Defining brand equity
Finance expert Phil Young takes a fresh look at ‘brand equity.’
I was slightly amused. But mostly, I was confused. The first time I heard the phrase ‘brand equity,’ my reaction was typical of finance types: “There go those marketers – throwing around jargon with no clear definition.”
Yet a company’s brand does indeed make a difference to its financial success. And if one were to view a brand’s importance in financial terms, one can see that it creates product loyalty (recurring revenue) and enables premium pricing (higher profit margins).
But why use the term ‘equity’? In finance and accounting, we talk about stockholders’ or shareholders’ equity, which is the value of the stakes held by a company’s owners.
So, if a brand has value for a company, would it not be more accurate to call it an asset? In fact, that’s exactly what happens when one company buys another.
After the purchase, valuation experts go to work to put a price tag on the value of the brand of the acquired company. To use recent headline news, I’m sure that these experts will soon be working on putting a brand value on IBM’s $34 billion purchase of Red Hat. And whatever that value is, it will go down on IBM’s books as an intangible asset.
Some years ago, a company called Interbrand devised a method of estimating the value of a company’s brand and published a list – Best Global Brands. Without even peeking at the league table, I’m sure you could come up with some of those in the top ten.
Did you think of Apple, Google, Amazon, Microsoft, Coca-Cola, Samsung, Toyota, Mercedes-Benz, Facebook, and McDonald’s? They are Interbrand’s 2018’s ten most valuable brands, listed in order from the top.
Interbrand’s method of calculating a brand’s value is proprietary and results in oddly precise numbers. For example, the value of Apple’s brand in 2018 was given as $214.48 billion.
But Interbrand does not say if this value is the same as, or related to, Apple’s equity. The book value of Apple’s equity in 2018 was $107 billion. Currently, the market value of its equity (its market capitalization) is about $935 billion.
I did a quick Alphabet search of the term ‘brand equity’. Note how my use of Google’s parent company’s name was not nearly as meaningful.
Investopedia, a trusted source of financial information, defines brand equity as:
“A value premium that a company generates from a product with a recognizable name when compared to a generic equivalent. Companies can create brand equity for their products by making them memorable, easily recognizable, and superior in quality and reliability.”
It’s true this definition fails to pertain directly to the financial definition of equity. But if Investopedia can accept and use the marketing profession’s more liberal definition of equity, then even we finance guys can learn to wear it.
The traditional rivalry between marketing and finance means the latter group will continue to mock the former’s lexicon. But behind the imprecise language hides precisely the sort of asset finance people want in the companies they manage.
However you term it, brand equity is big business.
— Phil Young PhD is an MBA professor and corporate education consultant and instructor. An adapted version of this article appeared on the Dialogue Review website.