B rand equity or “brand value” is the additional value ascribed to a company based on its ability to charge more based on positive brand perception by consumers.
A conjoint analysis experiment, which requires participants to make trade-offs, can help us understand something like brand equity gets measured. That situation is that you go to a bar and are asked to order a beer. There are two choices: 1) an unknown beer that you have never heard of and 2) and well known beer that you are familiar with.
The tester then asks if you’d pay 5 cents more for the beer you are familiar with. If you say yes, he continues to raise the price until you decide that you won’t pay that “premium”. In our example, let’s say that both beers start off at a $2.50. If the well known beer can make it to $4.75 before the person decides they will either buy the cheaper beer or buy no beer at all, then the known brand is getting a 90% premium.
For all practical purposes, it’s generating an additional $2.25 per bottle based solely on perception (this on top of simply selling more beer in general).
If we assume that both beers cost approximately the same to manufacture (naturally there will be some differences in marketing), we can begin to see why building brand equity is so critical and why once it's created it is so important to properly nurture and manage.
An interesting test is to take your own product and service and put it up against your competitor’s. Does your product or service allow you to make the first jump in price? How far do you think you can go before your customers wouldn’t buy? Why is there such a positive association with your brand?
If you take this test and don’t think that people would pay extra to get your product or service, then you could be in for a rough ride. I say could because if you’re a commodity product focused on low margins and volume, you might be okay. If, however, you don't see yourself as a commodity product, but feel that the market is perceiving you that way, then you have a bit of work ahead of you.
If you're interested in what valuations are for some of the big players, Taxi had a post with the infographic below.