Brand equity refers to the intangible value that accrues to a company as a result of its successful efforts to establish a strong brand. A brand is a name, symbol, or other feature that distinguishes the company's goods or services in the marketplace. Consumers often rely upon brands to guide their purchase decisions. The positive feelings consumers accumulate about a particular brand are what makes the brand a valuable asset for the company that owns it. Alan Mitchell of Marketing Week described brand equity as "the storehouse of future profits which result from past marketing activities."
Many companies structure their marketing programs around building and preserving their brand equity. "To be a strong brand, a company must instill a clear, unwavering consumer perception of the distinctive emotional or functional benefits of its products and services," Duane E. Knapp explained in an article for Risk Management . "At the end of the day, the brand is the sum total of the consumer's impressions about the product and service. The less distinctive these impressions, the greater the risk that a competitor's products or services may gain a stronger perception—and competitive advantage."
The basis of brand equity lies in the relationship that develops between a consumer and the company selling the products or services under the brand name. A consumer who prefers a particular brand basically agrees to select that brand over others based primarily on his or her perception of the brand and its value. The consumer will reward the brand owner with dollars, almost assuring future cash flows to the company, as long as his or her brand preference remains intact. The buyer may even pay a higher price for the company's goods or services because of his commitment, or passive agreement, to buy the brand. In return for the buyer's brand loyalty, the company essentially assures the buyer that the product will confer the benefits associated with, and expected from, the brand.
In order to benefit from the consumer relationship allowed by branding, a company must painstakingly strive to earn and maintain brand loyalty. Building a brand requires the company to gain name recognition for its product, get the consumer to actually try its brand, and then convince the buyer that the brand is acceptable. Only after those triumphs can the company hope to secure some degree of preference for its brand.
Name awareness is a critical factor in achieving brand success. Companies may spend vast sums of money and effort just to attain recognition of a new brand. But getting consumers to recognize a brand name is only half the battle in building brand equity. It is also important for the company to establish strong, positive associations with the brand and its use in the minds of consumers. The first step in building brand equity is for the company to define itself and what it hopes to represent for consumers. The next step is to make sure that all aspects of the company's operations support this image, from its product and service offerings to its marketing programs to its customer service policies. When all of these elements support a distinctive image of the company and its products in the minds of consumers, the company has established brand equity.
Although measuring brand equity can be difficult, it can also provide managers with a good indication of their company's future profitability. "Companies which develop good measures of their brand equity have an early warning indicator of likely future profit trends, and can get a much better feel of the dangers of short-termism," Mitchell noted. "If brand equity is falling, you're storing up trouble for yourself…. If brand equity is rising, you're investing in future performance, even if it's not showing through in profits today. Real business performance therefore equals short-term results plus shifts in brand equity."
Unfortunately, measuring brand equity is not as simple as counting the number of people who recognize a brand name or symbol. It is also dangerous to assume that simply because its brand is well-known, a company enjoys strong or growing brand equity. In fact, the most powerful brands can easily be diluted by company missteps or inconsistent marketing messages. Mitchell explained that the best way to measure brand equity depends on the particular company and its industry. For example, in some cases assessing consumer perceptions of product quality may provide the best indication of brand equity. In other cases, more traditional business measures such as customer satisfaction or market share may be more closely correlated with brand equity.
Finding an appropriate measure of brand equity is vital in order for companies to ensure that they protect this valuable asset. In his Risk Management article, Knapp claims that managers must remain constantly vigilant to protect their brand equity, since a declining brand image poses a significant risk to company earnings. If a brand loses its distinctive image in the minds of consumers, then the branded product becomes more like a commodity and must compete on the basis of price rather than value. Customer loyalty decreases, which has a corresponding negative effect on market share and profit margins. In order to prevent this decline, Knapp recommends that companies consider the impact of major decisions on consumer perceptions and brand equity. Every action taken by management—including the introduction of new products or advertising strategies, or the decision to lay off employees or relocate a factory—should be assessed for its effect on brand equity.
Companies often seek to leverage their brand equity by transferring consumers'positive associations with a brand to a related product or service. In the late 1990s, many companies attempted to extend their brands into the field of electronic commerce. But doing business online proved difficult even for established businesses with popular brands. "Think branding an offline business is tough? It's nothing compared with creating a brand for your company's electronic offshoot," Rochelle Garner declared in an article for Sales and Marketing Management. "That's because b-to-b [business-to-business] brands are built brick by independent brick with customer service, support, and quality—and are cemented by personal relationships. In the offline world, those relationships are forged by a sales force that calls on customers face-to-face. Successful online brands must deliver those same elements, and more, through the use of technology."
Garner outlined a series of steps for companies to take in creating a successful online brand. First, the company must decide whether or not to use its offline brand name in its new online venture. This strategy may prove effective in cases where the online business is a straightforward extension of the existing brand, but it may also have the effect of diluting the brand equity. Second, Garner says that companies should develop an understanding of the benefits they want to deliver through the online business and assess how technology can help in this mission. Third, she emphasizes that companies should try to understand customers'expectations for the online business and the brand. Finally, she recommends that companies find ways to use Internet technology to create a rewarding shopping or purchase experience for their customers.
Overall, according to Garner, the key to extending a brand online is using technology to enhance the buying experience for customers. After all, the Internet offers sellers a number of new ways to service their customers' needs, including bringing together buyers and sellers from all over the world, offering instant electronic customer support, creating new production efficiencies, and reducing order time and costs. When companies can take advantage of Internet technology to improve their relationships with their customers, moving the business online can only increase their brand equity.
Berry, Leonard L. "Cultivating Service Brand Equity." Journal of the Academy of Marketing Science. Winter 2000.
Garner, Rochelle. "A Brand by Any Other Name." Sales and Marketing Management. October 2000.
Knapp, Duane E. "Brand Equity." Risk Management. September 1999.
Mitchell, Alan. "Why Brand Equity Is the True Measure of Success." Marketing Week. August 3, 2000.
"The Name of the Game: Managing Brands as Strategic Assets." International Journal of Retail and Distribution Management. June-July 1998.
Yoo, Boonghee, Naveen Donthu, and Sungho Lee. "An Examination of Selected Marketing Mix Elements and Brand Equity." Journal of the Academy of Marketing Science. Spring 2000.