# Brand Equity: Definition, Importance, Effect on Profit Margins, and Examples

> **Definition**
>
> Brand equity is the value premium that a company generates from a product with a recognizable name, when compared to a generic equivalent.

## What Is Brand Equity?

Brand equity is the value a company gains from its name recognition and its perceived benefits and admirable qualities.

Companies can build their brand equity by making their products memorable, easily recognizable, and superior in quality and reliability. Mass marketing campaigns also help to create and strengthen brand equity.

When a company has positive brand equity, customers willingly pay a high price for its products, even though they could get the same thing from a competitor for less. Customers, in effect, pay a price premium to do business with a firm they know and admire.

### Key Takeaways

*   Brand equity is the added value that a company gains from sales of products with recognizable and admired names, from a company that's trusted and appreciated.
*   Brand equity has three basic components: consumer perception, negative or positive effects, and the resulting value.
*   It has a direct impact on sales volume and a company's profitability because consumers gravitate toward products and services with great reputations.
*   Often, companies in the same industry or sector compete on brand equity.

![Brand Equity](https://www.investopedia.com/thmb/XXdgyInuNpe3VPgjOR30ftKnIak=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BRAND-EQUITY-FINAL-825f60e364e147e1b3e3279349615e34.jpg)

*— Investopedia / Yurle Villegas*

## Understanding Brand Equity

Brand equity has a few basic components:

*   Consumer perception
*   Negative or positive effects
*   The [resulting value](https://www.investopedia.com/terms/v/value.asp)

### The Importance of Consumer Perception and Its Effects

Foremost is consumer perception, which includes both knowledge of and experience with a brand and its products. Consumer perception relates directly to brand equity. The perception that a consumer segment has of a [brand](https://www.investopedia.com/terms/b/brand.asp) results in either positive or negative effects for the company.

If the perception is positive, the organization, its products, and its financials can benefit. If the perception is negative, the opposite is true.

### Resulting Value

These effects can turn into either tangible or intangible value. If the effect is positive, tangible value is realized as increases in [revenue](https://www.investopedia.com/terms/r/revenue.asp) or profits. Intangible value is realized in marketing as awareness or [goodwill](https://www.investopedia.com/terms/g/goodwill.asp).

If the effects are negative, the tangible or intangible value is also negative. For example, if consumers prefer a generic product over a branded one, the brand is said to have negative brand equity. Such willingness to ignore the branded product might exist if a company has a major [product recall](https://www.investopedia.com/terms/p/product_recall.asp) or causes a widely publicized environmental disaster.

> **Important**
>
> Brand equity is an extension of brand recognition. But more so than recognition, brand equity is the added value associated with a particular company.

## Brand Equity's Effect on Profit Margins

The importance of brand equity's potential to boost profits and increase [profit margins](https://www.investopedia.com/terms/p/profitmargin.asp) is demonstrated by the effort that certain companies make to support the high quality of their products.

### Higher Prices

When customers attach a level of quality or prestige to a brand, they perceive that brand's products as being worth more than products made by competitors. Thus, they are willing to pay more for them. In effect, the market bears higher prices for brands that have high levels of brand equity.

Yet, the cost of manufacturing a polo shirt and bringing it to market is not higher, at least to a significant degree, for an established company such as Lacoste than it is for a less reputable brand.

However, because its customers are willing to pay more, it can charge a higher price for that shirt, with the difference going to profit. Therefore, positive brand equity can [increase profit margin](https://www.investopedia.com/ask/answers/021715/what-impact-does-brand-equity-have-profit-margins.asp) per customer.

### Higher Sales Volume

Brand equity has a [direct effect on sales](https://www.investopedia.com/terms/r/repeat-sales.asp) volume because consumers gravitate toward products that either have great reputations themselves or come from companies with great reputations (or both). For example, when Apple releases a new product, customers line up around the block to buy it even though it is usually priced higher than similar products from competitors.

One of the primary reasons [why Apple's products sell](https://www.investopedia.com/insights/what-makes-aapl-valuable-company/) in such large numbers is that the company has amassed a staggering amount of positive brand equity. Because a certain percentage of a company's costs to sell products is fixed, higher sales volumes translate to greater profit margins.

