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Brand equity: Everything you need to know

15 min read
Why are customers willing to pay higher prices for brand-name items over cheaper non-branded goods? Brand Equity is the measure of the perceived worth of a brand-name product, and nurturing your brand’s equity could help increase your profit margins. Learn how you can build your brand’s equity level in the eyes of your customers.


What is brand equity?

Brand equity is the additional value that a recognizable brand name adds to a product offering. Other words that are used to describe brand equity are ‘sway’, ‘good standing’, or ‘commercial value’. Brand equity is linked to brand recognition as a customer must be aware of the brand name initially, but it differs from it as brand equity emphasizes the added value that the brand-name provides to the product.

Let’s review an example. Drug stores have many different varieties of Paracetamol available to buy. Some versions are drug-store-owned brands, while others hold a recognizable brand-name that the brand-owning company created.

Each Paracetamol product may have identical ingredients and produce the same outcome when used. Yet, some branded products may hold a stronger ‘standing’ (brand equity level) in the minds of the consumer. This higher level can be an influencing factor in the customer’s buying decision, and hence companies that own these brand-name products can expect to gain an advantage in sales performance.

The brand-owning company can further capitalize on brand equity if they raise the purchase price of their brand-name Paracetamol product. The cost of production for a brand-name version and a generic non-branded version remains the same. However, as the customer opts to pay extra for the branding in addition to the base product itself, the brand-owning company increases its profit margin and gains a stronger market share of the pharmaceutical industry.

Components of brand equity

Brand equity is created as your customers becoming increasingly, and more personally, aware of your brand. They must first know that it exists, then form positive or negative opinions of it through their own interactions, and finally, arrive at a subconscious value they associate with your brand.

1. Brand perception

Brand perception is what customers believe a product or service represents, not what the company owning the brand says it does.

“Marketing managers spend 70 hours a week thinking about whatever product they are marketing, but the consumer is spending seven seconds,” says Professor Ravi Dhar of the Yale School of Management.

It’s true that it takes seven seconds for a customer to form an impression of a brand, and while companies can try to shape this with marketing campaigns, slogans, or desired associations, at the end of the day, a consumer’s perception of a brand is something they create themselves. This can happen during the following sub-stages:

  • Brand recognition – Brands have recognizable features that identify a product as belonging to a certain brand. An example would be the Go-Compare TV adverts that feature a specific logo, consistent brand ambassador, and a love-it-or-hate-it catchy jingle. The visibility of a brand has a large impact on our opinions – when a brand becomes a household name, the perceived value is higher. Consequently, the brand carries higher brand equity.
  • Brand awarenessBeing aware of what the brand stands for (their unique selling point) can provide a level of familiarity and transparency that can impact a customer’s perception of a branded product. For example, knowing the ins-and-outs of an iPhone and the Apple product range would provide more certainty and comfort when faced with an iPad over a Blackberry phone. While brand recognition is about features, brand awareness is about knowledge, values, and beliefs.

2. Positive or negative effects

The way a customer perceives a brand can directly impact their actions towards it. Their reaction will be subjective, and could be based on a number of factors:

  • Customer experience: The positive user experience of a branded product can create a favorable impression of the brand. (You may now understand why Apple has so many Apple stores, where you can handle and use its full branded product line – and why they come preinstalled with easy-to-win games. Angry Birds anyone?)
  • Quality: The brand name is associated with a good supply chain, reputation, and trust level. LEGO Group has topped the list of the most reputable companies in the world repeatedly based on its performance across several reputation markers (products, governance, leadership, financial performance, how innovative they are, and their “citizenship”).
  • Customer preference: Would a customer use the branded product themselves? The success of the sale relies on whether this brand represents the customer’s beliefs and values, and could easily feature within their life now. Preferences could be because of more emotive reasons: UK cereal organization, Kellogg’s, was launched in the 1920’s and engaged children with strong brand mascot characters on their packaging. Hence, customers who have grown up with Kellogg’s breakfast cereals will have strong associations of childhood and home.

When consumers react positively to a brand, they may buy the product and recommend the brand on social media, leading to increases in the brand-owning company’s reputation and bottom-line. When a brand is perceived negatively, the customer’s reaction may be to boycott products, downplay, or criticize the product to others, which could lead to the opposite effect.

3. Resulting positive or negative value

The return from the effects of a positive or negative brand perception falls into two categories: tangible or intangible value.

  • Tangible value is a result that can be easily measured, and is often physical in nature. An example of positive tangible value is increased revenue due to a greater number of sales. An example of negative tangible value could be a decrease in company stock price value as a result of a loss of confidence in the product’s ability to sell.
  • Intangible value is a result that can’t be tracked or replicated easily, and isn’t physical in nature. Positive intangible value could be to gain greater brand awareness and goodwill, through word of mouth. Negative intangible value could be the perception of a brand as dangerous or as being in bad taste.

Benefits of developing your brand equity

You can develop greater market share: Developing your brand equity will give you a competitive edge in the marketplace. In some saturated industries, your brand needs to stand out and appeal to customers through your unique selling point or distinct branding. When you can be remembered by a customer at a point of sale, then you have given yourself a greater chance of successfully selling your product.

You can charge a price premium: The price premium – also known as relative price – is the percentage that a product’s selling price exceeds or falls short of a benchmark price (in this case, a market average for a product). When you have better brand equity, you’re able to charge more for the product and increase your price premium percentage over the market average. This can be a good overall metric to measure your product’s financial performance.

