Walmart. Coke. Amazon.
When you read the name of each of these brands, you associate them with specific ideas. Walmart is cheap. Coke is refreshing. Amazon is fast and easy.
Ask consumers across the globe, and they’ll have similar perceptions of these brands. That’s the power of a brand, evoking the same feelings in customers everywhere.
But let’s put aside feelings.
Instead, let’s look at what those feelings are worth.
What is Brand Equity?
Brand equity describes how much a brand is worth. But how can you calculate something so abstract?
When consumers think about branding, they often view this as a logo and packaging. But those aren’t the brand; they are just representations of the brand. The brand itself is a set of perceptions about the company.
You can measure the value of those perceptions with a little effort.
Let’s use a simplified example. Let’s say Coca Cola is worth $1B. Their factories, trucks, equipment, machinery, and inventory are all worth $500M. Where did the other $500M come from?!
That additional value came from the brand.
What Brand Equity Means to Small and Midsized Businesses
You’re probably not a publicly-traded company, at least not yet. So how is brand equity relevant to you?
Here’s why small and mid-sized businesses should pay serious attention to brand equity:
- Pricing. You can charge more than your competitors can. The value of your new products increase as your brand equity increases, and your pricing model will reflect that.
- Brand extension. As your brand builds a reputation, customers will gravitate towards it for new introductions. For example, Tylenol “extends” its brand to other products, such as Tylenol Cold and Flu, Tylenol Arthritis Pain, or Tylenol Sinus. Customers who are already positively inclined towards the brand will be more likely to choose these over competing products.
- Customer retention. Think about brands like Heinz or Apple. Many people refuse to taste generic ketchup or buy anything other than an iPhone. A loyal customer base has value well beyond today; in fact, studies show that customers who view your brand positively are five times more likely to buy a new product from your brand.
- Exit strategy. This is probably the most important reason to pay attention to brand equity. Many, perhaps most, business owners dream of one day selling their businesses. But think about it. What value would your potential buyer be paying for? The obvious answer is “my customer list” or “my inventory.” But a strong company can offer the buyer something much more appealing: brand equity.
For Businesses Large and Small
Several market-research firms like BrandFinance and WPP’s Brandz rank brand values every year. Here is the Brandz 2018 ranking of the most valuable brands in the U.S.
At the top of the list, Google’s brand equity is valued at over $300 million. But this is meaningful to your business, too, just on a smaller scale. Let’s move from thinking about your business as a whole and consider a single product or service. Take a single product that bears your company’s name. Subtract the value of a similar, non branded product. By now, you know that the difference comes from your brand.
Let’s say that your company sells coffee shakes for $5 each. Costco sells Kirkland Coffee Shakes for $1.50 each. For our example, let’s imagine that the costs of producing both are similar. What, exactly, are your customers getting for that extra $3.50? They are getting your brand.
Now, this tells us that your brand is worth $3.50 per coffee shake. If you produce 100,000 coffee shakes a year, then your brand should generate an additional value of $350,000 a year. This is the way a potential acquiring company could look at it.
Think about it. Why would anyone pay to buy your business? After all, they could just hire someone who knows how to produce your product or replicate your service, and start their own, similar business.
But if they sell a shake without your brand, it’s only worth $1.50. Your brand equity means they can instantly command an additional $3.50 per unit, or $350,000 a year.
But how do you build your brand? The answer is beyond the scope of this article, but you can get started by…
- Finding the perfect niche for your company
- Taking advantage of social media
- Perfecting the art of customer service
- Learning to sell the experience to your customers
- Turning your brand into a business icon
So yes, building brand equity should be a high priority for any business owner, especially for one who hopes to one day make a profit off of selling the business. Whether you sell a product, a service, or an experience, you can successfully build brand equity – and to one day reap its rewards.