What is Brand Equity?
Brand equity refers to the value of a brand based on the associated perception of quality and loyalty that is attached to it. It is an intangible asset that depends on associations made by consumers between the brand and favorable characteristics. Companies with positive brand equity are able to earn greater profits and typically display higher customer retention rates.
How Does Brand Equity Work?
Brand equity arises from marketing efforts to promote awareness of a brand’s name and reinforce positive perceptions of its attributes. This process builds loyalty and associations in the minds of consumers that can be translated into tangible financial outcomes.
Here are some ways in which brand equity generates value for a business:
- Ability to charge premium prices: Strong brand recognition allows companies to charge more for their products or services than generic equivalents or lesser known competitors.
- Increased marketing effectiveness: Existing brand awareness makes it easier and more efficient to market and advertise new products under the same brand.
- Customer retention: Familiarity and loyalty lead to repeat purchases rather than switching to alternatives solely due to their lower prices.
- Resilience against crises: Strong and well-established brands are more capable of navigating PR problems and scandals.
- Licensing opportunities: Positive brand associations can be leveraged commercially by licensing the brand name or logo.
The financial worth of this equity is measured as the extra profits the business earns over a generic version of the same product. Companies can realize this value by selling the brand itself through mergers and acquisitions.
Types of Brand Equity
Brand equity can be divided into two main components:
Consumer Brand Equity
This refers to the value that the brand has in the minds of customers. It is influenced by awareness, loyalty, perceived quality, strong associations, and other impressions that make up a brand’s image. Marketing campaigns aim to build up this dimension of brand equity.
Financial Brand Equity
This refers to the monetary value derived from consumer brand equity. Metrics include incremental profit margins, asset valuations, price premiums, and licensing incomes attributable to brand recognition. It represents the financial impact of favorable consumer perceptions.
Building Consumer Brand Equity
There are several strategies that companies can use to develop positive brand equity among their target market:
- Effective branding: Logos, names, and slogans that are distinctive and memorable. Using a consistent visual identity and messaging builds awareness and recognition.
- Quality and reliability: Delivering consistently positive product or service experiences that fulfill promises.
- Thought leadership: Positioning brands and businesses as trusted authorities and influencers in their niche or industry.
- Omni-channel consistency: Ensuring integration and seamless experiences across physical, digital, and social touch points.
- Audience understanding: Developing messaging and experiences tailored specifically to resonate with the brand’s target demographics.
- Storytelling: Using content marketing and advertising campaigns that tap into emotions and forge connections.
- Social responsibility: Supporting ethical causes and sustainability helps elevate the brand’s image.
- Influencer partnerships: Associating the brand with key celebrities and public figures that appeal to its target audiences.
The goal is building awareness, recognition, recall, and rewards in consumers’ minds that generate automatic preference for the brand over its competitors. This instinctive loyalty is the essence of consumer brand equity.
Calculating Financial Brand Equity
While consumer brand equity is abstract and qualitative, financial equity uses quantitative metrics to assign monetary value to this intangible asset. Some of the most commonly used techniques to estimate the value of brand equity include:
- Price Premium: The extra amount that customers pay for the branded version over a generic equivalent, after accounting for any differences in quality.
- Revenue Contribution: Total revenues that are directly attributable to the brand rather than just the underlying product. This seeks to isolate the financial impact of branding.
- Brand Value Estimation: Calculate the net present value (NPV) of estimated future earnings from the brand itself. This helps estimate the overall financial worth of the brand.
- Brand Strength Score: Brand rating assessments by research firms like Interbrand and Brand Finance that survey consumer perceptions.
- Brand Net Asset Value: The amount that the brand contributes to the overall valuation of the business, calculated by comparing market capitalization to net tangible assets.
Financial valuation provides concrete estimates of returns on brand-building investments. It justifies allocating resources to maintain and grow brand equity over time.
Examples of Companies with Strong Brand Equity
Some of the world’s largest corporations have been successful in their industries and markets by intentionally strengthening their brand equity and perceived value among consumers. Here are various examples of some of the world’s most valuable brands and how they have managed to get to that point.
Apple’s brand is valued at over $800 billion, built on premium quality products, sleek minimalist design aesthetics, and a reputation for innovation. Apple can charge more for products like iPhones that have comparable specs to its competitors, with fans lining up to buy the latest versions due to the firm’s hard-earned brand equity.
Coca-Cola has some of the most recognizable branding globally, with its famous Spencerian script logo and red color scheme. The strength of its brand allows it to be priced higher than generic sodas and bottled water.
Nike’s “Just Do It” slogan and its partnerships with athletes have built an aspirational brand image that lets it enjoy huge price premiums on its shoes and apparel. The brand resonates with younger consumers especially, who perceive the fact of wearing Nike products as a status symbol.
Starbucks has built a community-driven brand centered around the coffeehouse experience. Consumers identify with its values and pay premium prices for its beverages and ambiance. Brand loyalty is very strong, with its rewards program having over 30 million members.
The Disney (DIS) brand carries strong emotions and nostalgia from generations growing up with its movies and characters. Its theme parks can charge high ticket prices and generate billions in merchandise sales thanks to brand loyalty.
These companies illustrate how brands become integral parts of consumers’ lives, driving emotional connections that allow premium value creation.
Pros and Cons of Building Brand Equity
There are significant advantages to investing in brand equity:
- Pricing power and higher profit margins.
- Increased marketing effectiveness.
- Higher customer loyalty and retention rates.
- Buffers against short-term blips or scandals.
- Building a competitive edge over rivals in the space.
Meanwhile, these are some of the common drawbacks of over-relying or spending excessively on brand equity:
- Requires large upfront marketing investments.
- Risk of overestimating true brand value.
- Reputational crises can rapidly undo equity.
- Changing consumer trends may erode equity beyond the company’s control.
- Difficulty quantifying return on investment.
Like all major investments, companies should carefully evaluate their brand equity goals and strategies against other growth options and capital allocation priorities.
Brand equity generates value by instilling loyalty and positive perceptions among target consumers. Companies can leverage these favorable associations to increase product prices and earn superior profits. Brand equity offers strategic advantages, but developing it requires significant investment and carries potential risks.