Ever wonder why loyal customers will buy anything a brand makes, no matter the price, quality or even randomness? That’s the company’s brand equity at work!
Brand equity is the value of the brand itself, an abstract figure determined by branding strategy and social perception. Unlike other financial assets, brand equity is much harder to pin down to an exact amount, but nonetheless it still has an enormous impact on a company’s bottom line.
This guide breaks down what companies need to know about brand equity. We talk about the importance of brand equity in a business model, how to build brand equity from the ground up and even share a brand equity formula to estimate your own.
What is brand equity?
Brand equity refers to the social value placed solely on a brand name and the associations a consumer has on it. Brands with more equity are more respected, so customers would rather buy from them than their competitors even if that means having to pay more. In the eyes of the consumer, brands with high equity offer products or services with more value.
Brand equity has roots in both consumer psychology and a company’s performance. In particular, it consists of:
- a consumer’s emotional attachment to the brand, good or bad, based on previous experiences
- a company’s consistency in areas like product quality, customer service and niche marketing
As you can see, both of those are developed with time, giving older brands an advantage in brand equity. However, even new brands like startups can expedite the process and instantly raise their brand equity by improving their brand marketing strategy, which itself relies heavily on advertising, the product/service lifecycle and the brand design itself like logos and website design.
The importance of brand equity
In a nutshell, brand equity makes a product/service more attractive, giving it a better position in the market and allowing the company to charge more. The beauty is that you don’t have to actually change the product/service itself (although it helps), but rather the public’s opinion of your brand.
Consumers’ opinions of a brand determines whether or not they do business with them, which is why companies invest so much money in branding. Past experiences, product/service consistency and what’s in the news can all affect an opinion of a brand, positively or negatively.
If you associate Google with essential aids that make using the internet easier, you raise its brand equity. If you associate Google with privacy invasions or other bad press, you lower its brand equity. Either way, whatever you associate Google with influences your purchasing decisions when they offer a new product or service.
Brand equity affects a company’s sales, profits and total value — most directly by allowing them to charge a higher markup. The effects of brand equity are easiest to see at its extremes, like in the fashion industry where the average markup for both retailers and designers is between 125 and 150%—for context, the average markup for a retail grocer is less than 15%.
To illustrate, let’s say a T-shirt that costs $5 to make is sold to a retailer for around $12, and then that retailer sells it to customers for around $25. A customer could buy a nearly identical, unbranded T-shirt for $5, but if that t-shirt has a Coco Chanel logo on it, certain customers would call $25 a bargain!
Brand equity components
There is no universal list of brand equity components — because it’s so abstract, different people use different methods, especially if they’re using it for different needs. For example, if you’re measuring brand equity as a stockholder evaluating shareholder interest, you might use event studies, which follow how a company’s stock value reacts to current events like new celebrity endorsements.
Below we use the David Aaker model, specifically his “Brand Equity Ten” because it’s simple, comprehensive, and general enough to be applied to almost any business. You can assess your own brand equity—and that of your competitors—by estimating your performance in the following areas. If you’re looking for hard numbers, see our brand equity formula in the next section.
Aaker outlines the ten most important brand equity components, divided into five categories:
How much extra are your customers willing to pay for your brand instead of your top competitors? This is a quantifiable way to measure customer loyalty.
Are customers happy with your product or service after purchase? Would they use it again? Do they simultaneously use your competitors to complement what you offer? Would they recommend your brand to a friend?
2. Perceived quality & leadership
This measures the degree of quality your products/service have, according to the consumer market. Are your products considered top shelf or a cheap knock-off? Is the quality of your products consistent?
How does your brand perform within its market? Is it a leading brand or does it trail behind? Is it an innovator; is it the first to come out with new features or updates? Do you start the latest branding trends or follow them? Also factor in the rate at which your popularity grows or wanes.
3. Associations & differentiations
This is similar to perceived quality, except focused on the price. Do customers feel they’re getting a bargain or ripped off? Why should they buy your products/services instead of competitors?
If your brand were a person, what type of person would they be? It’s important to consider how your business practices, outreach, content and visual identity all contribute to the “person” your brand grows up to be.
“Organization” refers to the company management, including areas like structure and leadership, but also charity work and bad press. In particular, is your company trustworthy?
Is your brand a household name or relatively unknown? You can build brand awareness through storytelling in your content and advertising, among other ways outlined in our linked guide.
