Brand equity is the value a brand possesses in the perception of consumers, or otherwise known as a value premium. It is the intangible asset that comes from having a well-known brand name and a positive reputation. Simply explained, brand equity is when consumers would rather purchase the brand name as opposed to a generic brand even though the products are the same. A brand with high equity has greater potential to generate revenue than a lesser-known generic brand because customers are willing to pay a premium price for it. Brand equity is about creating a strong connection between a company and its customers. By building trust, delivering on promises, and creating a positive brand image, companies can develop a loyal customer base that will continue to support the brand over time which builds a strong brand equity.
Having a high brand equity means companies can make more profit by charging higher prices for products and services. People will recognize the brand they trust and purchase those products as opposed to a generic brand that is less expensive. In addition the company does not pay more for releasing their brand name products even though their products are more expensive for the consumer; a generic brand company would have to pay the same amount.
Brand Equity Components
Brand equity is multi-dimensional in that it is built on three key components: consumer perception, negative or positive effects, and the resulting value. These elements are interrelated and play a vital role in shaping a brand’s overall equity.
Consumer perception refers to how consumers perceive and understand a brand. It is shaped by a brand’s marketing and advertising efforts, product quality, and overall customer experience. All of these facets affect how a consumer will construe the image and value of a brand. Positive consumer perception can lead to higher brand loyalty thus increasing sales, while negative perception can harm a brand’s reputation and lead to decreased sales.
The second component of brand equity is the negative or positive effects a brand has on consumer behavior. A brand with strong equity can influence consumer decisions, leading to higher sales and profit margin. On the flipside, a brand with weak equity may find it challenging to stand out amongst the competitions and may not have the same level of impact on consumer behavior.
Resulting value, the third component, is the tangible and intangible value that a brand generates as a result of its equity. A strong brand with high equity can sell at premium pricing and generate greater profits, while a weak brand may struggle to generate revenue and may have to compete on price. Being able to set a higher price point because of higher brand equity means an increase in profit margins, while generic brands do not get this benefit. This is the tangible arm of resulting value. The resulting intangible value in brand equity comes from brand awareness and goodwill. If a brand’s equity is negative or positive, the resulting value whether tangible or intangible will also be negative.
Brand Equity and Profit Margins
Brand equity is a crucial factor in growing a company’s profit margins. When a brand has high equity, it has a strong reputation and is widely recognized, this in turn leads to an increase in customer loyalty and a willingness to pay more for a trusted brand’s products and services.
One way that brand equity can increase profit margins is through pricing power. A brand with strong equity can set higher prices than its competitors because customers perceive its products to be higher quality and of greater value than a generic brand, even though the products are the same. As a result, the company can charge a premium price, resulting in higher profit margins.
Substantial brand equity can lead to increased sales and market share. Customers are more likely to choose a brand they know and trust over a lesser-known competitor. A classic example is often found in the world of technology where consumers will typically buy from big brand names that are known worldwide as opposed to smaller names that don’t carry a weighty reputation. Apple and Samsung are two companies that have built strong brand equity where consumers are so attached to the brand they form an allegiance to one or the other.
A strong brand can reduce marketing and advertising costs. When a brand has high equity, it is already well-known and recognized, reducing the need for over the top advertising and marketing efforts. This results in cost savings and increased profitability because there is an already existing customer base that keeps coming back for the newest products and services.
Brand Equity Examples
There is an endless list of companies that are now household names and boast substantial brand equity. These companies, amongst many more, have invested heavily in building their brand equity, resulting in customer loyalty, and increased profitability:
● Apple – Apple is known for its high end premium mobile phone products and is widely recognized world wide.
● Coca-Cola – Coca-Cola has one of the most recognizable and valuable brands in the world centering around its soda drinks. Its brand is associated with good times, refreshment, and tradition, and its logo and advertising campaigns are instantly recognizable.
● Amazon – Amazon is an e-commerce company that has built a strong brand based on customer-centricity, convenience, and innovation. Its brand is associated with a vast selection of products, fast shipping, and excellent customer service.
Significance
Building high brand equity takes time and includes creating a clear brand identity, consistent messaging and a positive customer experience, investing in marketing and advertising, building strong relationships with customers, and creating a unique brand that stands talls against its competitors. When a company does all of these things, they develop strong brand equity and that is important because it means a greater advantage in the market, higher market share, increased customer loyalty and satisfaction. A company with a high brand equity will survive the constant ebb and flow of the market economy and will sustain long term growth and stability.