You can extend your product line easily: When you have a high level of brand equity, customers will be more likely to continue their business with you and be the first to try your latest products and services. You could ask your community of customers for testers at the product development stage, or launch directly into the market for customers to buy.

You have a greater impact as a company: With your increased revenue and market dominance, you may find yourself in a powerful situation. You can use your high brand equity to form new partnerships, look around for better supplier rates, or be considered as worthy of a ‘seat at the table’ with other large brands. This could open the door to collaborations, business ventures, or investment opportunities that would otherwise not be available to you.

Company examples with positive and negative brand equity

Some products or services fall in and out of positive or negative brand perception, which then creates corresponding positive or negative actions and value results:

The Coca-Cola Company

The Coca-Cola brand is worth an estimated $83.8 billion and sells in every country of the world (aside from Cuba and North Korea!). It is consistently adapting to suit its customers’ lives, with past products offering label personalization for younger audiences, creating Christmas advertising featuring a Santa in a red-suit to welcome in the holidays, and past taglines emphasising positive experiences: “Make it real” (2005), “Open happiness” (2009) and “Taste the feeling” (2016).

Great brand equity means that a company can add to its product range within the brand, safe in the knowledge that customers will trust the brand enough to try the new products. Coke was able to do this through product expansion – and today they own over 20 brands.

WW (formerly Weightwatchers)

A word of caution to those of you that think changing your brand is easy. There have been some examples of companies that have faced backlash and negativity when trying to make a positive change.

In 2008, the dieting company then called Weightwatchers rebranded to try to focus on general wellness and self-care, by dropping the word ‘weight’ from their name and adding the tagline: ‘Wellness that works’.

While WW was reacting to the changing times, backlash against their changes caused negative customer experiences and took its toll on their share price. To restore their lost brand recognition, WW changed its approach and became ‘Weight Watchers Reimagined’.

How to measure brand equity

There are three core brand equity drivers that you need to track: financial, strength, and consumer metrics:

  1. Financial metrics: The C-suite will always want to see a positive balance sheet to confirm that the brand is healthy. You should be able to extrapolate from the data market share, profitability, revenue, price, growth rate, cost to retain customers, cost to acquire new customers, and branding investment. You can use solid financial metrics data to demonstrate how important your brand is to the business and secure higher marketing budgets to continue growing.
  2. Strength metrics: Strong brands are more likely to survive despite change and deliver more brand equity. You’ll need to track awareness and knowledge of the brand, accessibility, customer loyalty, retention, licensing potential, and brand ‘buzz’. Also, monitor social media and survey the public to get a picture of how your brand is known and loved (or not).
  3. Consumer metrics: Companies don’t build brands; customers do. It’s essential that you track consumer purchasing behavior and sentiment towards your brand. Track and measure brand relevance, emotional connection, value, and brand perception through surveys and social media monitoring. The right text analytics software that can interpret open text comments is particularly useful to gather sentiment and suggestions.

How to build brand equity

Brand equity is the value of your brand for your company. It’s based on the idea that a recognized brand that’s firmly established and reputable is more successful than a generic equivalent. It’s based on customer perception: customers will tend to buy a product they recognize and trust. When a brand is recognized and trusted to the point that the customer recognizes it and feels a deep psychological bond with it, your brand equity is valuable indeed.

Here are four steps towards building your own brand equity:

1. Build greater brand awareness

You need to make sure your customers recognize your brand identity when they’re looking for goods or services, and that they perceive it in the way you intend. There are several ways you can do this:

  • Using the same logo or image to ensure your branding is consistent
  • Great customer service
  • A heart-warming story behind the brand
  • Keeping the brand in front of your market
  • Providing ongoing value
  • Keeping in touch via email or newsletters
  • Tap into social media and share more – blogs, tweets, Facebook groups, Instagram photos
  • Word of mouth, positive customer experience, and targeted marketing all help you develop greater brand awareness.

2. Communicate brand meaning and what it stands for

Consider how well your product meets the needs of customers — not just the physical ones, but their social and psychological needs as well. A company that produces a useful product, and genuinely commits to social or environmental responsibility will attract customers and employees who share those values and who will be sufficiently connected and enthusiastic to be advocates.

IKEA, for example, has invested in sustainability throughout its entire business operation: 50% of its wood is from sustainable sources, 100% of its cotton is Better Cotton standard and 700,000 solar panels power its stores. With feel-good eco-credentials like these, spending a Sunday afternoon assembling an IKEA flat pack seems more a pleasure.

3. Foster positive customer feelings and judgments

When customers have a warm feeling towards your product, they’re more likely to become loyal customers and pass the word on. Judgments are made about a brand’s credibility, capability, quality, relevance to need, and superiority over the competition, so it’s important to maintain the integrity of all of these. Positive feelings can be excitement, fun, peer approval, security, trust, and self-respect.

A brand that can maintain positive judgments and feelings is a winner. For example, the iPad: did you think you needed one before you saw one and appreciated its capabilities? For many of us today it’s our computer, gaming console, TV, radio, alarm clock, mobile bank, messaging service… we love our iPads.

4. Build a strong bond of loyalty with your customers

This is a powerful, yet very difficult aspect of brand equity to attain. Loyal customers are customers that have formed a psychological bond with your brand. They make repeat purchases. They may feel part of a community of fellow consumers. They will act as your brand ambassadors, inadvertently selling your products for you through social media, online forums, and even physical events. Establishing a brand equity connection that borders on customer evangelism is invaluable.

What next for your brand equity journey?

You have a few routes to help yourself find out if Brand Equity is a concern for your business goals:

Download our free brand awareness survey template