When & How to Optimize your Margins

A Strategic Guide for Growth and Profitability

For many businesses, the path to sustainable growth starts with securing steady revenue and achieving product-market fit. Once these are in place, the focus often shifts toward enhancing profitability—and that means looking at gross margin. Gross margin, the difference between revenue and the cost of goods sold, not only reflects operational efficiency but is a key indicator of financial health, especially when attracting investor interest or scaling operations. One crucial lever for improving gross margin is brand equity, which can significantly bolster both revenue and profitability.

The Premium of a Strong Brand

One of the most tangible benefits of robust brand equity is pricing power. A strong brand allows a company to set premium prices, as customers are often willing to pay more for products they perceive as high-quality, reputable, or prestigious. This brand-driven pricing advantage directly boosts gross margin by widening the gap between revenue and cost.

Consider the luxury brand Louis Vuitton, which can command gross margins up to 17 times the cost of goods sold, significantly surpassing the 2x industry standard. Apple, known for its loyal customer base and high-quality perception, enjoys gross margins around 43%, far above most of its competitors. This pricing power, derived from strong brand equity, drives revenue without increasing the cost of goods sold, directly enhancing gross margin.

Building Loyalty to Drive Efficiency

Positive brand equity doesn’t just allow for premium pricing—it also drives higher sales volumes and customer loyalty. Strong brands enjoy repeat purchases, as customers are more likely to stick with companies they trust. This loyalty is not only more cost-effective than constantly acquiring new customers but also creates steady demand that can lead to economies of scale, reducing production costs and improving gross margins.

For example, well-known brands like Coca-Cola leverage their brand strength to ensure a consistent customer base, which stabilizes demand and reduces the per-unit production cost. Economies of scale achieved through higher sales volumes enable companies to manage their cost structures more effectively, further supporting profitability.

Protecting Margins Against Price Wars

A strong brand acts as a competitive moat, allowing companies to avoid the need for aggressive price cuts to attract customers. When a brand’s equity is weak, it often resorts to discounting as a primary strategy, eroding gross margins and threatening long-term financial health. In contrast, a well-established brand can maintain price integrity even in highly competitive markets, protecting its gross margins.

Apple is a prime example of this strategy. The brand’s reputation for innovation and quality keeps customers willing to pay premium prices, even as new competitors enter the market. This pricing resilience, driven by strong brand equity, provides a buffer against margin pressures and ensures sustained profitability .

Gross Margin as a Growth Signal

For investors, high gross margins are a sign of pricing power and competitive advantage—traits often associated with strong brands. When assessing a company’s valuation, investors look favorably on brands that demonstrate resilience in maintaining premium pricing and cost efficiency. High gross margins often lead to higher valuations because they suggest robust profitability and efficient operations.

For instance, Apple’s strong brand equity contributes to its market capitalization exceeding $2 trillion, while Dell, which operates in a lower-margin, more price-sensitive market, has a significantly lower valuation. Investors are willing to pay a premium for companies with strong brands because of the stability and pricing power these brands provide.

Strategies for Leveraging Brand to Improve Gross Margin

Adopt the following strategies to capitalize on brand equity for gross margin improvement.

Invest in Brand Differentiation

Your brand's activation and marketing efforts should emphasize unique value propositions which cause you to stand out while fitting in. This differentiation strengthens pricing power, allowing brands to charge a premium without losing customer interest .

Enhance Product Quality and Customer Experience

Building a reputation for high-quality products and exceptional customer experiences justifies premium pricing. Customers who associate a brand with quality are more likely to remain loyal, reducing churn and enhancing profitability.

Develop High-Margin Products or Services

Consider expanding into complementary high-margin offerings. Apple’s subscription services, for instance, generate significant profit without the physical costs associated with product manufacturing, providing a reliable revenue stream that boosts gross margin.

Optimize the Product Mix

Focus on promoting high-margin products within your offerings. This approach can effectively increase average transaction value without additional production costs, contributing to a higher gross margin .

Building Sustainable Growth with Brand

By understanding and strategically leveraging brand equity, companies can significantly enhance their gross margins, positioning themselves for sustainable growth and increased valuation. Gross margin is not just a financial metric—it’s a powerful indicator of brand strength, competitive positioning, and customer loyalty. For businesses looking to scale, attract investment, or improve financial stability, brand equity offers a pathway to profitability that reaches beyond simple cost-cutting measures. Embracing these strategies not only secures financial health but also builds a lasting brand that resonates with customers and investors alike.

We're not just brand strategists. We're business strategists that understand the science of people. If you want to see how we can leverage our science-based methodology to fuel your success, let me know. I'd love to have a chat.

Damien Foord is an Air Force veteran and creative entrepreneur that has advised hundreds of brands in Silicon Valley, including LinkedIn, Tesla, Adobe, and many more. He is the founder of Prismonde, applying cognitive science to business strategy and brand development and speaks on organizational identity and human-centered innovation.