Unit IV: Brand Equity and Performance

By ADAM HAYES, Investopedia

By Orana Velarde, Visme

What Is Brand Equity?

Brand equity refers to a value premium that a company generates from a product with a recognizable
name when compared to a generic equivalent. Companies can create brand equity for their products
by making them memorable, easily recognizable, and superior in quality and reliability.
Mass marketing campaigns also help to create brand equity.

When a company has positive brand equity, customers willingly pay a high price for its products,
even though they could get the same thing from a competitor for less. Customers, in effect, pay a price
premium to do business with a firm they know and admire. Because the company with brand equity
does not incur a higher expense than its competitors to produce the product and bring it to market, the
difference in price goes to their margin. The firm's brand equity enables it to make a bigger profit on
each sale.

Elements of Brand Equity

The elements of brand equity include:

1. Brand awareness: This refers to the extent to which consumers are familiar with and
recognize a brand.
2. Brand loyalty: This refers to the degree to which consumers consistently choose a specific
brand over others.
3. Brand image: This refers to the perception that consumers have of a brand and its associated
attributes, such as quality, reliability, and uniqueness.
4. Brand associations: This refers to the emotional or psychological associations that consumers
have with a brand, such as feelings of trust, reliability, or nostalgia.
5. Brand value: This refers to the perceived benefits and overall value that consumers attribute
to a brand, which can influence their purchasing decisions.

Importance of Brand Equity

When customers attach a level of quality or prestige to a brand, they perceive that 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 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. Plus, 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.

The concept of brand equity was first introduced in the 1980s by David Aaker, a marketing professor
at the University of California, Berkeley.

Real-World Examples of Brand Equity

While many companies and products have established brand equity, some of the most recognized are
Tylenol, Kirkland Signature by Costco (COST), Coca-Cola (KO), Starbucks (SBUX), and Porsche.
All of these companies enforce quality control to ensure the best possible service or product is
delivered to the client or consumer.

Creating and maintaining strong brand equity is critical to a company's success. When a brand is
associated with high quality, trust, reliability, and other positive attributes, consumers tend to flock
to these brands almost automatically. For a company, this ensures strong sales, growth, and a
positive future outlook.

Tylenol

Manufactured since 1955 by McNeil (now a subsidiary of Johnson & Johnson), Tylenol ranks above
average in the pain relief category. A study performed by researchers at the University of Chicago
showed that, even though Tylenol is "physically homogenous" with generic brands of
acetaminophen, consumers without any expert knowledge end up choosing Johnson & Johnson's
brand about 26% more than its generic counterpart.1

Furthermore, as of Q2 2021, Tylenol is the third most popular drug brand, after Band-Aid and
Neosporin. With Millennials, it is the second most popular drug brand. Out of all respondents
questioned, 97% have heard of Tylenol.

Tylenol has been able to grow its market with the creations of Tylenol Extra Strength, Tylenol Cold
& Flu, and Tylenol Sinus Congestion & Pain.
Kirkland Signature

Since 2009, the Kirkland Signature brand by Costco has maintained positive growth.2 Kirkland
Signature encompasses hundreds of items, including clothing, coffee, laundry detergent, and food
and beverages.

Kirkland Signature even includes gasoline, which Costco provides its members. The gasoline is
cheaper than standard market rates and is provided at Costco's private gas stations. Adding to
Kirkland's popularity is the fact that its products often cost less than other name brands.

Starbucks

Thanks in part to Starbucks' loyalty program, which in Q1 2021 had more than 21 million members,
up 15% year over year, Starbucks is one of the most powerful brands in the world. Rated the fifth-
most-admired company in the world by Fortune magazine, Starbucks is held in high regard for its
pledge to social responsibility.

Starbucks' main competitors are Dunkin Donuts, Costa Coffee, McDonald's, and Tim Hortons—
companies with their own strong brand equity.
With more than 32,000 stores around the globe, Starbucks remains the largest roaster and retailer of
Arabica coffee beans and specialty coffees. Among Fortune 500 rankings for 2021, Starbucks ranks
no. 125.

