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What is Brand Equity and Why is it So Important?

October 25, 2017

6 min read

Do you buy the generic painkillers or the branded ones? And why does it matter?

When asked whether they would prefer to buy from a brand they know or the cheapest product, 69% of consumers would choose the trusted brand over a cheaper alternative.

What is brand equity

As consumers, our purchasing decisions come from exposure to marketing messages that ultimately lead us to conclude if one is better than the other.

The effect is cumulative; built through advertising, PR and “social proof”, and it’s vital to brands if they want to stand out in a crowded marketplace. This pulling power is known in the marketing industry as ‘brand equity‘.

It may sound like just another buzzword, but the truth is, if you’re trying to build a brand or promote a new product, understanding brand equity is key. In this article, we’ll walk you through what brand equity really is, and why it’s so important to get it right.

What is Brand Equity?

Brand equity describes the value of having a well-known and loved brand name. It’s not to be confused with brand loyalty, though the two are really similar – brand equity refers to the value of a recognisable name, while brand loyalty refers to people sticking with a brand regardless of any change in the market.

Wikipedia explains this as:

“the idea that the owner of a well-known brand name can generate more revenue simply from brand recognition.”

Investopedia adds:

“Brand equity refers to a value premium that a company generates from a product with a recognisable name, when compared to a generic equivalent.”

Put simply, the idea is that companies can earn more money from their products if consumers believe them to be superior to lesser-known brands, and they can do this without having to rely purely on price or promotions. This helps them avoid the ‘race to the bottom’ and lifts them above commodity status.

Considered as an asset in itself, a business with high brand equity will, therefore, be more valuable than one with low brand equity.

As Stephen B. Shepard, an American business journalist, puts it:

“A great brand is a promise, a compact with a customer about quality, reliability, innovation, and even community. And while the concept of brand is intangible, brand equity is far from it.”

Why Does Brand Equity Matter?

Whether you simply want to sell more products, at higher prices, or you’re hoping to attract investors, brand equity matters. It even plays a role in the quality of employees you’ll be able to secure for your company.

Here are three key benefits of great brand equity:

1. Increased Sales

The purpose of a brand is to give the consumer something they can trust – it’s a seal of quality, a promise of what to expect, and a statement of values and ideals that a consumer can align with their own.

These values are important to most consumers – at least in certain categories. For example, one study found 74% of women prefer to buy brand name health and beauty products, while 69% of shoppers think it’s important for washing detergent to come from a well-known name. Our own research found that 55.5% of consumers are willing to spend more money to buy from brands that align with their own personal values.

Building brand equity is central to cutting through the noise and securing that all-important repeat custom, but also to future business development and the ability to stay ahead of new market entrants.

Risk when introducing a new product is dramatically reduced for companies with a recognisable brand (though success is never assured). An established brand is also at an advantage when it comes to distribution – you’re more likely to get stocked if your brand is in demand, leading to even higher sales.

2. Higher Profits

Consumers are willing to pay more for brands they like – you only have to wander through any supermarket to see the price difference between branded and generic products. For example, Tesco’s own-label Italian chopped tomatoes cost 35p for 400g, while Napolina’s same-sized chopped tomatoes tin cost 95p – that’s 171% more!

In the battle for brand equity, it’s who dares wins. Back in 2016, FMCG giants Proctor & Gamble, Unilever, and Mondelez refocused on their brand building efforts and away from promotions, in a bid to improve profit margins. There’s a huge focus on brand equity building amongst online consumer brands too – it’s all in the aim of setting themselves apart.

Research shows brand equity plays an important role in price structure, with companies able to charge a premium for products even when physical superiority over competitors can’t be demonstrated.

The ability to charge more results in higher profit margins and, as such, brand equity is a major indicator of company strength and performance, specifically in the public markets. The top 5 most valuable brands globally (as of 2019) are Amazon, Apple, Google, Microsoft, and Visa – all brands with a whole heap of brand equity in their respective marketplaces, and the world at large.

3. More Influence

Just as being good looking reportedly gives people an advantage in life, brands experience perks from having high levels of brand equity. Essentially, it becomes much easier to open doors. When it comes to making strategic partnerships, companies are naturally keener to team up with influential allies. In turn, such collaborations result in even further enhanced brand equity for both partners – it’s a win-win!

What’s more, studies show that companies with high brand equity find it easier to recruit talent. That’s because job seekers use reputation perception as a signal about job attributes, and reputation affects the pride that individuals expect from organisational membership.

Plus, they know that working for a well known, well-respected brand will help them when searching for their next role. Individuals will even accept lower wages to join firms with positive reputations.

Conclusion

With the rise of increasingly connected and “switched on” consumers, brand equity is more important than ever. Garnering fans both online and offline actively affects your bottom line – according to Thomson Reuters and Interbrand 75% of an average corporation’s value is now intangible (three decades ago it consisted of 95% tangible assets).

This means, if you don’t have brand recognition among consumers and you don’t have customers willing to recommend you, your company won’t be able to maximise its value.

Taking steps to building brand equity, and consistently measuring your progress, will increase sales and prestige – and both are needed to become truly successful and remain a leader in your market.

Want expert tips and tricks on measuring your brand, including brand equity, brand loyalty, and a bunch of other metrics? Check out our free Complete Guide to Brand Tracking.

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