### Customer Retention

Customer retention is the third area in which brand equity affects profit margins. Returning to the Apple example, most of the company's customers own not just one Apple product, but several. Plus, they eagerly anticipate new releases.

Apple's customer base can be fiercely loyal, sometimes bordering on evangelical. The company enjoys high customer retention, another result of its brand equity. By retaining existing customers, Apple increases profit margins by lowering the amount it has to spend on [marketing](https://www.investopedia.com/terms/m/marketing.asp) to achieve the same sales volume. It costs less to retain an existing customer than to acquire a new one.

> **Fast Fact**
>
> The concept of brand equity was first introduced in the 1980s by David Aaker, a marketing professor at the University of California, Berkeley.

## Examples of Brand Equity

A general example of the importance of brand equity is when a company wants to expand its [product line](https://www.investopedia.com/terms/p/product-line.asp). If the brand's equity is positive, the likelihood that customers might buy its new product increases. Customers associate the new product with an existing, successful brand.

For example, if Campbell's releases a new soup, the company is likely to keep it under the same brand name rather than inventing a new one. The positive feelings and trust that generations of customers already have for the Campbell Soup Company (established in 1869) and its products make a new product more enticing compared to a soup associated with an unfamiliar brand name.

Here are some other examples of companies with significant brand equity.

### Tylenol

Manufactured since 1955, first by McNeil and then by subsidiaries of [Johnson & Johnson](https://www.investopedia.com/articles/markets/020316/johnson-johnsons-3-most-profitable-lines-business-jnj.asp), Tylenol is a first-line treatment for mild to moderate pain. Tylenol has been able to grow its market with the creation of additional products that emphasize the brand: Tylenol Extra Strength, Tylenol Cold & Flu, Children's Tylenol, and Tylenol Sinus Congestion and Pain.

### Costco

Started in 1995, Costco's Kirkland Signature brand has maintained positive growth and represents solid profit margins as well as a growing portion of the company's overall sales. This is an example of consumers forsaking more expensive products from well-known companies and flocking to Costco's typically lower-priced products because of their high quality and value.

Kirkland Signature encompasses hundreds of items, including clothing, coffee, laundry detergent, food, and beverages. [Costco](https://www.investopedia.com/how-costco-makes-money-5094774) also provides members with exclusive access to cheaper gasoline at its private gas stations.

### Starbucks

Recognized as one of the most admired companies in the world by _Fortune_ magazine in 2023, [Starbucks](https://www.investopedia.com/articles/markets/021316/how-starbucks-makes-money-sbux.asp) is held in high regard for its pledge to social responsibility. With 40,199 stores operating around the globe, Starbucks remains a premier roaster and retailer of Arabica coffee beans and specialty coffees.

### Coca-Cola

With profit margins from 23-32%, [Coca-Cola](https://www.investopedia.com/articles/markets/112515/how-does-cocacola-actually-make-money.asp) is often rated the most valuable soda brand in the world. However, the brand itself represents more than just products. It's symbolic of positive experiences and relationships, a proud history involving consumers, and even of the United States itself. Also recognized for its unique marketing campaigns, the Coca-Cola Corporation has had a global impact on consumer engagement.

### Porsche

Porsche, a brand in the automobile sector with strong equity, retains its image and reliability through the use of high quality, unique product materials. Viewed as a [luxury brand](https://www.investopedia.com/terms/l/luxury-item.asp), Porsche provides owners of its vehicles not only with a high quality car but a memorable experience. Compared to other vehicle brands in its class, Porsche was the top luxury car brand in 2025, according to _U.S. News & World Report_.

## Tracking a Company's Brand Equity

Brand equity is a major indicator of a company's strength and performance, specifically in the public markets. Investors and analysts can look to brand equity as a gauge for potential stock performance. They may make brand equity a criterion for investment selection.

Often, companies in the same industry or sector compete on brand equity. For example, two top companies—Home Depot and Lowe's Home Improvement—consistently rank as the top two home improvement store brands, as they did in 2025.

