Brand Equity: How to Measure a Brand’s Value
In 2011, Nike dropped Jordan Retro 11 Concord sneakers in stores across America. Right on cue, lines of shoppers wrapped around city blocks, in many cases waiting several hours, for a chance to spend $180 on a single pair.
Picture an alternate reality where Nike produces the same exact quality products, employs the same staff and management, and has the same manufacturing and distribution capabilities that it does today. Except in this scenario, imagine the company is no longer called Nike, the swoosh logo is gone and whatever fond feelings bubble up when people hear the word Nike is wiped from their memories.
Would shoppers still wait in line for hours so they could pay a couple hundred bucks for identical-but-unbranded sneakers?
Not a chance.
The reason? Nike has brand equity.
What Is Brand Equity?
What Is Brand Equity?
Brand equity can be thought of as the “bundle of associations” that makes a product or service more attractive to customers beyond the utility it provides, according to Jonathan Knowles, who heads a brand strategy consulting firm.
These associations do many things in the minds of customers. Brand equity may manifest in strong emotional attachments or relationships between customers and brands. Purchasing from a particular brand may be a mode of self-expression for customers, or a way to signal status. And it may make them feel safer than they would buying something from a new or unknown brand. This also saves them from spending time researching every available option.
The enhanced perceptions of a brand’s offerings ideally result in customers who pay more for it, customers who buy more of it, and more customers in general.
Because Nike has generated lots of goodwill among its customers, it can get away with charging more for its sneakers than a brandless, yet equally functional, pair. As long as Nike maintains its brand equity, people will stay loyal and continue to pay a premium for its products and try new products that bear the Nike name (because they bear the Nike name).
All of this ultimately increases the value of Nike’s business: Its brand is estimated to be worth between $35 billion and $50 billion, and the company itself is valued at $220 billion at the time of this writing.
That’s the power of brand equity.
Why Is Brand Equity Important?
Strong brand equity helps create awareness — and eventually preference — in the minds of customers. That alone can boost a company’s margins and market share, which is often reflected in market valuations. It benefits companies in other ways too.
Strong brands may not have to spend as much on advertising, since their names are already out there and their customers already have a willingness to try new products from them, according to Natalie Mizik, a professor of marketing at the University of Washington.
Mizik also said that, in some cases, companies with favorable brand reputations have an easier time energizing their workers. The thinking is that people are more apt to work hard for companies that have strong identities and cultural cachet. And top executives are often willing to work for less pay at firms with strong brand equity than they would elsewhere.
Brand equity can also grease the wheels for companies forging relationships with investors, creditors and business partners, Mizik added. It often helps them secure more and larger credit lines, negotiate better leasing terms and have an easier time scoring government contracts.
How Is Brand Equity Measured?
Brand equity is typically measured through surveys in which third-party consultants ask consumers about their brand preferences and assign scores. In addition to alerting companies to their overall brand equity, this research can also help brands figure out how to make better use of their marketing budgets.
How much is a brand really worth though? In dollars and cents?
Because brand equity is an intangible asset — you won’t find “how positively consumers perceive the brand” as a line item on a balance sheet — it’s difficult to quantify its financial impact on the bottom line. But that doesn’t stop some analysts from trying.
Every year, business publications and consultancies publish lists of the world’s most valuable brands. They use various methodologies to come up with their estimates. When you compare these lists, though, you’ll find virtually no consistency between them. That’s because nobody agrees on how to best attribute a company’s cash flow (current and future) to its brand’s value.
“The market for brands does not really exist. They’re not frequently traded assets. So the idea of placing monetary value on the brand itself is controversial,” Mizik said.
“The idea of placing monetary value on the brand itself is controversial.”
You can’t really separate Nike the brand from Nike the company and determine how much money each side brings in. Not confidently, anyway.
According to Mizik, it’s hard enough to find two people who can agree on the definition of brand equity, let alone how to determine how much brand contributes to a company financially. But there are a few ways you can try.
