Understanding brand equity


This article is devoted to a discussion on brand equity. The term brand equity is being used to denote a mix of things relating to brand.

Brand Equity Defined

Brand equity is defined as the unique set of brand assets and liabilities that is linked to a brand. Brand equity is the net result of all the investment and effort that a marketer puts into building a brand. User-ship of the brand, consumer loyalty towards it, its perceived quality, positive symbols and favorable associations around the brand and a bundle of all these attributes together result in brand equity. Only by continuously monitoring all these aspects, does the marketer convert what really is a product into a brand. And, that is how brand equity is built up. In simple terms, brand equity is the value or the worth of the brand.

Brand Equity, a Financial Concept

Traditionally, firms were not measuring a brand’s financial equity or worth; the attempt was only to identify the consumer’s disposition towards the brand, which finally decided the brand’s market share. Today there is the need to assess the monitory worth of the brand. Let us understand this requirement through some examples.

We know that high prices are paid to acquire strong brands. Coca-Cola paid Rupees 40 crores for buying out Parle brands — Thums Up, Limca, Gold Spot and Citra; Godrej bought over Transelektra’s Good Knight and Hit for Rs 80 crore; Heinz took over Glaxo’s food brands for Rs 110 crore.

The price of the brand in any such transaction is essentially governed by the buyer’s perception of what he can do with the brand. In fixing this price, the brand’s market share, its profitability and future potential are the crucial considerations.

Godrej paid Rs 80 crore for Good Knight and Hit because the brands earned an annual net profit of Rs 13 crore for the company and Good Knight commanded a market share of 50%.

Godrej’s assessment was mainly around the profit potential of Good Knight and Hit. In this deal, the tangibles to the business accounted for just 10%. The brand value of Transelektra brands were assessed to be around Rs 70 crore, with Good Knight taking the lion’s share.

This is the context in which we have to understand brand equity. Companies are compelled to measure the worth of their brands, because over time, their brands grow, absorbing all the nourishment given to them and become major assets, like other durable assets. In other words, a company builds up over time some assets, strengths and values in various forms and brand is one among them. The brand too is a trade able asset. So, there is a requirement to understand the brand’s price/worth. The only handicap is that the brand is intangible and highly fluctuating, posing limitations in measurement of its equity. Though brand value defies precise mathematical calculation, it can be assessed.

The price differential between the value of a business enterprise in its entirety and its tangible assets accounts for the value of its intangibles, which mainly constitutes brand value and goodwill.