5. Market behavior
Market share is the most quantifiable of the brand equity components, providing a concrete value based on sales, customer surveys and other syndicated data.
Price and distribution indices
A combination of statistics to further reveal the brand’s place in its market. The relative market price considers the average price of all product/service varieties (disregarding promotions) against the average price of competing products. Distribution coverage refers to how many outlets carry your brand and how many consumers have access to what you offer.
Brand equity formula: how to measure your brand equity
Want a monetary value on your brand equity? Again, there is no single, accepted brand equity formula to use for calculations; different companies use different methods, such as cost-based, market-based, or income-based.
Interestingly, we found the most helpful brand equity formula in the Branding for Dummies series of books, written by the former creative director of Landor Associates, Bill Chiaravalle, and marketing author, Barbara Findlay Schenck.
This brand equity formula draws on the cost to establish/replace your brand and the economic value of your brand’s premium market position; we’ll explain what those mean in one minute. You can use one or both methods, depending on your needs. For example, if you’re selling your company, you’ll want to know the precise cost to establish/replace your brand, whereas if you’re just looking to raise prices, your brand’s market premium position will help with the math.
The cost to establish/replace your brand
This is essentially the amount of money you spend on branding. It’s the sum total of expenses for:
- brand identity: the costs for your name registration, logo trademark, slogan, online presence (including web design and domain name) and any other strictly branding expenses like a musical jingle or mascot
- marketing costs: all your advertising, promotions, online outreach and other paid publicity
- attracting and retaining customers: any relevant marketing expenses above, plus money spent on lead generation, customer acquisition, loyalty programs or other endeavors like viral marketing
The economic value of your brand’s premium market position
Basically, this evaluates your economic advantage your brand gives you in the market. It involves two main areas:
- favorable price elasticity: how much can you raise your prices without losing customers? This can be determined through experimenting with different prices to see what your customers tolerate.
- premium pricing: how much more will your customers pay for your branded products than their unbranded equivalent? To calculate this, take the price difference between your branded products and their generic competition (an unbranded product or a store brand), multiply it by the number of units sold and adjust the results for future projections.
How to build brand equity: 3 tips
1. Try outside-the-box advertising
If traditional advertising isn’t producing the results you want, try something untraditional. A new and unique approach to advertising won’t just get you noticed—if it’s memorable enough, it will leave a lasting impression, therefore boosting your brand awareness. It may even strike an emotional chord with your customers, increasing loyalty and satisfaction while furthering your own brand personality.
For example, the dating app Bumble knows that their target audience of users in their twenties largely ignores online ads, so they make their social media content more engaging to raise brand awareness that way. In the app’s Instagram reels, they feature user-generated content to both create a community and display content their followers actually want to see.
Viral content, public demonstrations and guerilla advertising are all common but still unconventional forms of advertising. Methods like this that stand out are great examples of how you can improve your brand image while leaving your greater business model largely untouched.
2. Hone in on your target customers
Broad customer bases mean broad customer interests, which makes it harder to target specific preferences, emotional needs and pain points. By honing in on more specific customer groups, you can tailor your branding strategies to their particular wants, as opposed to spreading yourself thin trying to make everyone happy.
Examine your existing customer data to see where your strengths lie and how to best adapt your strategies. When you’ve chosen a niche, do some research to see what they want in your products/services as well as your brand personality. If you have the resources, you can even target multiple target groups with specially curated marketing campaigns for each.
3. Audit your marketing campaigns
Marketing is one area of business that should always be evolving. Experiment with new campaigns and on new channels and check the data to see how effective they are. Hard numbers from are always more reliable than guessing what people want, so enlist the help of tools like Google Analytics, Similarweb or BuzzSumo.
At the same time, you can change up your current campaigns to optimize individual aspects. For example, try a new color, font or arrangement for your ad to see if it performs better. To mitigate the risk, you can always conduct a quick split test to see the results before actually spending your ad money. You can even add one of the 6 key ingredients of viral marketing to an existing campaign.
Is your brand identity lost in the crowd?
Understanding the importance of brand equity is one thing, but actually developing them is another. Even if you’ve got the business and marketing aspects down, creating a brand that resonates with your target audience is always a challenge, especially when you don’t know much about art.
Brand equity incorporates a lot of emotional connotations, in particular with visuals like logos or web design. Feel free to hire a professional designer and leverage their expertise on the business aspects of graphic design. You’d be surprised at how much a new logo can change brand perception!