A large component of brand equity in the hardware environment is consumer perception of the strength of a company's [e-commerce](https://www.investopedia.com/terms/e/ecommerce.asp) business. Both Lowe's and Home Depot are industry leaders in this category. Besides e-commerce notability, both companies have high overall recognition among consumers, allowing them to further penetrate the industry and increase their brand equity.

## Why Is Brand Equity Important?

Brand equity is important for customer loyalty, which can translate to repeated and increasing sales despite higher-priced products or services. Brand equity is also important because it supports higher perceived value, greater customer satisfaction, and a more stable customer base. Simply put, consumers are more likely to choose a brand that they know and trust.

## What Are the Elements of Brand Equity?

The elements of brand equity include:

1.  Brand awareness: The extent to which consumers are familiar with and recognize a brand.
2.  Brand loyalty: The degree to which consumers consistently choose a specific brand over others.
3.  Brand image: The perception of attributes that consumers have of a brand, such as quality, reliability, and uniqueness.
4.  Brand associations: The emotional or psychological associations that consumers connect with a brand, such as feelings of trust, reliability, or nostalgia.
5.  Brand value: The perceived benefits and overall value that consumers attribute to a brand.

## What Factors Affect Brand Equity?

Several factors can affect brand equity. One is the quality of products or services. Consumers are more likely to have a positive perception of a brand if it consistently provides high-quality products or services. Consistent marketing and branding efforts are also important. These can help build and maintain a [positive brand image](https://www.investopedia.com/ask/answers/020915/what-are-some-examples-companies-or-products-have-outstanding-brand-equity.asp). Customer experiences also matter. Positive experiences can lead to increased loyalty and positive brand associations. Brand reputation is also important, as consumers are more likely to choose a brand they perceive as trustworthy and reliable. Competition can also impact a brand's equity, as consumers may have multiple options to choose from. Finally, changes in consumer preferences or trends can affect a brand's equity, as consumers may shift towards different brands or products.

## The Bottom Line

Brand equity refers to the added value that a company earns from a product or a service. It is the positive perception or emotional attachment that consumers have towards a brand, which can influence their purchasing decisions and overall loyalty.

Brand equity is created and built through consistent [marketing efforts](https://www.investopedia.com/terms/m/marketing-campaign.asp), positive customer experiences, and the overall reputation of the brand. Companies with strong brand equity often have a competitive advantage in the market and can command higher prices for their products or services.

> **Article Sources**
>
> 1.  Campbell's. "[About Campbell's](https://www.campbellsoupcompany.com/#:~:text=Formed%20in%201869%20when%20fruit,people%20through%20food%20they%20love.)."
>     
> 2.  Mayo Clinic. "[Chronic pain: Medication decisions](https://www.mayoclinic.org/chronic-pain-medication-decisions/art-20360371)."
>     
> 3.  Costco. "[Costco Wholesale 2023 Annual Report](https://s201.q4cdn.com/287523651/files/doc_financials/2023/ar/cost-annual-report-final-pdf-from-dfin.pdf)," Page 8.
>     
> 4.  Starbucks. "[Our Long-Standing Efforts To Put Our Partners First](https://one.starbucks.com/get-the-facts/putting-our-partners-first/#:~:text=Starbucks%20was%20recognized%20by%20Fortune's,consecutive%20year%20on%20this%20list.)."
>     
> 5.  Starbucks. "[Starbucks Fiscal 2024 Annual Report](https://s203.q4cdn.com/326826266/files/doc_financials/2024/ar/Starbucks-Fiscal-2024-Annual-Report.pdf)," Pages 3 and 7.
>     
> 6.  Yahoo Finance. "[The Coca-Cola Company Statistics](https://finance.yahoo.com/quote/KO/key-statistics?p=KO)."
>     
> 7.  U.S. News & World Report. "[U.S. News Best Luxury Car Brands for 2025](https://cars.usnews.com/cars-trucks/advice/best-luxury-car-brands?slide=16)."
>     
> 8.  Lifestory Research. "[Ranked: 2025 America’s Most Trusted Home Improvement Store Brand](https://www.lifestoryresearch.com/2025-best-home-improvement-store-ranking-review)."