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Brand Equity

Perceived Quality: Critical Asset For Brands

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Perceived Quality: Critical Asset For Brands

Perceived quality is a brand association that is elevated to the status of a brand asset for several reasons:

* among all brand associations, only perceived quality has been shown to drive financial performance.

* perceived quality is often a major (if not the principal) strategic thrust of a business.

* perceived quality is linked to and often drives other aspects of how a brand is perceived.

Perceived Quality Drives Financial Performance

There is a pervasive thirst to show that investments in brand equity will pay off. Although linking financial performance to any intangible asset (whether it is people, information technology, or brand equity) is difficult, three studies have demonstrated that perceived quality does drive financial performance:

* Studies using the PIMS data base (annual data measuring more than one hundred variables for over 3,000 business units) have shown that perceived quality is the single most important contributor to a company”s return on investment (ROI), having more impact than market share, R&D, or marketing expenditures. Perceived quality contributes to profitability in part by enhancing prices and market share. The relationship holds for Kmart as well as Tiffany: Improve perceived quality, and ROI will improve.

* A five-year study of 77 firms in Sweden, conducted by Claes Fornell and his colleagues at the National Quality Research Center at the University of Michigan, revealed that perceived quality was a major driver of customer satisfaction, which in turn had a major impact on ROI.

* A study of 33 publicly traded firms over a four-year period showed that perceived quality (as measured by the EquiTrend method) had an impact on stock return, the ultimate financial measure. The study looked at American Express, AT&T, Avon, Citicorp, Coke, Kodak, Ford, Goodyear, IBM, Kellogg’s, and 23 other firms for which the corporate brand drove a substantial amount of sales and profits. Remarkably, the impact of perceived quality was nearly as great as that of ROI (an acknowledged influence on stock return), even when the researchers controlled for advertising expenditures and awareness levels.

Perceived Quality As A Strategic Thrust

Perceived quality is a key strategic variable for many firms. Total quality management (TQM) or one of its relatives has been central to many firms for the past decade, and perceived quality is usually the end goal of TQM programs.

Many firms explicitly consider quality to be one of their primary values and include it in their mission statement. For example, one of the guiding principles put forth by IBM’s president, Lou Gerstner, is an “overriding commitment to quality.” In one study in which 250 business managers were asked to identify the sustainable competitive advantage of their firms, perceived quality was the most frequently named asset.

Perceived quality is often the key positioning dimension for corporate brands (such as Toshiba or Ford) and other brands that range over product classes (such as Weight Watchers, Kraft, and store brands such as Safeway Select). Because these brands span product classes, they are less likely to be driven by functional benefits, and perceived quality is likely to play a larger role.

Further, for many brands perceived quality defines the competitive milieu and their own position within that milieu. Some brands are price brands, and others are prestige or premium brands. Within those categories, the perceived quality position is often the defining point of differentiation.

Perceived Quality As A Measure Of “Brand Goodness”

Perceived quality is usually at the heart of what customers are buying, and in that sense, it is a bottom-line measure of the impact of a brand identity. More interesting, though, perceived quality reflects a measure of “goodness” that spreads over all elements of the brand like a thick syrup. Even when the brand identity is defined by functional benefits, most studies will show that perceptions about those benefits are closely related to perceived quality. When perceived quality improves, so generally do other elements of customers” perception of the brand.

Creating Perceptions Of Quality

Achieving perceptions of quality is usually impossible unless the quality claim has substance. Generating high quality requires an understanding of what quality means to customer segments, as well as a supportive culture and a quality improvement process that will enable the organization to deliver quality products and services. Creating a quality product or service, however, is only a partial victory; perceptions must be created as well.

Perceived quality may differ from actual quality for a variety of reasons. First, consumers may be overly influenced by a previous image of poor quality. Because of this, they may not believe new claims, or they may not be willing to take the time to verify them. Suntory Old Whiskey, Audi automobiles, and Schlitz beer all found that making excellent products was not enough to erase consumer doubts raised by previously tarnished quality. Thus it is critical to protect a brand from gaining a reputation for shoddy quality from which recovery is difficult and sometimes impossible.

Second, a company may be achieving quality on a dimension that consumers do not consider important. When Citibank dramatically increased back-office efficiency by automating its processing activities, the expected impact on customer evaluations was disappointing. Customers, it turned out, either did not notice the changes or did not recognize any benefit from them. There is a need to make sure that investments in quality occur in areas that will resonate with customers.

Third, consumers rarely have all the information necessary to make a rational and objective judgment on quality — and even if they do have the information, they may lack the time and motivation to process it. As a result, they rely on one or two cues that they associate with quality; the key to influencing perceived quality is understanding and managing these cues properly. Thus, it is important to understand the little things that consumers use as the basis for making a judgment of quality.

Contributed to Branding Strategy Insider by: David Aaker, Author of Building Strong Brands

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2 Comments

Alex J. Mann on June 01st, 2009 said

The studies cited at the beginning are fascinating, but I’m curious what the impact of perceived quality is on stock price and ROE in the short-term vs. long-term.

For instance, positive or negative news on a publicly traded company typically has instant effect on a stock price in an efficient market. But, a change in brand design or short-term investment in quality would not have an instant impact on stock price. Do you know what general time span is for this investments to correlate (positively or negatively) with the ROE?

Kirsten Rijke on July 15th, 2009 said

Interesting, and I think also true.. but isn’t ‘perceived quality’ just a complicated way of gathering several brand/product/market aspects such as actual quality, brand image, user benefits/relative advantage, complexity and observability, to name a few?

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