Role of Brand Equity
Brand equity describes the intangible worth that a company generates by leveraging its goodwill and the name recognition, which it establishes and builds through effective advertising and brand building. A high level of brand equity can contribute to better sales and higher profit margins for a company, relative to its competition.
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Basics and Benefits
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When a company increases its brand equity, it naturally increases its ability to derive better sales and more predictable cash flow by selling products and services under the brand's label. NetMBA also indicates that brand equity is considered an asset because a company call sell a brand or lease it. One of the most common ways to explain brand equity is to note that if you take away all of the tangible assets a company owns, brand equity is the additional worth that a prospective buyer would pay for the company and its brand.
Brand vs. Generic
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One way to understand the role of brand equity is to compare the significance of buying a brand name product versus a generic product in the marketplace. Generic products are actually brands, but the reference "generic" indicates a lower cost, less equitable brand. Brands with high brand equity typically fill a higher price point in the market. To achieve success, companies must perpetually build the value of their brand through effective advertising and communications.
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Brand Loyalty
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One of the strongest metrics of brand equity is the level of loyalty a given brand generates from its customers. Customers become loyal to brands and their products for a number of reasons. Usually, strong loyalty stems from emotional bonds formed by high quality products, excellent service, unique products and features, and other unique traits. Brand loyalty leads to cumulative effects over time, as loyal customers typically buy more consistently, and in higher volumes. Thus, companies that are the strongest and creating loyal customers have higher brand equity.
Brand Growth
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One of the most valuable benefits of having high brand equity is the ability to grow the brand by leveraging its value. This process is informally called the "King Midas Touch" in some casual conversations. Just as everything King Midas touched turned to gold, companies with strong brand equity have the ability to extend their brands with new stores or new product lines. Apple, Microsoft and Coca-Cola were the top three brands in the 2010 Forbes list of "The World's Most Valuable Brands." Each of these brands was estimated at well over $50 billion in value. Each of these brands has also used their brand equity to diversify through new product lines and services.
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References
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