Brand Equity is the additional value a product receives from having a well known brand, or high level of brand awareness. It is the difference in price that a consumer pays when they purchase a recognized brand’s product over a lesser known, generic version of the same product. Brand equity is a competitive advantage that results in higher sales, higher revenues, and lower costs.
The Brand Equity Concept
While most brand equity research has taken place in consumer markets, the concept of brand equity is also important for understanding competitive dynamics and price structures of business-to-business markets. In industrial markets competition is often based on differences in product performance. It has been suggested however that firms may charge premiums that cannot be solely explained in terms of technological superiority and performance-related advantages. Such price premiums reflect the brand equity of reputable manufacturers. Three brand equity drivers were selected by researchers from numerous factors that have impact on a brand: brand awareness, brand perspective, and brand attachment.
Brand equity is strategically crucial, but famously difficult to quantify. Many experts have developed tools to analyze this asset, but there is no agreed way to measure it. As one of the serial challenges that marketing professionals and academics find with the concept of brand equity, the disconnect between quantitative and qualitative equity values is difficult to reconcile. Quantitative brand equity includes numerical values such as profit margins and market share, but fails to capture qualitative elements such as prestige and associations of interest. Overall, most marketing practitioners take a more qualitative approach to brand equity because of this challenge. In a survey of nearly 200 senior marketing managers, only 26 percent responded that they found the "brand equity" metric very useful.
Some marketing researchers have concluded that brands are one of the most valuable assets a company has, as brand equity is one of the factors which can increase the financial value of a brand to the brand owner, although not the only one. Elements that can be included in the valuation of brand equity include (but not limited to): changing market share, profit margins, consumer recognition of logos and other visual elements, brand language associations made by consumers, consumers' perceptions of quality and other relevant brand values.
Consumers' knowledge about a brand also governs how manufacturers and advertisers market the brand. Brand equity is created through strategic investments in communication channels and market education and appreciates through economic growth in profit margins, market share, prestige value, and critical associations. Generally, these strategic investments appreciate over time to deliver a return on investment. This is directly related to marketing ROI. Brand equity can also appreciate without strategic direction. A Stockholm University study in 2011 documents the case of Jerusalem's city brand. The city organically developed a brand, which experienced tremendous brand equity appreciation over the course of centuries through non-strategic activities. A booming tourism industry in Jerusalem has been the most evident indicator of a strong ROI.
The Components of Brand Equity
- Brand perception: Brand perception is what customers believe a product or service represents, not what the company owning the brand says it does. In effect, the consumer owns brand perception, not the company.
- Positive or negative effects: When consumers react positively to a brand, the company’s reputation, products and bottom line will benefit, whereas a negative consumer reaction will have the opposite effect.
- Value: Positive effects return tangible and intangible value – tangibles include profit or revenue increase; intangibles are brand awareness and goodwill. Negative effects can diminish both tangibles and intangibles. Uber, for example, was trending positively in late 2016, but a series of scandals ranging from sexism to spying negatively impacted its reputation, bottom line and brand equity.
The Dimensions of Brand Equity
Brand equity has four dimensions — brand loyalty, brand awareness, brand associations, and perceived quality, each providing value to a firm in numerous ways. Once a brand identifies the value of brand equity, they can follow this roadmap to build and manage that potential value.
- Brand Loyalty
- Reduced marketing costs
- Trade leverage
- Attracting new customers via awareness and reassurance
- Time to respond to competitive threats
- Brand Awareness
- Anchor to which other associations can be attached
- Familiarity which leads to liking
- Visibility that helps gain consideration
- Signal of substance/commitment
- Brand Associations (Including Perceived Quality)
- Help communicate information
- Create positive attitude/feelings
- Basis for extensions
The introduction of brand loyalty to the model was and is still controversial, as other conceptualizations position brand loyalty as a result of brand equity, which consists of awareness and associations. But when you buy a brand or place a value on it, the loyalty of the customer base is often the asset most prized, so it makes financial sense to include it. And, when managing a brand, the inclusion of brand loyalty as a part of the brand’s equity allows marketers to justify giving it priority in the brand-building budget. The strongest brands have that priority.
The Importance of Brand Equity
Brand equity is important for not only increase market share along with increasing its valuation in the marketplace.
- Increases market share: Good brand equity results in loyal customers who prefer one brand over the other and increases its market share.
- Price premium: Positive brand equity can charge more for its product than the actual market price.
- Asset: Brand equity is an intangible asset of an organization and like any other asset; this too can be licensed, leased or sold to others.
- Extension of product line: Having positive brand equity, it is easier to introduce new product lines. For example, Apple started with Mac operating systems and easily converted its equity with iPhones.
Positive and Negative Brand Equity
The perception that a consumer segment holds about a brand directly results in either positive or negative effects. If the brand equity is positive, the organization, its products, and its financials can benefit. If the brand equity is negative, the opposite is true.
Finally, these effects can turn into either tangible or intangible value. If the effect is positive, tangible value is realized as increases in revenue or profits and intangible value is realized as marketing as awareness or goodwill. If the effects are negative, the tangible or intangible value is also negative. For example, if consumers are willing to pay more for a generic product than for a branded one, the brand is said to have negative brand equity. This might happen if a company has a major product recall or causes a widely publicized environmental disaster.
Examples of Positive Brand Equity
Apple, ranked by one organization as “the world’s most popular brand” in 2015, is a classic example of a brand with positive equity. The company built its positive reputation with Mac computers before extending the brand to iPhones, which deliver on the brand promise expected by Apple’s computer customers. On a smaller scale, regional supermarket chain Wegmans has so much brand equity that when stores open in new territories, the brand reputation generates crowds so large that police have to direct traffic in and out of store parking lots.
Examples of Negative Brand Equity
Financial brand Goldman Sachs lost brand value when the public learned of its role in the 2008 financial crisis, automaker Toyota suffered in 2009 when it had to recall more than 8 million vehicles because of unintended acceleration, and oil and gas company BP lost significant brand equity after the U.S. Gulf of Mexico oil spill in 2010. Achieving positive brand equity is half the job; maintaining it consistently is the other half. As Chipotle’s 2015 food poisoning crisis indicates, one negative incident can nearly eliminate years of favorable brand equity.
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- Definition - What Does Brand Equity Mean? TrackMaven
- The Brand Equity Concept Wikipedia
- The three components of brand equity Qualtrics
- The Roadmap for Building & Managing Brand Equity Prophet
- Why is Brand Equity Important Marketing Tutor
- Positive and Negative Brand Equity Shopify
- Understanding Positive and Negative Brand Equity Investopedia