Editor’s note: Robert Passikoff is president of Brand Keys, Inc., a New York research firm. This article is adapted from a speech presented as part of the American Marketing Association’s Executive Forum Series “Corporate Branding: Leveraging Your Company’s Key Intangible Asset” in New York in February.

Let’s review the customer loyalty/profitability mantras of the last century:

  • It takes seven to 10 times the cost and effort to gain a new customer than it does to keep one.
  • In some sectors, an increase in the customer base by just one percent is otherwise equivalent to a 10 percent cost reduction program.
  • Depending upon the category, a 5 percent increase in customer loyalty will lift the lifetime profits per customer by up to 95 percent.

What about this century? What engine will fuel such loyalty?

Happily, answers for the 20th and 21st centuries coincide: Brand equity.

So the increased importance of strategic brand management and planning in influencing the future of companies should come as no surprise.

The notion of strategic brand management and planning has already altered the view sharply with which some firms are regarding their business. This is especially true in environments where consumers have more options, where information plays a greater role in driving consumer choice, and where levels of accelerated gratification have reached new heights.

These days understanding that doesn’t narrow the field very much. Most acknowledge that brand equity plays an essential part in the strategic brand management process, but in our experience, however, few firms can clearly define where their brand equity lies. In fact, even fewer can define their brand equity in the context of the management challenges they face.

Most of the efforts - and definitions - devoted to brand equity have concerned themselves with image, personality, essence, affinity, naming, identity, and positioning. Most, if one is truthful, have been in aid of communication or design-related development rather than strategic brand management.

And let’s be honest. Talking about brand equity in those terms is easy. But if we define the central goal of strategic brand management as the creation of an expanding pool of loyal customers, then, clearly, talk is cheap.

If every definition of brand equity and conception of brand-equity management yielded loyal customers, there would be a lot more loyal customers in the world!

If we revisit the ways most companies identify brand equity, most of the definitions and examples offered up would, once again, reference back to image and positioning, which are the advertising agencies and design firms’ best attempts at creating manifestations of a brand’s equity.

These are creative expressions - entertaining, eye-catching and visually differentiating even, pretty perhaps, but unable to move a brand closer to strategic goals.

This would suggest the need for a realignment of - primarily - the definition of brand equity, and - secondarily - a governing application which goes beyond the communications arena.

A definition is required which is:

  • better established within the context of the category;
  • better captures the direction and velocity of customer values; and
  • far better correlates with the market activities and loyalties of the customer.

That is why we assert that brand equity exists - and only exists - at those points where the brand exceeds customer expectations within the category.

Correctly measured, customer expectations identify how the customer and category values come together to form the dimensions of purchase and loyalty. Correctly measured, customer expectations identify precisely how “high” a ceiling the brand (and marketer) face. And, correctly measured, customer expectations provide a yardstick against which the brand can be measured.

To accomplish this of course, one needs to possess statistically reliable customer assessments of customer expectations.

This would normally bring us to a fundamental discussion of the benefits and deficiencies of various research systems, but that is not our topic.

Not kept pace

Suffice to say, however, that research systems have certainly not kept pace with either the changing dynamics of customer values or the new business and marketing paradigms we face in the new century.

It is sad to note - but cannot be ignored - that the most aggressive minds in an organization rarely focus on measurement systems, and most executives today work with inherited measurement systems which distort their business strategies.

Few, if any, of these systems incorporate brand equity as a critical measure, which makes the care and handling of brand equity all the more important.

Let’s examine the three key required measures and their import in the identification and planning process:

1) Category purchase drivers. We hear talk of changing marketplaces and marketing paradigms, the need to meet and adapt to customers’ needs before the competition does, and yet most of the traditional research methods are not leading indicators of customer purchase, let alone accurate portrayals of how the customer views the category, makes brand comparisons in that category, and - ultimately - buys in the category.

2) Real levels of customer expectations about these drivers. That is to say, expectations unconstrained by what literally exists today and a reflection of what people really think (as opposed to what they say they think).

3) A precise measure of a product’s or service’s brand equities.

This is not, of course, meant to suggest that one should ignore traditional, reliable and valid marketing and research techniques. They are generally quite helpful in identifying an opportunity for a company, but they are generally not brand-equity based and will not reveal what the customer is willing to believe about your brand except in the broadest of inquiry circumstances.

Every brand has its own Brand Equity InfrastructureSM , which is based upon the composition and configuration of category purchase drivers, real levels of customer expectations about these drivers, and a brand’s true equities.

All of the traditional elements can be in place (acceptable product, adequate distribution, financial wherewithal, attractive logos, attention-getting advertising, etc.) yet we know that some brands can’t fulfill the marketing proposition.

Some on-line booksellers (a personal and professional interest of my own), have high-profile sales and share value, but don’t generate profits. The convenience of electronic purchase and home delivery is a major factor in stimulating e-commerce, but is convenience the prime factor or a contributing factor? The answer to this question could well determine the success of e-commerce brands.

