What is Brand Equity?
Brand equity refers to the additional value a company gains from a product with a recognizable name compared to a generic equivalent. Businesses build brand equity by making their products memorable, easily recognizable, and superior in quality. Effective marketing campaigns further enhance this value.
When a company enjoys positive brand equity, customers willingly pay a premium price for its products, even when lower-cost alternatives are available. This willingness to pay more elevates the company’s profit margin without increasing production costs.
Key Takeaways
- Value Derivation: Brand equity is the value a company gains from its brand name compared to generic products.
- Components: It includes three core elements: consumer perception, the effects (positive or negative), and the resulting value.
- Impact: High brand equity results in increased sales and profitability, as consumers prefer reputable brands.
- Competition: Brands often compete within the same industry based on brand equity.
Elements and Importance of Brand Equity
Brand equity hinges on three basic components: consumer perception, effects, and the resulting tangible or intangible value.
- Consumer Perception: This includes knowledge and experience with a brand and its products.
- Positive or Negative Effects: The consumer perception leads to either positive or negative outcomes for the brand.
- Resulting Value: The effects materialize as increased revenue or enhanced brand awareness (intangible value).
Negative brand equity, however, can decrease both tangible and intangible value. For instance, a major product recall can severely damage a brand’s reputation and equity.
Effect on Profit Margins
Brands with high equity can command higher prices because consumers associate these brands with superior quality or prestige. The higher price justified by brand equity significantly boosts profit margins.
- Case Example: Apple customers willingly pay premium prices for new products, driven by the company’s extraordinary brand equity.
- Customer Retention: Companies like Apple also benefit from high customer retention, which reduces marketing costs and maximizes profit margins. Returning customers require less marketing expense than acquiring new ones.
Real-World Examples of Brand Equity
Tylenol
Since 1955, Tylenol has been synonymous with pain relief. Through product diversification and strong consumer trust, it has managed to capture a significant market share.
Kirkland Signature
Costco’s private-label brand, Kirkland Signature, encompasses hundreds of items and maintains positive growth through lower pricing compared to name brands.
Starbucks
Globally admired for its social responsibility and quality products, Starbucks holds strong brand equity supported by a large presence of over 31,000 stores.
Coca-Cola
Often rated the most valuable soda brand, Coca-Cola transcends its product line, symbolizing positive experiences and a proud history.
Porsche
With a reputation for quality and luxury, Porsche leads in the automobile sector, exemplifying high brand equity.
Tracking a Company’s Success with Brand Equity
Brand equity is crucial for measuring company strength, particularly in competitive sectors. For instance, Home Depot and Lowe’s constantly vie for the top spot based on their brand equity, driven significantly by consumer perception and e-commerce strength.
Why is Brand Equity Important?
High brand equity leads to increased customer loyalty, higher perceived value, competitive market advantage, and a positive market reputation. In essence, stronger equity translates to higher sales, better margins, and a more loyal customer base.
Elements of Brand Equity
- Brand Awareness: Familiarity and recognition of the brand among consumers.
- Brand Loyalty: The extent to which consumers consistently choose one brand over competitors.
- Brand Image: Consumers’ perceptions of the brand’s attributes like quality and reliability.
- Brand Associations: Emotional ties and psychological associations, such as trust and nostalgia.
- Brand Value: The overall perceived benefits and value ascribed by consumers.
Factors Affecting Brand Equity
Several elements impact brand equity:
- Product/Service Quality: Consistent, high-quality offerings.
- Marketing Efforts: Effective, consistent branding strategies.
- Customer Experiences: Positive interactions that build loyalty.
- Brand Reputation: Trustworthiness and reliability.
- Competition: Industry rivals and consumer choices.
- Consumer Trends: Evolving consumer preferences or trends.
The Bottom Line
Brand equity embodies the added value that a specific brand imparts to a product or service. It strengthens through marketing, customer experiences, and strong reputation, granting companies a significant competitive advantage.
Related Terms: brand recognition, goodwill, product recall, marketing, e-commerce.
References
- Mayo Clinic. “Chronic pain: Medication decisions”.
- The Harris Poll. “Enduring Brands Top 2015 Harris Poll EquiTrend List”.
- Costco. “2019 Annual Report, Fiscal Year Ended Sept. 1, 2019”, Page 17.
- Fortune. “World’s Most Admired Companies, 2020”.
- Starbucks. “Starbucks 2019 Annual Report”, Page 9.
- Yahoo Finance. “The Coca-Cola Company Statistics”.
- U.S. News & World Report. “U.S. News Best Luxury Vehicle Brands for 2020”.
- The Harris Poll. “The Harris Poll EquiTrends Brands of the Year, 2020”.