One is by comparing the book value of assets with the market value of the company and calling the difference “brand equity.”
But according to Mizik, that’s an imprecise method, since other intangible things factor into a firm’s market valuation — including growth opportunities, perception of the quality of senior management and potential for innovation.
Another way to measure is called the price-premium method, where you observe the difference in prices between similar products in the market.
You can also approach the price-premium method a slightly different way: You can determine how many more customers would buy a certain brand’s product versus how many would opt for an identical product without the brand attached to it.
For example, one study showed that the approval rating for Kellogg’s Corn Flakes went from 47 percent to 59 percent when the consumers were told the identity of the brand name, at which point analysts can calculate how many extra sales are attributable to the brand.
And there’s the royalty-relief method. This estimates how much a company could make if it licensed out all of its intellectual property and everything associated with its brand (name, logo, slogans, etc.). But Mizik said that’s an unreliable method too.
She added that, try as we might, there is currently no clear winner as to the best way to assign a dollar value to a brand’s brandyness. All fall short.
“I’m a great believer in thinking of brand as a multiplier, or an accelerator.”
Given that, why are some marketers so keen on learning that number?
Knowles, the brand strategist, said he gets called by executives who want to know how much their brand is worth. When he asks why they want to know: “The answer, 85 percent of the time, is, ‘I want to justify my advertising budget,’” Knowles said.
But Knowles disagrees with the premise. “I’m not a great believer in brand value as this sort of standalone valuation,” he said. “I’m a great believer in thinking of brand as a multiplier, or an accelerator.”
How Is Brand Equity Built and Maintained?
Building up brand equity takes time, discipline and patience.
The key is to build association between your brand and the constructs and ideas that customers value, so that your brand represents those ideas and constructs, Mizik said. That requires marketing messages that focus on establishing and reinforcing those associations — as opposed to sales and promotions.
Think about literally any luxury fashion brand. Building brand equity, for them, means continuing to use their messaging to create FOMO and hammer home the idea that their products are exclusive and elite.
If a luxury brand ran frequent promotions and discounts, and started distributing its products through outlet malls, its sales would surely increase. And its quarterly reports would get the numbers people excited.
But its brand equity would take a hit in the long run. Because eventually, the brand’s most loyal customers would no longer come to rely on it or its products to give them feelings of luxury and exclusivity. It would be just another clothing company. Its brand equity would be diluted.
This happened to Lacoste, the company that makes collared shirts with the alligator logo, in the 1980s. The brand’s products went from being sold in select high-end stores to the clearance bins at several discount retailers. While sales increased, the brand lost its prestige. After the company changed ownership, Lacoste raised its prices and started selling only in high-end retailers again. Over time, the brand became reinvigorated — and worth a lot more.
“There’s definitely tension between keeping and supporting the brand, and achieving a greater level of sales,” Mizik said.
Even so, brands fall into this trap all the time.
“There’s definitely tension between keeping and supporting the brand, and achieving a greater level of sales.”
Leonard Lodish and Carl Mela, both marketing professors, suggest that companies that become myopic about their brands tend to do it because of several factors, including “an abundance of real-time sales data that make short-term promotional effects more apparent, thus pushing manufacturers to overdiscount; a corresponding dearth of usable information to help assess the effect of long-term investments in brand equity, new products, and distribution; and the short tenure of brand managers,” they wrote in Harvard Business Review.
It’s easy to see the needle move up when companies do short-term growth hacks. And it’s a really tempting sight to try to behold. Strong brand building, though, is slow, and the results are often more opaque.
I asked Mizik what startups can do to invest in building brand equity over the long run. She said that, first, brands need to get a clear sense of what it is their customers value, and obsessively keep that in mind while developing products, setting prices and creating messaging.
“You have to have a very clear understanding of your brand identity, and the psychological value it creates for your consumers,” she added. “And you have to be patient. Because the benefits of strong brands, and the returns from building strong brands, don’t accrue within a year or a quarter, when your spending is undertaken. You invest, and it pays off in a very, very long term.”