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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. Foremost, consumer perception, which includes both knowledge and experience with a brand and its products, builds brand equity. 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, 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 No. 1 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 e-commerce business. The Home Depot is an industry leader in this category. It was also found that, besides e-commerce, The Home Depot has the highest familiarity among consumers, allowing it to further penetrate the industry and increase its brand equity.

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