In the case of equity markets while some company’s stock price trades at a higher PE ratio while other companies that are in the same industry trade at a lower PE ratio, this difference in PE ratio is due to the difference in perception about the company’s present as well as future worth. In the case of marketing similar concept is applied which is called brand equity of a company which refers to the ability of the company to charge premium price from its customers for its products or services even though those products have cheaper substitutes. In order to understand this concept in a better way, one should look at some of the important features of brand equity –
Characteristics of Brand Equity
Intangible Asset
The first and foremost feature of brand equity is that it is an intangible asset implying that unlike physical or financial assets one cannot see or touch this asset. Hence the patronage and liking of products by the consumers cannot be seen or touched but one can certainly assign the value to such patronage which is nothing but the brand equity of the company.
Better Profit Margins
In the case of a company that has built brand equity over the years, it can charge a higher price for its products even though its substitutes are available at a lower price the reason being once the customer has that confidence over the brand of the company than he or she will not go away from company merely due to price of the product. In simple words, brand equity in a way helps the company in maintaining higher profit margins as compared to other companies operating in the same industry.
Less Marketing
Companies that have positive brand equity will require less marketing effort on the part of the company as their brand itself is an advertisement which ensures that the company saves a lot of marketing and publicity expenses on their products. In simple words just like marvel movies in itself generates so much buzz that the movie will take bumper opening even if they don’t advertise much about their movie because of their strong brand equity in the same way company having strong brand equity will not require much of advertising while launching new products in the market.
Long Term in Nature
Another characteristic of brand equity is that it is long term in nature as it is not built overnight rather it is a long term process, hence for example brands like Microsoft, Johnson and Johnson, Samsung, Procter and gamble, and many more are not created overnight rather they are the result of them serving their customers quality products for a long period of time and hence they receive patronage from their customers which translates into brand equity for such companies.
Subjective
Unlike other financial statements and ratios, there is no standard formula or method to calculate brand equity and hence there is always this subjectivity attached as far as valuation of brand equity of the company is concerned. In simple words measuring brand equity is not a simple task as there are too many variables that affect brand equity resulting in making brand equity valuation a subjective concept rather than an analytical concept.
Positive and Negative Equity
In the case of equity markets the stock which is liked by a market move up quickly even at the slightest of good news while some stocks which are not liked by the market will not move even when the news is huge same is the case with brand equity where companies enjoying positive brand equity can charge a higher price for its products and get away with it while companies having negative brand equity will not be able to sell their products even when they are reasonably priced and are of good quality.
As one can see from the above characteristics of brand equity that it is a long-term and continuous process and that is the reason why any company cannot take it for granted and the company should be always on their toes when it comes to maintaining and enhancing the brand equity.