Marketing concepts and applications

¶ … difficulty in measuring brand equity for a brand like Coca Cola. Investopedia defines brand equity as the value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. As an example, they mention Coca Cola, whose consumers are willing to spend additional money to buy Coca Cola rather than the store brand of soda (Investopedia, 2011).

One scenario when brand equity is important occurs when a company wants to expand its product line. If the brand's equity is positive, the company can increase the likelihood that customers will buy its new product by associating the new product with an existing, successful brand (Investopedia, 2011).

According to Peterson, brand equity is difficult to measure because much of it depends on consumers' opinions about and perception of a brand. Measuring Coca Cola products brand equity is also made more difficult because the company has extended their brand to include numerous products. Coca-Cola has numerous versions of its products worldwide that compete against other beverage brands, but Coca Col also competes against itself. Coca Cola products include Coca Cola Classic, Dasani Water, Full Throttle and Fanta. Coca Cola consumers who dislike one product may actually enjoy a different Coca Cola product. However, the consumer may be unaware that the beverage is actually part of the Coca Cola family. A s a result, measuring brand equity may be difficult given that consumers may be loyal and repeat customers of a brand without knowing its origin (Peterson, 2008).

In his article, Sinclair discusses the difficulty in quantifying brand equity as a component of firm value. Initially brand valuation was seen as an accounting problem, and was therefore subjected to methodologies that would be considered acceptable in a boardroom and which would not be in any conflict with accounting conservatism. According to Sinclair, the real challenge that brand valuation should focus on is isolation of the portion of "super profits" generated by the brand. The brand is central to a company's ability to earn profits, and it exerts an influence on the resources and capabilities that are directly responsible for a firm' success. There is no other intangible that has the same linear link between the market, which is the source of a company's revenues, and the wealth the company creates for its shareholders (Sinclair, n.d.).

Brand valuation is a fairly young science whose development in the 1980s was spurred by a number of mergers and takeovers whose goal was to acquire brand-owning companies. Companies made these acquisitions because they wanted the cash flows that these established assets would generate, but at a cost less than creating new brands themselves. The Net Present Value associated with buying an existing portfolio of brand leaders with loyal customers, distribution, and legally protected trademarks posed an attractive proposition for which the acquiring companies were willing to pay a premium (Sinclair, n.d.).