Brand equity: It's worth more than companies realize

Plenty of consumers sip Maxwell House coffee because it's "good to the last drop," and would proudly answer "yes" if asked, "Doesn't your dog deserve Alpo?" The brand-building punch of such slogans helps companies turn shoppers into customers. But if brand equity boosts sales to consumers, doesn't it make sense that it also affects relationships with resource suppliers, corporate partners, government bodies and other constituencies? Cheryl Burke Jarvis, professor of marketing at the W. P. Carey School of Business, thinks that companies are undervaluing brand equity in their financial calculations.

Plenty of consumers sip Maxwell House coffee because it's "good to the last drop;" trust State Farm Insurance because "like a good neighbor, State Farm is there;" and would proudly answer "yes" if asked, "Doesn't your dog deserve Alpo?" The brand-building punch of such slogans helps companies turn shoppers into customers.

But, does the value of brand equity extend beyond supermarket shelves and other shopping venues? If brand equity boosts sales to consumers, doesn't it make sense that it also affects relationships with resource suppliers, corporate partners, government bodies and other constituencies?

That's a question researchers sought to answer when they looked at whether brand equity would attract job seekers, which it did. In a recent study, entry-level job hunters perceived greater opportunities at companies with powerhouse brands. With this concrete example in mind, the researchers concluded that it is likely most companies undervalue the brand equity they've worked hard to achieve.

Sizing up the sizzle

Most business people understand the power of a well-recognized and respected brand name. It can strengthen consumer preference for your product, raise customer loyalty, insulate you from competitive forces and cut your promotional costs. In addition, you can probably charge more for your product, and brand strength opens the door to brand extensions, where you slap your well-regarded name on other products your customers might want.

All the while, you're probably selling more product than Brand X. It's no wonder brand equity shows up on financial balance sheets. Still, "when companies calculate what a brand is worth, they're only talking about the value of a brand in terms of interaction with customers," says Cheryl Burke Jarvis, professor of marketing at theW. P. Carey School of Business.

She maintains that companies use brands in many ways and with more groups than customers alone. Jarvis thinks that companies probably could — or even do — use their brand muscle to negotiate better financing terms, gain deferential treatment from government bodies, and form partnerships with other firms. In fact, the list of brand-equity uses is probably longer than that.

"Ford Motor Company negotiated more favorable prices with suppliers in return for the kind of implicit endorsement that the supplier received by listing the Ford name among its customers," she explains. She also remembers her days spent working for advertising agencies. "I'd practically give my services away to get certain brand names on my client list," Jarvis recalls. She'd use that client list to attract even more clients, noting that potential customers might be saying, "If 'Company A' uses this agency, they must be pretty good."

Companies ought to be able to account for such favorable brand outcomes, but they don't, she says. That's why she teamed up with Devon DelVecchio from Miami University, Richard Klink of Loyola College in Maryland and Brian Dineen from the University of Kentucky to see if brand equity really could give companies the advantage in up-channel relationships, where they're shopping for resources themselves, rather than selling something to customers down the sales channel.

"There are all sorts of resource markets," Jarvis notes. She uses suppliers, financial markets and prospective employees as examples. The research team chose to look at the human-resource market by surveying potential employees that a company might try to woo onto its payroll. "Human resources is the single highest cost in many organizations, and it's a primary source of competitive advantage," she explains.

Eying the résumé

Jarvis and her colleagues predicted and found that strong-brand companies appeal to entry-level job seekers. The team limited the research to recent college graduates because these are the people least likely to have information about a corporation and its work environment. Hence, they're more likely to rely on brand associations — the way consumers do when shopping for unfamiliar items — to make judgment calls.

Just as diners at McDonald's anticipate quick service and low prices, job seekers use brand awareness to evaluate job characteristics. Specifically, the researchers felt that job hunters would equate strong brand equity with abundant internal opportunities to hone skills, meet challenges and move around the company, which could be a way to "pay dues." These perceptions translate into a belief that the strong-brand companies are great places to build up a résumé.

