While marketing is one of the most important drivers of organic growth, the strength of a brand is rarely analyzed in depth within the investment community. Generally, the topic is discussed only vaguely, ignoring its powerful contribution to shareholder value.
Existing research
Plenty of research highlights ways of measuring brand value and the most reliable method often depends on the specific business model. For instance, some approaches focus on the social capital created within a brand’s network, while traditional financial models value a brand based on current profit divided by the difference between the interest rate and the profit growth rate (Swaminathan et al., 2020). Both models have inherent flaws; they often overlook each other’s contributions by focusing exclusively on either intangible assets or current income, though both are essential metrics. Thus, this model accounts for both, though to a higher degree the focus is on growth potential.
Brand Equity
I define Brand Equity (i.e. brand value) as the aggregate of three core pillars: Customer Perception, Market Position, and Product Utility. These factors are frequently discarded in standard models because they rely on imperfect data and require a degree of subjective interpretation. This framework seeks to bridge that gap by offering a method to get a holistic picture of the brand’s strength and growth potential.
The market
An essential component of brand equity is the potential of the brand. Because most companies operate in a highly competitive environment, assessing the opportunity to obtain market share is critical for future growth (i.e., current market share and market growth). Furthermore, whether a brand has a high or low market share, the threat of new entrants is a vital consideration.
- A way to assess
Assessing market share: Should use a combination of units sold and revenue. Relying on a single metric is often deceptive; a brand may dominate in units (Volume) but lag in profitability (Value) due to heavy discounting, or vice versa. Addressing the market share is thus: brand revenue / total market revenue and units sold / total units sold.
Assessing market growth: While historical growth rates (CAGR) provide a baseline, they are often poor predictors of future performance, particularly in disruptive sectors. To accurately forecast growth potential, the analyst must asses: Total potential customers * average revenue pr user. It’s important to account for the time estimated – I argue for a 10 year horizon, though brands with longer plausible runway demands a higher valuation multiple.
Assessing potential of new entries: builds upon Porters Five Forces and MOATS (i.e. network effects).
The product
Discrepancies between customer perception and actual product attributes may occur, typically caused by recent product launches or failures in marketing communication.
Estimating this mismatch highlights dormant opportunities within the marketing funnel. If a product is superior to its reputation, it signals future growth potential that is likely overlooked by the market, presenting a case of undervalued equity – and vice a versa.
Using a conjoint analysis would be ideal, but is in many cases too costly.
- A way to assess
The analyst must assess the correlation between target group needs and product positioning. For instance, in the laptop market, ease of use and screen size may drive high utility for older generations, whereas Gen Z consumers might prioritize portability above all else.
In many cases, Psychographic Segmentation (analysis based on lifestyle and personality) provides more direct insight than simple demographics, allowing for a more accurate assessment of whether the product actually fits the user’s life.
The customer perception
A substantial component of brand value is brand perception. The marketing funnel provides insight into this. Accordingly, a brand’s strength depends on the efficiency of its marketing funnel and its capacity for optimization.
High Awareness / Low Conversion: This often signals general dissatisfaction with the product or pricing. If the company improves the product’s utility, a rapid increase in market share is plausible.
Low Awareness / High Loyalty: This presents a clear “scaling” play. The product works; the company simply needs to increase advertising spend to reach a broader audience.
- A way to assess
Tools such as Brandwatch and Google Trends provide valuable insights into Word of Mouth (WOM) and customer sentiment. A discrepancy where high social volume does not translate into sales typically signals a bottleneck between Awareness and Consideration. However, the significance of this metric varies significantly by sector.
In aggregate
The true power of this model lies not in analyzing these pillars in isolation, but in observing their convergence—or lack thereof. By overlaying Market Position, Product Utility, and Customer Perception, one can uncover specific investment narratives that traditional financial models miss:
- The Value Play (High Utility / Low Perception): A brand with a superior product but weak marketing or low awareness is an “operational fix” away from growth. If management is competent enough to fix the marketing funnel, the stock is likely undervalued relative to its potential.
- The Value Trap (Low Utility / High Perception): A brand resting on its laurels. High awareness and historical prestige can mask a degrading product (e.g., legacy luxury or tech hardware). This divergence is a leading indicator of future market share loss, regardless of current robust earnings.
- The Compounder (High Utility / High Perception / Growing Market): The rare case where all three align. While these usally trade at higher multiples, the durability of their growth is often underestimated by financial models.
Ultimately, true Brand Equity isn’t a single, magical metric. It is the exact point where Market Position, Product Utility, and Customer Perception intersect.
If you only look at one pillar, you get a distorted view. A great product means nothing if the market is shrinking. Incredible perception is useless if the product is fundamentally flawed. But when you evaluate all three pillars together, you stop guessing about a brand’s strength. You get a stronger picture of whether a company’s growth engine is actually functioning, where the bottlenecks are, and whether the market has mispriced its true potential.
Future research (improve)
Research on casual relationships between brand equity and shareholder value are to my knowledge still limited. Finally, other theories or models might provide more useful in different or all segments.
Discussion
Segmentation Constraints: Focusing on one segment demographics (Age/Location) or psychographics (Lifestyle), can lead to overlooking sales from secondary groups, leading to incorrect assumptions.
The Execution Gap: Identifying a gap in the marketing funnel is not the same as fixing it. This model identifies potential value, but it implicitly assumes management is capable of executing the pivot. They might not be.
Capacity Constraints: If a company successfully capitalizes on increased brand equity, can they fulfill the demand? For companies with complex supply chains, increased desire without increased capacity leads to customer frustration, not revenue.
Already Priced In: Brand Equity is an input, not a buy signal in isolation. A company with massive brand power (e.g., Apple or Hermès) may already be priced for perfection.
Notes
Share of revenue, profit margin relative to competitors, return on marketing expenditures, pricing power, perceptual mapping. High and low MOA.
Pricing power and network effects are often mentioned, but pricing power is a feature of other marketing effects.
Swaminathan, V., Sorescu, A., Steenkamp, J.-B. E. M., O’Guinn, T. C. G., & Schmitt, B. (2020). Branding in a hyperconnected world: Refocusing theories and rethinking boundaries. Journal of Marketing, 84(2), 24–46. https://doi.org/10.1177/0022242919899905
Gemini 3.0 has been used to improve language.
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