Marketing professionals frequently discuss brand equity as a metric for measuring the strength of a brand. However, very few people can actually define the term, let alone calculate it in any scientific way. Traditionally, brand equity has been defined as “the value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent.” Walk the aisles of any grocery store and you’ll notice that name-brand products are more expensive than their off-brand equivalents. Using this very mathematical definition of the term, the amount of that difference could be labeled as the product’s brand equity. It is, in other words, the portion of a purchase price that is paying for the brand rather than the product.

This definition of brand equity, while both interesting and useful, is not the only way to think about the term. The word “equity”, of course, is more commonly used in the world of real estate, where it is generally defined as a share of ownership. A homeowner who purchases a home using a bank loan, for example, slowly increases her equity in the home as she pays down her mortgage loan. This property-centric definition of equity can actually be very useful when applied to brands. After all, as famous advertising executive John Hegarty once said, “a brand is the most valuable piece of real estate in the world: a corner of someone’s mind.”

Brands exist in the minds of consumers, where they have been built over time and across countless interactions with a company. However, no brand can completely own a consumer’s mind, even when it comes to that consumer’s thinking about a certain category or industry. If brands are to be understood as a corner of a consumer’s mind, then brand equity could correctly be defined as a brand’s share of ownership, or the portion of the mind which a brand occupies.

Without knowing it, most brand marketers are actually referring to the second, real-estate-inspired definition when discussing brand equity. Outside the world of large-scale consumer product marketing, most companies rarely think about the comparative value of their branded products over generic equivalents. Marketers don’t need to quantify equity in order to for the concept to provide value. They do need to know, however, how widely recognized, how differentiated, and how strongly preferred their brands are. These three things—recognition, differentiation, and preference—are what most people mean when they use the term brand equity.

Equity as Measured by Level of Recognition

Stated simply, brands with a lot of equity are those brands with high levels of marketplace recognition. A brand that few people can identify cannot be said to possess any meaningful brand equity. Without thinking through the details, many marketers understand this concept intuitively. When companies rebrand or refresh their visual identities, for example, it is common to first enquire about the amount of equity in the current brand elements. In other words, if a company changes its name, its logo, or its colors, how much recognition will be lost?

Equity as Measured by Level of Differentiation

Of course, brands do not succeed by simply gaining widespread recognition. Many brands are widely recognized, but cannot be meaningfully distinguished from their competitors. In other words, consumers might be able to pick out a logo or a color palette, but they have been unable to assign any meaning to the brand. In order for a brand to achieve its ultimate purpose, it must stand for something—quality, quickness, affordability, or something else—in the minds of consumers. That brand statement must make it different from other available options.

Equity Measured by Strength of Preference

While recognition and differentiation are important, brands must also obtain one more level of success. They must translate that recognition and differentiation into purchase preference. In other words, consumers must recognize a brand, perceive it as different, and want to buy because of those differences. This is the final and most definitive method for evaluating brand equity. Interestingly, it is also the closest to the original financially inspired definition of brand equity.

While brand equity is often discussed in marketing and advertising circles, very few professionals can define the term or quantify it for their brands. This inability, however, doesn’t necessarily demonstrate a lack of understanding surrounding the topic. It also does not mean that the concept of brand equity isn’t useful. It simply shows that, as a professional group, marketers have adopted a new, preferred way of thinking about this common metric. Remembering this property-inspired definition can keep the concept of brand equity relevant for all companies.