Fellow blogger Chris Kenton–former CMO of the CMO Council–pointed me to a great article by Jonathan Knowles that tackles the subject of brand equity and what marketers need to understand in order to increase our credibility with finance, a particularly prescient subejct given the current economic conditions.  Knowles’s background includes more that 10 year in finance and management consulting and another 10 in brand consulting, so his is a rich take on a topic that is “frustratingly elusive” to define.  The article begins by providing an historical perspective on brand equity and then gets into how the various camps–marketing, finance, and accounting–understand the concept, and ends with some suggestions as to how marketers can close the gap.

As marketers, our perspective is informed by the belief that a strong brand enriches and deepens a product or service.  Consumers will tend to prefer a product or service associated with a strong brand.  However, as Knowles quotes a finance friend, “preference, in and of itself, doesn’t put money in the bank.”

From a finance perspective, in order to clear the hurdle of accountability

brand equity has to be defined in terms of behavior that will create current and future cash flow.

Accounting tends not to like the concept of “brand” because they see the world in terms of assets, tangible (physical property) or intangible (intellectual property), that can be sold.

In fact, they do not recognize the term “brand” at all. What they do recognize is the intellectual property on which the brand is based (the trademark), because this represents a legally enforceable right to do business under a certain name. To the extent that it can be proven that the trademark could be licensed to a third party in exchange for a royalty payment, accountants will have no difficulty with the concept of brand equity (although they would use the term “trademark and associated goodwill”).

So, who’s right?

Actually, Knowles suggests that all three POVs are valid, and it’s ultimately more useful to define the context in which each is appropriate and to look for the commonalities between them.  Of course, the burden of integrating these perspective falls on marketing because, given the other two definitions, ours is the broadest.

The rest of the article looks at four (4) arguments that we should use in order establish our concept of brand equity:

• The three definitions of brand equity lie on a single continuum that describes how marketing creates, captures, and reports value.
• Brand valuation is not the “silver bullet” of marketing accountability.
• Marketing accountability requires an explicit model for how marketing adds value to the business.
• Once the model is agreed upon, marketers should focus on customer metrics rather than financial metrics.

There are a lot more useful ideas in this article, so check out Chris’ commentary here, where you’ll find a link to Jonathan’s article.