Brand equity

In business, brand equity is the value of a brand as determined by the public in response to a company's efforts to establish itself in the marketplace. Firms that have high brand equity are widely recognizable and familiar among consumers. It is a key indicator of a company's performance. Brand equity is based on how customers perceive a company's products. This is dependent upon brand loyalty, name awareness, perceived quality, brand associations, and assets exclusive to the firm, such as patents. These factors can positively or negatively affect the firm's brand equity. In turn, they determine the brand's value, which has tangible and intangible components. Companies rely on brand equity to introduce new products or enter new markets. The performance value is critical in evaluating a firm's strength.

Background

A brand is a name or symbol that differentiates a company's products and services from its competitors. Companies distinguish their brands through unique names, packaging, logos, marketing, and advertising. Brands signal to consumers that a specific company makes the item or provides the service. They prevent one company from being mistaken for another that produces a similar product. For example, Coca-Cola and Pepsi are both brands of soda. To differentiate themselves, their packaging looks much different. Coca-Cola uses white lettering on a red background for its cans and bottles, while Pepsi products feature the Pepsi globe, a circular logo with swirls of red, white, and blue.

The concept of brand equity emerged in the 1980s. As companies sought to diversify their offerings, they looked to purchase well-known brands that would continue to grow in value. In 1988, tobacco giant Philip Morris bought food manufacturer Kraft for $13 billion, more than six times its intrinsic net worth, or book value. By purchasing a sturdy brand, Philip Morris believed the acquisition would allow the firm to expand outside the tobacco market.

Companies build brand equity by making distinctive products of superior quality. As customers use the products, they develop a preference for the brand and are willing to pay a higher price for it. As its customer base grows, the company claims a higher market share, the percentage of sales the business claims in its industry. A company has high brand equity when customers would rather buy the name brand over its generic equivalent. For instance, customers may prefer to buy the allergy medication Zyrtec and pay more for it than the generic version offered by drug stores.

Sometimes a brand becomes so associated with the product or service it provides that people use its name to refer to the category of items. For example, bandages are commonly called Band-Aids, the brand name they are manufactured under by first aid supply manufacturer Johnson & Johnson. Through brand equity, companies can attain a steady customer base, which gives them an edge over the competition and a foothold upon which to expand.

Overview

Brand equity is dependent upon the relationship between companies and consumers. The foundation of brand equity is customer perception, which is how consumers view a product after using it or knowing about it. Five factors shape customer perception.

Brand loyalty refers to customers who like a brand's products and continue to use them, regardless of price. For example, although Apple's iPhones are among the most expensive smartphones, there are many people who are very attached to the brand and will not consider buying any other brand of smartphone. Companies benefit from retaining existing customers, as it costs more to attract new ones through marketing and advertising. Brands that have a built-in customer base are attractive to potential buyers.

Name awareness occurs when consumers are more likely to purchase a brand if they are familiar with it. They may recognize the name and associate it with being reliable. They also may feel comfortable sticking with what they already know. Consumers are less likely to buy a brand they do not recognize.

Perceived quality refers to how consumers view a brand's ability to deliver what the customer wants. A consumer may buy a product based on the overall level of quality associated with the brand, rather than knowing about the product's specific features or benefits. For example, a customer may choose a laptop made by Dell over one made by Hewlett-Packard because of positive associations with Dell rather than because of the particular features each computer has.

Brand associations are specific connotations to a brand that influence how consumers regard it. For example, the sandwich chain Subway is associated with being a healthy form of fast food because it promotes itself as offering a variety of fresh ingredients.

A brand's exclusive assets may also influence customer perception. Such assets include patents, copyrights, and trademarks. These prevent competitors from making identical products and confusing customers. By protecting their product, companies protect their customer base. Johnson & Johnson has trademarked the word Band-Aid so other competitors cannot produce bandages with the same name.

The factors of consumer perception add or take away from a firm's brand equity. When customers exhibit brand loyalty, recognize a brand name, and perceive a high level of quality, the firm's brand equity is positively affected. Consumers will buy the product and likely continue to purchase it, which benefits the company. However, if customers do not like a brand's products, perceive the quality to be insufficient, or associate the brand with harmful connotations, the company's brand equity is negatively affected. For example, if customers associate a brand with product recalls or contamination, the brand may lose potential sales.

Consumer perception and its effects determine the value of a company's brand equity. Brand equity has a tangible value, which is reflected in a company's financial information. A positive effect on brand equity leads to higher revenue and profits. However, a negative effect can lead to a decrease in revenue and profits. Brand equity also has an intangible value, which cannot be measured by numbers. This refers to the goodwill and trustworthiness established by the brand among consumers. When a brand has a positive intangible value, it has a reputation for providing a superior product, which can translate into sales.

Companies strive to build brand equity to expand the brand, either by launching new products or by entering new markets. Household care manufacturer Procter & Gamble has been successful in building upon Ivory soap, a mainstay of the company since the 1880s. Customers held the soap in high regard for its then-unusual white color and gentle texture. Based on the customer loyalty and goodwill generated by Ivory, Procter & Gamble greatly expanded its offerings during the next century, creating a multitude of products such as Crisco shortening, Tide detergent, and Crest toothpaste.

By focusing on brand equity, companies can shore up their strength and secure their prospects for success. They can extend their competitive edge by providing quality products and services to a loyal, established customer base.

Bibliography

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