Loading the player...

What is 'Brand Equity'

Brand equity refers to a value premium that a company generates from a product with a recognizable name, when compared to a generic equivalent. Companies can create brand equity for their products by making them memorable, easily recognizable, and superior in quality and reliability. Mass marketing campaigns also help to create brand equity.

BREAKING DOWN 'Brand Equity'

Brand equity has three basic components: consumer perception, negative or positive effects, and the resulting value. First and foremost, brand equity is built by consumer perception, which includes both knowledge and experience with a brand and its products. The perception that a consumer segment holds about a brand directly results in either positive or negative effects. If the brand equity is positive, the organization, its products and its financials can benefit. If the brand equity is negative, the opposite is true.

Finally, 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 and intangible value is realized as marketing as awareness or goodwill. If the effects are negative, the tangible or intangible value is also negative. For example, if consumers are willing to pay more for a generic product than for a branded one, the brand is said to have negative brand equity. This might happen if a company has a major product recall or causes a widely publicized environmental disaster.

Brand Equity Example

A general example of a situation where brand equity is important is when a company wants to expand its product line. If the brand's equity is positive, the company can increase the likelihood that customers might buy its new product by associating 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 brand. The positive associations customers already have with Campbell's make the new product more enticing than if the soup has an unfamiliar brand name.

Tracking a Company's Success with Brand Equity

Brand equity is a major indicator of company strength and performance, specifically in the public markets. Often times companies in the same industry or sector compete on brand equity. For example, an EquiTrend survey conducted on July 14, 2016, found that The Home Depot was the number one hardware company in terms of brand equity. Lowe's Companies, Inc. came in second, with The Ace Hardware Corporation scoring below average. A large component of brand equity in the hardware environment is consumer perception of the strength of a company's ecommerce business. The Home Depot is an industry leader in this category. It was also found that, in addition to ecommerce, The Home Depot has the highest familiarity among consumers, allowing it to further penetrate the industry and increase its brand equity.

RELATED TERMS
  1. Brand Awareness

    Brand awareness is the extent to which consumers are aware of ...
  2. Product Line

    A product line is a group of related products manufactured by ...
  3. Corporate Umbrella

    A corporate umbrella is a large, generally successful brand name ...
  4. Brand Piracy

    When a product is named similarly to a well-known brand so that ...
  5. Parity Product

    A brand of good that has enough similarities with other brands ...
  6. 100% Equities Strategy

    A 100% equities strategy is an investment strategy for an individual ...
Related Articles
  1. Small Business

    The Power of Branding

    It's the ultimate economic moat, and we look at the approaches and effects of good and bad branding.
  2. Insights

    Tech and Auto Companies Dominate World's Most Valuable Brands List (AAPL, GOOG)

    Brand consultancy firm Interbrand released its 2016 ranking of the most valuable brands in the world, and technology and automotive brands dominated by holding a combined 29 positions. According ...
  3. Investing

    Best Buy Betting On House Brands

    Best Buy uses its house brands strategically, but is this hurting the company or helping it to stay on top?
  4. Small Business

    9 Brands Resurrected Into Household Names

    All of these brands saw a dip in their popularity, only to have a revival to even greater heights.
  5. Insights

    4 Addictive Brands Consumers Crave

    Many product brands breed loyalty and obsession. Discover which ones people can't seem to live without.
  6. Small Business

    Reinventing Brands: Makeover Or Move Over

    Brands undergo various changes to remain competitive. Discover those that changed and those that fell behind.
  7. Trading

    Constellation Brands Begins 2018 With a Mojo Buzz

    Constellation Brands has an elevated P/E ratio of 27.27 with a puny dividend yield of 0.86%.
  8. Investing

    An Endorsement for a Brand New ETF

    This new ETF has already earned an endorsement from a research firm.
  9. Investing

    Top 5 Positions in Charles Brandes' Portfolio (ERJ, MSFT)

    Learn about Charles Brandes' investment philosophy and largest positions. To which industries is Brandes exposed and how has his fund performed?
  10. Small Business

    6 Branding Tips For Small Business Owners

    One of the most important areas for all businesses to utilize is branding.
RELATED FAQS
  1. What kinds of events or circumstances will increase or decrease the proportion of ...

    Learn the variety of events and circumstances which can significantly increase or decrease the proportion of intangible assets ... Read Answer >>
  2. What is the difference between a company's equity and its shareholders' equity?

    Understand the difference and the interrelationship between shareholders' equity in a company and the company's actual total ... Read Answer >>
  3. How can I use the equity multiplier to determine if a stock is a good investment?

    Find out how investors use the equity multiplier ratio in fundamental analysis to determine whether a given stock is a solid ... Read Answer >>
  4. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ... Read Answer >>
  5. How do companies use the equity multiplier to determine a financing strategy?

    Find out how the equity multiplier reflects a company's degree of financial leverage and how businesses use this ratio when ... Read Answer >>
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center