Coca-Cola

With a brand value of $64.4 billion according to Forbes's 2020 list, up 9% from 2019, Coca-Cola is
often rated as the best soda brand in the world. However, the brand itself represents more than just
the products; it's symbolic of positive experiences, a proud history, even the U.S. itself.

Also recognized for its unique marketing campaigns, the Coca-Cola corporation has made a global
impact on its consumer engagement. According to Fortune, Coca-Cola is the 22nd most admired
company in the world. Among beverage companies, it ranks no. 1. For the Fortune 500 rankings,
Coca-Cola comes in at no. 93.6

Coca-Cola outsells its historical rival, controlling almost 45% of the soft drink market while Pepsi
controls a little less than 25%. The next largest share of the market, approximately 19%, is controlled
by Keurig Doctor Pepper. It appears that Coca-Cola is winning the cola wars.

Porsche

Porsche, a brand with strong equity in the automobile sector, retains its image and reliability through
the use of high-quality, unique materials. As a luxury brand, Porsche provides owners of its vehicles
not only with a product but an experience. In comparison to other vehicle brands in its class such as
Mercedes Benz and BMW, Porsche ranks no. 1 in terms of automobile brand rankings, according to
Consumer Reports.
Growing and Sustaining Brand Equity

Building brand equity takes time and plenty of work. These are the six steps a brand must follow to
grow, sustain and continually improve its brand equity:

Step #1: Craft Your Core Brand Values and Stick by Them

The first step to building a brand and subsequently its brand equity is to write down a set of core
values. These are the cornerstones of what a brand believes in and stands for. Brand values cover
topics like teamwork, customer success, user experience and interaction and are laid out in a value
proposition. To put together your value proposition, the team has to answer a few questions about the
brand. First of all, what matters to the company, its founder and its team members? What does the
brand stand for? How well does the company know its customers and competitors? Once your value
proposition is ready, stick by it and build the rest of the steps around it.

Step #2: Build Awareness

The next step is to build brand awareness. This is another step that is built over time. To build brand
awareness, your brand must be seen by your consumers at the right time and in the right place. This is
achieved through strategic brand placement and a marketing strategy. Good avenues for building
brand awareness are content marketing and social media marketing, along with participation in events,
brand placement and community involvement. Word of mouth is another great tool for building brand
awareness. There’s nothing better than a happy customer recommending your brand to her friends and
family. Ask loyal customers for reviews on your website, social media pages etc.

Step #3: Create Positive Brand Perception

Brand perception can go either way; positive or negative. Needless to say, for good brand equity, your
brand needs a positive perception. The initial steps of perception are first impressions and reactions.
Be sure to know your client base and what makes them click. Communicate with them in a language
they’re comfortable with. Consider colour psychology when crafting visual marketing assets and how
different colours carry different perceptions.

Step #4: Build Strong Loyal Bonds

When a client or customer begins to show loyalty, it’s the perfect time to cement those bonds.
Building loyalty with customers that are consciously aware of your brand, click with your brand
values and have a positive perception. A good way to keep your client base loyal is to stay consistent
with your messaging. The most effective way to keep your brand experience consistent is to invest
in brand management software that improves your bottom line and puts your brand vision at the
centre of everything. For example, by powering your work with a software, you'll be able to turn your
static PDF brand guidelines into a digital format, ensuring that your graphics and messaging remain
unified by giving your company a single resource to store, share, and manage all your branded
elements.

Step #5: Continuously Improve Customer Experience

The way your brand deals with customer relations, good or bad, is important to building brand equity.
Making customers feel heard is important for solving any problems they encounter when using your
products or services. Often users and clients get attracted where they can give suggestions and ideas
for feature requests and new products. Listen to what they have to say and take action if a number of
them suggest the same thing. To continuously improve customer experience, make sure you have a
strong support team. If your brand is international, keep a remote team with support team around the
clock. Implementing a social listening process is also a good idea to ensure you don't miss any online
conversations about your business and can immediately work to take a negative comment about your
brand and turn it onto a positive one.

Step #6: Keep an Active and Engaged Community

There are many ways through which a brand can build a community like social events, participation in
conferences, summits and other virtual events etc. Another great way to create a community is
through social media mainly Facebook and Twitter where conversations are happening 24 hours a
day.