Part of the reason heavy-hitting brands enjoy such perceptions is that, generally, a brand's success stems from the quality and skill of the workers who promote it. Consequently, those new to the workforce think the skills development that comes from working for a strong brand will help them jump to the next level on their corporate climb. The scholarly team invited job seekers to evaluate hypothetical job offers from competing firms.

These job descriptions were equal in terms of amount of information given, perceived job difficulty and overall job attractiveness. The difference? One job was from a well-known player in a given industry, and one was from an also-ran. For instance, students compared supposed jobs offers from Jack Daniels and Old Forrester. As the researchers note in a recent paper, Jack Daniels "commands a 50 percent higher price than Old Forrester and holds four times more market share."

Study participants ranked whether they agreed or disagreed with several statements, such as, "Working for Jack Daniels would be a definite résumé builder," or "I feel that I would be able to advance my career at Jack Daniels." As the researchers suspected, many job seekers agree with David D'Alessandro, CEO of John Hancock Financial Services.

In his book on brand warfare he wrote, "The best brands are the best places to be from. These names work magic on a résumé, which is, after all, not just a statement of experience, but also a collection of more and less desirable brands that determines your relative desirability as a job-seeker."

To further test their hypothesis, the researchers had study participants evaluate two other hypothetical job offers but, this time, one of the brand names was seen as having low quality, while the other was perceived to be a high-quality player. The young job seekers were asked to imagine they had researched both companies and compared them along several lines: number of employees, benefits, location, financial performance and job security.

There were only two comparison categories that weren't almost identical between the two pretend job offers: product quality and consumer awareness. Perceived quality and consumer awareness are two components of brand equity. Not surprisingly, results from this approach to the researchers' investigation reinforced the findings that entry-level job seekers rely on brand names as a stand-in for actual corporate knowledge, and they prefer companies enjoying high brand equity.

The researchers also tested whether the price premium that brand equity delivers in grocery store aisles translates into the hiring arena. To evaluate this, they included a slightly lower salary on jobs from high-brand-equity companies. Still, job seekers opted for those strong-brand firms.

"In the real world, we don't expect that any high-brand-equity company would expect to pay less for good employees," Jarvis says. However, she thinks that brand strength gives companies a price premium in hiring by upping a firm's ability to "attract better job candidates than competitors could with equivalent resources."

Body count

Employers plan to hire nearly 20 percent more 2006-07 college graduates than they hired from the 2005-06 school year, according to the job-outlook survey conducted annually by the National Association of Colleges and Employers. "Employers cited business growth and expansion as reasons for the increase in hiring," said Marilyn Mackes, NACE executive director, in a recent statement. She also noted that many employers "reported plans to put more emphasis on college hiring this year."

The competition for fresh faces is likely to be fierce. "It's always fierce for the top candidates," notes the W. P. Carey School's Jarvis. "Companies should emphasize brands in recruiting efforts," she adds. "Brands are significant indicators of company quality for young job applicants." Beyond the recruiting arena, there also are those myriad uses for brand equity that Jarvis and her colleagues were thinking about when they first decided to test brand power with job hunters.

Better financing, partnerships, and stronger positions in negotiation situations are a few possible uses for brand strength, Jarvis maintains. "When we looked into how companies make brand-equity calculations, they're not taking these benefits into account," she notes. Her conclusion: "We think companies are undervaluing brand equity in their financial calculations."

Bottom Line

• Companies calculate the value of brand equity for balance sheets, but some researchers think the calculations, which focus on how brand strength affects sales, fall short.
• Along with affecting sales, brand equity can and most likely is used to help companies attract partners, negotiate financing and gain more favorable pricing from suppliers, among other things.
• To test whether brand equity has value in up-channel relationships, where companies are the "buyer" of goods or services, researchers evaluated whether job hunters who are selling themselves would treat strong-brand corporations preferentially.
• Job seekers are attracted to firms with high brand equity because they view these as places in which to build their own skills and résumé power.