The category leader is revolutionary newcomer Amazon.com. Neither a book shop nor a retail chain, Amazon exists only in cyberspace, but boldly advertises itself as “Earth’s Largest Bookstore.”

By combining shop-at-home convenience and speed-of-light transactions with an understanding of the evolving e-market, Amazon has built a loyal franchise and created a formidable brand in less than five years. In fact, the most astonishing thing about Amazon is how quickly they became a trusted brand.

Given the dominance of Amazon.com, chased on the net by Borders and Barnes and Noble, and a howling pack of wannabes, the question emerges: Is there enough space for other on-line branded booksellers to prosper?

That depends upon the bookseller’s brand equity. In order to compete - let alone thrive - in the increasingly bustling e-marketplace a company must know both the market, and consumers’ changing values in order to build a brand.

Amazon understood that the Internet is more than a high-speed cash register. It’s a whole new way of connecting with customers. The Internet isn’t a distribution channel, it’s a community, and every community has certain key values that govern its behavior. What’s this new community like? What do they want? What are their brand values, and which of those values do we share? Which services - based upon these values - can we provide, beyond a fast, cheap way to buy stuff?

Amazon made its mark with huge selection, easy purchase, good prices, and credit card security, all in a way which resonated with customers’ brand values. It is current and colloquial and speaks the dialect of their market. It learned which brand values drive its purchasing and based its service on those values. Amazon was obviously fully awake during the early morning hours of e-commerce.

Ask questions

If you are preparing to make the foray into the brand arena of the 21st Century, you must ask the above questions, and others.

You’ll get different answers from Amazon, because you’re asking your questions later in history among a different brand set and, more importantly, among a more attuned customer base.

Can you do it the same way Amazon did it? Yes, but the world has changed a lot since 1995. E-commerce has exploded. New strategies, based upon new consumer-to-brand modeling are needed to measure the values that motivate the rapidly-changing e-marketplace.

The speed and convergence of social and technological change make it difficult to execute anyone else’s five-year-old game plan with any hope of repeating their success. Relying upon traditional brand research techniques, some of which are over 40 years old, make it impossible.

How, then, to build a strong brand (“e-” or otherwise)?

Central to the process - as previously mentioned - is knowing how purchase drivers combine to create a perception of your brand. Our studies indicate that the four basic drivers for on-line book customers are: right product (has what I want), ease of operation (hassle-free Web site), good price-value relationship, and system/payment security (no anxieties).

Virtual book shops lack the brand value dimensions usually associated with book buying. Book people enjoy the physical process of book shopping - the touch and smell of books, the chat with other book-lovers, cappuccino and the quiet swirl of classical music. Convenience isn’t the point. Buying on-line may be faster, but it’s an entirely different experience based on entirely different brand values. Which may be why the bn.com “brand” isn’t as highly rated as Amazon.com, but Barnes and Noble, the store brand, does quite well.

On-line merchants must address these issues in a way that satisfies the value system of the customer. People aren’t as easy to study as they were in slower times. How they make decisions has become more complex, as they’re in constant motion - often very fast motion - especially those who are plugged into the Net.

And despite increased advertising budgets, it’s getting harder and harder to build a successful brand. Customers have more choices and can exercise those choices more easily. And the more numerous the purchase options, the greater the need for concentrated, differentiating brand management.

The exercise is even more complex given the recognition that to build a brand is to develop loyalty among increasingly fickle folks. It’s not just share of market, but also share of customer that matters.

Internet brands owe at least some of their early success largely to novelty. But now, at the high noon of both traditional and e-commerce, the dew is off the rose. As competition thickens, only the companies that fully understand the changing values of the marketplace are likely to prosper as viable brands. They must continually probe the dimensions of customer and brand values, or their prospects would appear to be very questionable indeed.

Highly evolved customer-listening systems provide the wherewithal to effectively track the velocity and direction of customer value - the key element in being able to actually measure a brand’s equity.

By doing so, it will allow a brand to determine its trajectory as it enters into the “world of tomorrow,” which was - as it turns out - yesterday.

Still a gap

To review, the three key required measures for successful management in the e-commerce age are: leading-indicator category purchase drivers; real levels of customer expectations about these drivers (expectations unconstrained by what exists today and a reflection of what people really think as opposed to what they say they think); a precise measure of a product’s or service’s brand equities.

What is evident is that there is an intellectual gap between what we know and what is still practiced.

What is manifest is that the techniques developed and handed down over the past half-century are no longer equal to the task at hand, and if the changing dynamics of customer values demand new marketing paradigms, they also require 21st Century assessment tools.

As we move into the new millennium, it is incumbent upon brand planners to capitalize upon the power of their brand’s equity in its definition and in its application.