The power and purpose of brand equity

Ask almost any company and they will tell you that improving their brand awareness is a top priority. In fact, 77% of marketing leaders say building a strong brand is critical to their growth strategy.

Having a recognizable brand name is highly advantageous, especially in industries with high competition. That’s because consumers are reluctant to take a risk on an unknown quantity, preferring familiar and recognizable brand names.

From a consumer perspective, it makes sense. Choosing a well-respected brand can save time in comparing similar products, and usually leads to satisfying outcomes. After all, well-known brands usually become familiar for a reason: quality.

This brand-based value driver has a name: brand equity.

But how can new or growing companies develop strong brand equity? And what are the subsequent effects of having a high or low brand equity?

What is brand equity?

Brand equity refers to the value of a brand’s name in the minds of consumers. It is the difference between the value of a branded product, and the value of that product without a brand name attached to it.

Companies and products with a high brand equity can generate more revenue through greater brand recognition, both by selling more products and by charging higher prices. However, when a brand disappoints its customers and develops a negative reputation, it can develop low or negative brand equity, leading to loss of business.

Brand equity is also directly related to brand awareness. Regardless of specific associations, people are more likely to choose a brand they are familiar with, which sets the foundation for building brand loyalty and other positive associations.

The ROI of positive brand equity

Here are some of the top ways brand equity can improve your marketing ROI:

Brand equity drives perceived value

Perceived value is the result of deeply embedded positive brand associations in the minds of customers. It is how brands like Louis Vuitton, Apple, and Adobe can command such high prices in the market, relative to competitors. Customers are willing to pay more for recognizable brand names, regardless of absolute costs, resulting in higher profit margins.

Brand equity creates customer loyalty

Brands that carry strong positive associations are more likely to generate brand loyalty, as they receive both intrinsic positive feedback (the satisfaction of purchasing and using a “premium” product) as well as extrinsic feedback (the recognition from others of using something considered “desirable”).

People who are loyal to a brand are also seven times more likely to forgive brands for mistakes and nine times more likely to try new products from that brand.

Brand equity reduces customer acquisition costs

Brand names with high recognition attract customers, relying less on paid advertising. Where an unknown brand might require a full-funnel marketing campaign, a brand with strong equity can generate more awareness with fewer messages.

Brand equity maximizes customer retention

Companies with high brand equity typically have high customer retention — a direct effect of brand loyalty. Companies benefit from the recurring revenue of customers who are eager to upgrade or buy new products from them, without needing to invest heavily in customer retention campaigns.