality rating, the branded goods have a lower revenue premium.
This research has two main implications for firms that market branded consumer goods. First, a product’s revenue premium gives you important information about how your brand is evolving. “You ought to be measuring the revenue premium of your product versus some standard of comparison and noticing how this premium changes over time,” says Lehmann, “because that’s a pretty strong early warning signal about what’s likely to happen to your brand in the future.” That standard of comparison could be a generic product, the cheapest brand or an average of all other brands in the category.
If your revenue premium goes up, you might capitalize on your growing brand equity by raising your price or spending a little less on advertising. If your revenue premium falls, you might consider lowering your price, increasing your advertising budget or revamping your product. “Automatically cutting price in response to a drop in sales is not necessarily a good idea,” warns Lehmann, “because there’s a whole other field of literature showing that people infer quality from price.”
The study’s second insight is that brand equity doesn’t just show up in a product’s price premium — it also shows up in the number of units sold. In fact, if you break down the revenue premium for most branded consumer goods, you find that brand equity manifests itself largely in increased volume, not higher prices. That’s likely due to the fact that most branded goods have at least one branded competitor that is a close substitute.
“If there were only one name brand, it could well take its premium in price,” says Lehmann. “But to a lot of people Coke and Pepsi are interchangeable, which is why they buy whichever is on special. So Coke can’t raise its price, because that group of people — which is substantial — just switches to Pepsi.”
An increase in sales volume can come about indirectly, because if you have brand equity, you’re able to get your product into more channels. A 7-Eleven store, for example, only carries the top two or three brands in each category because of limited shelf space. “Brand equity should help you get more placements and better shelf placings,” Lehmann says. “Because you have better shelf placings, customers may infer that this is a good brand. In any event, it’s easier to buy a widely available brand than one available only in selective outlets.”
Lehmann emphasizes that since revenue premium is a top-line calculation, it isn’t equivalent to the extra market capitalization you would expect to see as a result of brand equity. “Managers spend an awful lot of time looking at ticker tapes,” he says. “They ought to be looking at things like revenue premium and customer satisfaction, since that’s what’s eventually going to drive the stock price.”
Donald Lehmann is the George E. Warren Professor of Business in the Marketing Division at Columbia Business School.