What’s the value of a brand? It ultimately comes down to brand equity. While it can be hard to measure, it is undeniably real. A strong brand will make your life easier, and all it takes is some commitment.

I get it. Branding – when done well – can look expensive, as launching a brand is really not enough. You need to maintain it and to reinvigorate it with constant communication activities, and you also have to align your whole company on it.

A startup might think it’s better to reserve this expense (and a few headaches) for later. An established company might postpone it indefinitely as it always seems less important than present revenue targets.

Again,I get it. But I also disagree. Branding is actually a very smart investment, and I’m not using this as a metaphor. Branding can directly – and positively – impact your bottom line in ways that would make the CFO and CEO happy, too. 

The best part: it’s all backed by data.

Unwrapping the concept of “brand equity”: why your brand is an asset

When looking at branding from an economic point of view, the concept of brand equity is the first that needs to be addressed. Borrowing from financial language, the term brand equity can be defined in different ways, but you can see it as the value that the brand adds to the product beyond the product’s intrinsic value.

Think of a Balenciaga plastic bag. Its price is clearly detached from its value as an object, and a large part of its price is based on brand equity.

It’s easy to understand why brand equity has been found to be positively correlated with market capitalization, in other words as your brand gets stronger, your stocks go up.

There are different ways to measure brand equity, but no fixed formula. The variables to monitor go from the perceptual to the tangible: brand awareness and recognition, customer loyalty, perceived quality and associations, and finally price premium.

Even though a measure of brand equity is never precise, don’t think it’s abstract and unmeasurable: when companies get acquired or merged, the value of the brand is usually priced as part of the value of the company.

To give you an idea, McDonald’s capitalization is roughly $200 billion, while its brand value is estimated to be $40 billion. Read this if you are interested in how brand valuation is computed.

But how does the brand ultimately create value?

The key factor to brand equity: pricing power

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The first and most important way a strong brand makes a company grow is by increasing its pricing power or, in other terms, by reducing its customers’ price elasticity. A brand that is known, desirable and trusted can not only command higher prices but also change its prices without customers fleeing.

Evidence from IPA (Institute of Practitioners in Advertising) shows how companies who have invested in their brand see a lower price sensitivity. Think about Apple and how the company has been long “getting away” with prices that competitors couldn’t dream of, often increasing year after year.

On the other hand, when you stop investing in your brand and focus on short–term tactics, it’s very possible that you will end up in some pricing war, trying to attract a customer that only goes for the cheapest option.

Brands with a strong equity perform better in sales and conversion, too

Brand equity is not just about the price: it’s also about how easily people will buy your product or service.

The reason is quite intuitive: a well-known brand, which also has some very clear established mental associations (both in functional and quality terms) is a so-called “no brainer”: choosing it doesn’t require any effort, which is exactly what most customers look for.

Data from Nielsen shows two interesting phenomena at play: first, a 1% increase in metrics like awareness translates to a 1% increase in sales. People want – and buy – what they know and remember.

The second interesting finding is that having a strong brand improves the performance of your conversion-focused campaigns (eg. Google Search Ads). In other words, a strong brand is like a media discount: you get more with less.

It can sound paradoxical, but branding campaigns can bring you more conversions in the long run than tactical ones. If you are into long reads, you will find more about this in the landmark work “The Long and Short of It”.

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A strong brand equity helps you weather a crisis better

There is another perk to having a strong brand: failing hurts a bit less.

Whether it’s a brand’s reputational hiccup or an industry-wide crisis, brand equity provides a precious “buffer” that helps the company resist and restart.

When the 2008 financial crisis ended, powerful brands were found to rebound quicker and perform better afterwards. This resilience is not a detail: it can make or break a company, especially in our very volatile times.

Strong brand equity makes it easier to expand your product line

Launching a new product or even a new product line under the umbrella of a well-known brand is usually seen as a valid derisking strategy. The familiarity of the brand will be reflected upon the new product, and so will all the positive associations.

If a brand that makes power tools is known for the sturdiness of its product, the moment it introduces a gardening line, the attribute of sturdiness will transfer to the new product, at zero cost.

Obviously, introducing new products is never without risk: they don’t only benefit from the brand equity but they influence it in a two-way exchange. The new product has to be a good fit for the brand and respect its associations: in this case, brand equity will be reinforced and its territory will be expanded.

On the other hand, failing the fit test can dilute the brand equity or even damage it. If the above-mentioned power tools company decided to launch a line of perfumes, instead, that could weaken the brand associations.

Let your investment work for you

Brand equity sounds good until you need to create it. The key word here is “long term”. Branding efforts never pay in the short term, at least not primarily.

Building a proper brand takes conviction and patience. The fruits, we promise, are quite sweet.