Brand equity refers to the value of a brand name. If customers are willing to pay more for a product from a particular company than for a generic product, that company has brand equity. An example of brand equity is the clothing manufacturer Lacoste. A golf shirt festooned with the Lacoste alligator typically retails for much higher than a similar shirt with no alligator; many customers happily pay the premium because they associate Lacoste with prestige and sophistication.
Brand equity can also be negative. If a brand has a huge product recall, for example, or is involved in a highly publicized environmental disaster such as the 2010 BP oil spill, some customers actively avoid that brand, and the brand name becomes a liability rather than an asset. Brand equity impacts profit margins by affecting profit margin per customer, sales volume and customer retention.
A Big Effect on Profit Margins
When customers attach a level of quality or prestige to a brand, they perceive the brand's products as being worth more than products made by competitors, so they are willing to pay more. In effect, the market bears higher prices for brands that have high levels of brand equity. The cost of manufacturing a golf shirt and bringing it to market is not higher, at least to a significant degree, for Lacoste than it is for a less reputable brand. However, because its customers are willing to pay more, it can charge a higher price for that shirt, with the difference going to profit. Positive brand equity increases the profit margin per customer because it allows a company to charge more for a product than competitors, even though it was obtained at the same price.
Brand equity has a direct effect on sales volume because consumers gravitate toward products with great reputations. For example, when Apple releases a new product, customers line up around the block to buy it even though it is usually priced higher than similar products from competitors. One of the primary reasons why Apple's products sell in such large numbers is that the company has amassed a staggering amount of positive brand equity. Because a certain percentage of a company's costs to sell products are fixed, higher sales volumes translate to greater profit margins.
Customer retention is the third area in which brand equity affects profit margins. Returning to the Apple example, most of the company's customers do not own only one Apple product; they own several, and they eagerly anticipate the next one's release. Apple's customer base is fiercely loyal, sometimes bordering on evangelical. Apple enjoys high customer retention, another result of its brand equity. Retaining existing customers increases profit margins by lowering the amount a business has to spend on marketing to achieve the same sales volume; it costs less to retain an existing customer than to acquire a new one.
Negative brand equity has the opposite effect on customer retention and, as a result, profit margins. After the BP oil spill, the company lost many customers. Its profits immediately dipped, and BP had to pour millions of dollars into an exhaustive advertising campaign to restore its image.
FAQs
If you have negative brand equity, you'll get the opposite result. Therefore, if positive brand equity increases profits and demonstrates your good reputation, negative brand equity indicates a poor reputation and decreases profits.
How does branding impact profit? ›
Positive brand equity increases profit margin per customer because it allows a company to charge more for a product than competitors, even though it was obtained at the same price. Brand equity has a direct effect on sales volume because consumers gravitate toward products with great reputations.
Why is brand equity profitable? ›
Brands with high equity have a positive reputation and a loyal customer base, which can lead to increased sales and profitability—especially when there are similar products in the marketplace. The higher your brand equity, the more likely consumers are going to pick your product over the competition.
How does brand equity benefit the company? ›
Once a brand has strong equity, it can consider expanding its product line. Consumers may be more willing to try a company's latest offerings if they already have strong faith in its current offerings. By expanding its product line, a company can appeal to a more diverse audience and increase its profit margins.
How does brand equity generate value? ›
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, it can follow this roadmap to build and manage that potential value.
How does brand equity affect sales? ›
Brands with high equity find it easier to cross-sell or upsell related products or services. Customers who trust a brand are more likely to explore other offerings within the brand's portfolio, leading to increased revenue per customer.
How does branding increase revenue? ›
Once you have a strong brand, you'll notice customers are more likely to buy more, pay more, and make quicker purchase decisions while telling others how great your products or services are. Finally, a good brand accelerates the sales cycle.
How is equity profitable? ›
The main benefit from an equity investment is the possibility to increase the value of the principal amount invested. This comes in the form of capital gains and dividends. An equity fund offers investors a diversified investment option typically for a minimum initial investment amount.
What is brand equity and describe why it is important in terms of securing profits? ›
Every company wants customers to recognize it, but brand equity means clients can identify your brand and your products are perceived as high quality or better than the competition. Building positive brand equity is crucial for your business because it allows you to offer your products at higher prices.
What are the negatives of brand equity? ›
Brand equity can also be negative. If a brand has a huge product recall, for example, or is involved in a highly publicized environmental disaster such as the 2010 BP oil spill, some customers actively avoid that brand, and the brand name becomes a liability rather than an asset.
A strong brand equity drives customer loyalty, premium pricing, increased sales, and ultimately, a positive bottom line. By focusing on key elements such as brand awareness, loyalty, associations, and value, businesses can enhance their brand equity and stand out in a crowded market.
How does equity benefit a business? ›
Offering equity compensation to employees can help a company reserve their funding for operations, starting initiatives and investing, and it can help reduce spending money on high salaries. This is especially common for startup companies that may be reliant on seed funding, and may not have a large cash flow.
Which of the following is a benefit of brand equity? ›
Customer loyalty. Customers are not only willing to pay more for a product with strong brand equity; they're also willing to stay loyal to a company over many years, while, routinely coming back to buy the product.
Does brand equity build brand loyalty? ›
Managing brand equity is a driver of brand loyalty, then; people who make positive brand associations when they think of your company are more likely to become repeat buyers.
What is the main source of brand equity? ›
The main sources of brand equity and value are brand awareness, brand loyalty, perceived quality, brand associations, and other proprietary brand assets.
What is the impact of branding on a business? ›
A strong brand can support an increase in sales, help a business attract new customers, and grow its market share. Creating a brand warrants more than just designing a logo or choosing a catchy name. It requires research into the target audience, competition and the company's strengths and weaknesses.
How does branding actually influence sales? ›
Brand Loyalty Improves Engagement and Customer Acquisition
In other words, branding creates loyal advocates who not only stay with you and purchase from you but grow your business exponentially by bringing others with them.
How does branding influence price? ›
When customers attach a level of quality or prestige to a brand, they perceive the brand's products as being worth more than products made by competitors, so they are willing to pay more. In effect, the market bears higher prices for brands that have high levels of brand equity.
How will branding benefit a business? ›
It can help you build trust with customers, increase your market share, and drive sales. A strong brand can also improve your company's overall value, attract top talent, and create a sense of unity among your employees.
