How to Determine Brand Equity

The topic of brand equity has been much written about and extensively studied. Drawing on our own research and our experience as B2B marketing and brand consultants, we have developed a methodology with which we can indicate the monetary value of a brand. We’ll tell you all about it in this article.

Topics in this article:

  • What is brand equity?
  • Why should you calculate brand equity?
  • Components we use to calculate brand equity
  • Standardization of the Isolated Brand Valuation© method

What is brand equity?

Before we go into how to calculate brand equity, it is important to know what the components of brand equity are. The value of a brand is determined by several factors, which we have divided into “hard” and “soft” factors.

Hard factors are directly observable and measurable, such as market penetration rate, churn rate factor, and the company’s growth rate.

Soft factors, by contrast, are about the emotions a particular brand evokes. Examples of soft factors are the brand promise, the associations the brand calls to mind, the experience customers have while making a purchase, and the feeling that the buying experience gives them. These components of brand equity manifest themselves primarily in customer satisfaction scores and customer loyalty.

Brand equity calculation is a must for takeovers/mergers and acquisitions, as it helps to determine the value of a company.

Why should you calculate your brand equity?

Whether you run a start-up, a scale-up or a mature business, one thing is certain – you’ve worked hard to get your company to where it is today. Most entrepreneurs don’t realize it, but having a strong brand comes with certain benefits. The most significant benefit of a strong brand is that it reduces financial risk. After all, having a strong brand increases the likelihood that your company will continue to generate revenue in the future. Strong brands can even charge higher prices, which has a direct impact on your margin and therefore operating profit.

In short, having a strong brand helps you grow your business. Research has shown that a company’s brand may determine up to eighty percent of its value, even though brand equity doesn’t appear on the balance sheet. An important question for investors is whether a company will be able to create value in the future. Calculating brand equity can also help you decide which brands to retire in a brand architecture.

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Brand equity calculation = fun!

At some point in your entrepreneurial journey, you may find yourself in a situation where you need to determine the value of either your own or another company. You may be considering taking over a company, or selling yours, or opening multiple branches, or turning your business into a franchise. And even if you’re not considering any of these things, it’s just fun to have a sense of what your brand is worth. In short, there are various reasons why you may want to know and calculate brand equity.

  1. It’s fun to know what the value of your brand is and how it contributes to the overall financial value of your organization.
  2. You want to prepare your business for sale, so it’s helpful to know your brand equity before entering into negotiations.
  3. You need to perform due diligence, which includes a brand equity analysis.
  4. You want to monitor the value of a specific brand over the next few years to see if and how marketing efforts are paying off in terms of brand equity.

Being able to determine brand equity is particularly useful for accountants, controllers, and mergers and acquisitions specialists performing business valuations. Monitoring brand equity is useful for chief marketing officers and marketeers who want to be able to show the impact of their efforts, and for entrepreneurs who want to build their brand with the intention of eventually selling it.

A strong brand accelerates and improves cash flow. It can also reduce volatility and cash flow vulnerability.

What components do we use to calculate brand equity?

Degree of volatility

People often think that a brand is worth whatever you can get for it. This is because brand equity can be fairly volatile in the consumer market. It’s closely related to brand image, which is created through sponsorship and collabs with influencers or artists, for example. Volatility is higher in some industries (e.g., hospitality) than others (e.g., car sales). But in both cases, brand equity is retroactively determined by service quality. In other words, will customers recommend the restaurant or dealership to their friends and family after their experience there?

Degree of stability

Things are different in the business market. Whereas the image of consumer-driven organizations can be volatile, the business market tends to be more solid and stable. Think about it – we often sign multi-year contracts, requiring us to work more closely together. And there are larger interests at play, such as supply chain dependencies.

Degree of reliability

Ultimately, the business market is all about reliability, stability (in terms of delivery guarantees and solvency), and connectivity. By “connectivity” we mean cooperation, a mutual connection, and a willingness to solve problems together.

Besides Price, then, soft factors are what matter most when doing business in the B2B market. And they contribute significantly to brand equity. But how do we quantify these factors?

In our research and in our experiences with M&A processes, the following factors keep popping up when it comes to calculating brand equity (in no particular order):

  • Intellectual property rights to the brand, product and/or model, as trademarks, patents, and copyrights protect the brand and thereby reduce future risk.
  • Sales growth rate, as this is related to brand awareness. A faster growth rate means your brand will spread faster.
  • Customer satisfaction scores, as these give insight into customer perception and experience.
  • Market penetration rate, as your actual sales volume compared to the total estimated market says something about the (geographic) range of brand awareness.

We have added the following factors to this list:

  • Churn rate, as the number of customers who leave or come back to a brand is an indication of brand loyalty and image.
  • Legacy, as a brand’s age testifies to its ability to maintain a long-term presence in the market.
  • Brand architecture, as – if the brand in question is part of a brand architecture – the overarching brand’s strength or weakness can directly affect the value of that brand.

Having negative equity or net losses could somewhat affect brand equity. However, many startups and scale-ups manage to navigate these challenges while building a strong brand.

Check how our brand valuation methodology – the Isolated Brand Valuation© Method – complies the ISO 10669-2010 standard.

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