Brand Equity: Definition, Importance, Effect on Profit Margin, and Examples

What Is Brand Equity?

Brand equity is the value premium that a company generates from a product with a recognizable name, when compared to a generic equivalent.

Companies can build their brand equity with their products by making those products memorable, easily recognizable, and superior in quality and reliability. Mass marketing campaigns also help to create and strengthen 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.

Understanding Brand Equity

Brand equity has a few basic components:

• Consumer perception
• Negative or positive effects
• The resulting value

The Importance of Consumer Perception and Its Effects

Foremost is consumer perception, which includes both knowledge of and experience with a brand and its products. Consumer perception relates directly to brand equity. The perception that a consumer segment has of a brand results in either positive or negative effects for the company.

If the perception is positive, the organization, its products, and its financials can benefit. Brand equity builds. If the perception is negative, the opposite is true.

Resulting Value

These effects can turn into either tangible or intangible value. If the effect is positive, tangible value is realized as increases in revenue or profits. Intangible value is realized in marketing as awareness or goodwill.

If the effects are negative, the tangible or intangible value is also negative. For example, if consumers prefer a generic product over a branded one, the brand is said to have negative brand equity. Such willingness to ignore the branded product might exist if a company has a major product recall or causes a widely publicized environmental disaster.

Brand Equity's Effect on Profit Margins

The importance of brand equity's potential to boost profits and increase profit margins is demonstrated by the effort that certain companies make to support the high quality of their products.

Higher Prices

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. Thus, they are willing to pay more for them. In effect, the market bears higher prices for brands that have high levels of brand equity.

Yet, the cost of manufacturing a polo shirt and bringing it to market is not higher, at least to a significant degree, for an established company such as 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. Therefore, positive brand equity can increase profit margin per customer.

Higher Sales Volume

Brand equity has a direct effect on sales volume because consumers gravitate toward products that either have great reputations themselves or come from companies with great reputations (or both). 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 is fixed, higher sales volumes translate to greater profit margins.

Customer Retention

Customer retention is the third area in which brand equity affects profit margins. Returning to the Apple example, most of the company's customers own not just one Apple product, but several. Plus, they eagerly anticipate new releases.

Apple's customer base is fiercely loyal, sometimes bordering on evangelical. The company enjoys high customer retention, another result of its brand equity. By retaining existing customers, Apple increases profit margins by lowering the amount it 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.

Examples of Brand Equity

A general example of the importance of brand equity is when a company wants to expand its product line. If the brand's equity is positive, the likelihood that customers might buy its new product increases. Customers associate the new product with an existing, successful brand.

For example, if Campbell's releases a new soup, the company is likely to keep it under the same brand name rather than inventing a new one. The positive feelings and trust that generations of customers already have for the Campbell Soup Company (established in 1869) and its products make a new product more enticing compared to a soup associated with an unfamiliar brand name.

Here are some other examples of companies with significant brand equity.

Tylenol

Manufactured since 1955, first by McNeil and then by subsidiaries of Johnson & Johnson, Tylenol is a first-line treatment for mild to moderate pain. Tylenol has been able to grow its market with the creation of additional products that emphasize the brand: Tylenol Extra Strength, Tylenol Cold & Flu, Children's Tylenol, and Tylenol Sinus Congestion & Pain.

Costco

Started in 1995, Costco's Kirkland Signature brand has maintained positive growth and represents solid profit margins as well as a growing portion of the company's overall sales. This is an example of consumers forsaking more expensive products from well-known companies and flocking to Costco's typically lower priced products because of their high quality and value.

Kirkland Signature encompasses hundreds of items, including clothing, coffee, laundry detergent, food, and beverages. Costco also provides members with exclusive access to cheaper gasoline at its private gas stations.

Starbucks

Recognized as one of the most admired companies in the world by Fortune magazine in 2023, Starbucks is held in high regard for its pledge to social responsibility. With 38,038 stores operating around the globe, Starbucks remains the premier roaster and retailer of Arabica coffee beans and specialty coffees.

Coca-Cola

With profit margins from 23-32%, Coca-Cola is often rated the most valuable soda brand in the world. However, the company brand itself represents more than just products. It's symbolic of positive experiences and relationships, a proud history involving consumers, and even of the United States itself. Also recognized for its unique marketing campaigns, the Coca-Cola Corporation has had a global impact on consumer engagement.

Porsche

Porsche, a brand in the automobile sector with strong equity, retains its image and reliability through the use of high quality, unique product materials. Viewed as a luxury brand, Porsche provides owners of its vehicles not only with a high quality car but a memorable experience. Compared to other vehicle brands in its class, Porsche was the top luxury car brand in 2023, according to U.S. News & World Report.

Tracking a Company's Brand Equity

Brand equity is a major indicator of company strength and performance, specifically in the public markets. Investors and analysts can look to brand equity as a gauge for potential stock performance. They may make solid and growing brand equity part of the criteria for investment selection.

Often, companies in the same industry or sector compete on brand equity. For example, two top companies—Home Depot and Lowe's Home Improvement—consistently rank as the top two home improvement store brands, as they did in 2024.

A large component of brand equity in the hardware environment is consumer perception of the strength of a company's e-commerce business. Both Lowe's and Home Depot are industry leaders in this category. Besides e-commerce notability, both companies have high overall recognition among consumers, allowing them to further penetrate the industry and increase their brand equity.

The Bottom Line

Brand equity refers to the added value that a company earns from a product or service. It is the positive perception or emotional attachment that consumers have towards a brand, which can influence their purchasing decisions and overall loyalty.

Brand equity is created and built through consistent marketing efforts, positive customer experiences, and the overall reputation of the brand. Companies with strong brand equity often have a competitive advantage in the market and can command higher prices for their products or services.