Brand equity is the added value that a company gains from having a brand that consumers recognize and trust, and for which they are willing to pay a premium. A brand is a familiar name, logo or symbol that marks products or services and helps consumers recognize them and associate them with certain qualities, values or characteristics. A brand-name product has a higher value than its generic equivalent because it is known to consumers and is therefore perceived as being more trustworthy and familiar.
Brand equity can also mean that a brand is easily recalled, or that it comes to mind when a consumer thinks of a certain category of products or services. This familiarity leads to higher consumer confidence in purchasing the product and therefore translates into higher sales, more customer loyalty and ultimately higher profits. Consumers are often willing to pay a premium for brand equity because they believe certain brands have higher value or quality. Another measurement of brand equity is the willingness of consumers to recommend the brand to others.
While the term "brand equity" is usually used to describe positive associations that purchasers have, a "negative brand equity" can also develop around brands that are associated with danger to the public (such as through a large-scale recall of a product or an instance of contamination), mismanagement or corruption associated with the corporation.
Brand equity is based on the perception of the brand in the marketplace. If a brand is well-known and it is seen positively by consumers, it is said to have high brand equity. Companies that enjoy high brand equity are careful to protect the brand's image and to make it as widely recognized as possible. Brands that have a clear, unique and highly recognizable or memorable identity often develop the highest brand equity.
Companies use brand equity to expand their product lines. If consumers trust and like one product made by a company, they are more likely to extend that trust and their willingness to purchase a new product if the branding is shared by the established and newly introduced items. "Family branding," in which companies apply the same marketing techniques to many products, is used to create associations in consumers' minds between new products and those with which they are already familiar. Brand equity also means that the selling power of a brand can help companies launch new products with less financial risk.
Brand equity is intangible and cannot be calculated precisely. Brand equity can be measured, or estimated, by taking into account the brand's share in the marketplace, its stability and its place in current purchasing trends. Companies often use market research to understand how consumers see their brands and to estimate the value they have when shoppers make purchasing decisions. In Brand Price Trade-Off research, for example, consumers are polled to determine how much more they would be willing to pay for certain brands of products, as compared to their preferences if all the products are the same price.
Companies also estimate brand equity by comparing their sales to those of similar products without the brand equity. For example, sales of generic soda provide a yardstick by which a company with high brand equity like Coca-Cola can measure the added value of their brand's familiarity and positive value. Brand equity is often measured in terms of the future value of a company's products. The stronger the brand, the more it guarantees future profitability from ongoing sales of the products associated with it.
Greater brand equity can be created by making a brand relevant to consumers, positioning it effectively in the marketplace and strengthening the characteristics that distinguish the brand from its competitors. Marketing and advertising strategies often center around creating distinctive brands, building brand recognition and enhancing the value of the brand by creating positive associations for the brand in consumers' minds.
The importance of brand equity became recognized in the 1950s as advertisers sought to create an association between certain brands and concepts of quality and reliability for which customers were willing to pay more. Some economists suggest that brand equity may become less important to current and future generations of consumers than it has traditionally been. As manufacturing and technology improve, many consumers feel that generic products are just as well-made as their branded equivalents. Additionally, large retailers such as Wal-Mart have house brands that are becoming increasingly popular and which may reduce the value of other branded merchandise for consumers. Buyers may become less willing to pay for the premium of branding and savvier about marketing practices designed to manipulate their purchasing habits.