A:

Positive brand equity enables a firm to make a higher margin on sales and reduce advertising and marketing costs. Brand equity is defined as the value of having a well-known brand name. It can be positive or negative. Apple, for example, maintains a high level of positive brand equity; its products are renowned for quality and its customers are fiercely loyal. On the other end of the spectrum, BP accumulated negative brand equity following its 2010 oil spill. Its name became synonymous with environmental destruction, and many customers made a conscious effort to avoid giving the company business.

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 margin. The firm's brand equity enables it to make a bigger profit on each sale.

Another benefit of successful branding is not having to work as hard, or spend as much money, on marketing. A company with a great reputation has thousands of customers on the streets spreading the word for it. Compared to a lesser-known or less-reputable competitor, the firm with brand equity has less need to use marketing channels such as television, radio and search engine marketing to spread its message. Its customers are doing that for free.

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