Brand Equity is the value of a brand that decides its worth. Many brands have high brand equity. Forbes magazine has recognized the top 5 valuable brands and their worth as of 2018, which is as below:
- Microsoft: $104.9 billion
- Facebook: $94.8 billion
- Apple: $182.8 billion
- Google: $132.1 billion
- Amazon: $70.9 billion
Measuring brand equity is the process of calculating the value of a brand. In other words, it is the equivalent amount of money that a person or a company is ready to pay for the brand.
Measuring brand equity is the starting point to understand and design the efforts that are required by a brand to grow its market share. Measuring brand equity will help to develop a strong brand with high value. Measuring brand equity will give you an understanding of other indicators of your brand performance, such as reliability, satisfaction, quality, loyalty, etc. These indicators depict the brand perception and ultimately give you a lead on whether the customers are indeed happy about your brand.
By measuring brand equity, you will gain a better understanding of your target customers and their demographics, such as their location, interests, buying habits, income group, gender, age group, etc. This information will help to personalize branding efforts and will be able to reach out to the right set of people.
Measuring brand equity is will also give an accurate picture of brand value that can be used for reporting purposes such as showing the value in the balance sheet, tax purposes, securitization, litigation, licensing, and even during mergers and acquisitions. Commercial valuation of brand equity is equally important for budgeting purposes and for designing marketing strategies.
Brand equity can be measured quantitatively and quantitatively. Quantitative measurement includes measuring revenue, profit, loss, and sales. Qualitative methods of measurement include intangible factors such as consumer satisfaction, consumer awareness, brand perception, etc.
Brand value means different things to a different set of people. It is an objective term, and quantifying the qualitative value can be difficult. Though it is difficult, and the process of measuring brand equity can be challenging, it is not impossible. There are numerous ways in which brand equity can be measured.
Most popular valuation approaches are:
a) Historical Cost Method
This method of brand equity measurement is very simple and easy. It is the total amount spent on building a brand from the start till date. It is the total of the individual costs incurred towards creating a brand such as the advertising cost, campaign cost, promotion cost, registration costs, and licensing costs. The total value is at which a brand can be sold. This method of measuring brand equity will require you to put a value to the cost of the brand and establish the actual expenses incurred in the current cost.
b) Replacement Cost Method
In this method of brand equity measurement, the value of the brand is estimated after considering the total expenses and investment that will be required to replace the brand with a new brand of equal value.
c) Recreation Cost Method
In this method, the current cost of recreating a brand is calculated using the current prices. This method is trying to eliminate the problems faced in the historical cost method.
d) Conversion Method
In the conversion method, brand equity can be measured by estimating the level of awareness that is required to be generated to get to the current sales level. This method is based on the conversion model, which considers the level of awareness in customers that will trigger further buying. The result will be used to estimate the cost that is needed to acquire new customers, which is actually the cost of brand equity.
e) Customer Preference Method
This method uses the brand awareness to calculate brand equity. The brand equity is calculated by observing the change in the market share when there is an increase in brand awareness.
2. Market-Based Brand Valuation
a) Comparable Method
In this method, the brand equity is measured based on the similar transactions that occurred in the companies in the same industry. The measurement considers the premium paid by other companies of similar nature and applies it to their own brand.
b) Equity valuation Method
In the Equity valuation method of measuring brand equity, the brand value is calculated using two parameters. The first parameter is the returns that are generated from investments that enhance demand for the product, such as the advertising that can generate profits. The second parameter is the savings in the costs relating to marketing their branded products. This can include the cost saved during new product launch due to the already established brand.
c) Residual Method
The residual method of measuring brand equity takes into account the value that is remaining after subtracting any of the physical attributes of the brand. It is the residual value that remains after subtracting the net asset value from the market capitalization. In this method, brand equity is measured in financial terms, which is important during events such as mergers and acquisitions.
3. Income-Based Brand Valuation
a) Price Premium Method
In this method of brand equity measurement, brand value is calculated by first taking the price difference between the branded product and a generic product, and then multiplying the difference with the total branded sales volume. This method uses the assumption that a branded product creates an additional benefit for consumers, and the consumers are willing to pay extra for this additional benefit.
b) Royalty Relief Method
The royalty relief method of calculating brand equity is a very popular method used mostly by many corporations. In this method, brand equity is calculated based on the royalty fees that an organization has to pay for using the trademark if it did not own the brand.
c) Excess Earnings Method
Brand equity measurement in this model is done based on the intangible returns. The returns on all the tangible assets plus all of the financial assets are calculated, which is then deducted from the total returns of the company. Then a portion of the excess returns is assigned to the brand.
d) Competitive Equilibria
In this method of brand equity measurement, the brand earnings from the market share of the branded company are compared with that of an unbranded peer company which is not described by factors such as price, distribution, investment, and marketing. The resultant value is then discounted to arrive at the brand equity value.