The power of the brand

If Shakespeare were writing today, he might have missed the following lines:

“What’s in the name? What we call roses/
Any other name will smell sweet. ”

why? Because studies have shown that it is possible to put a rose on a Coca-Cola can or a McDonald’s wrapper, and it will really make people feel that it smells sweeter.

A brand is more than just a name—it is the sum of consumer experience with identifiable products—but it is powerful and usually brings a competitive advantage. It is also difficult for investors to value.

Key points

  • The brand is the total consumer experience of an identifiable product.
  • The brand is powerful, it is the core identity of the company, and it can be accomplished or destroyed.
  • A kind of intangible asset, a brand has a kind of value, but it is difficult for investors to measure this value by numbers.
  • The three main methods of evaluating brand value are divestiture of assets, product-to-product, and intensive methods.
  • The power of a brand can help a company win in a price war, thrive in an economic downturn, or simply increase operating margins and create shareholder value.

Elite list

Per year, Brand Room Publish the ranking of the world’s best brands.This list reads like a Who’s Who in the financial world, which contains many companies that make up the famous Dow Jones Industrial Average (DJIA). However, you don’t need to be a disciple of the Dow Jones Indexes to recognize these brands; these are some of the most well-known symbols in the world. Is visibility valuable to the company? Indeed it is.

The following are some examples of the impact of branding on the company:

  • Marlboro Friday: Philip Morris, the inventor of the cowboy, the cowboy who smokes, faced increasing competition in the cigarette industry in the 1990s. When the company lowered the price of its big-name cigarettes, investors pressed the panic button and the stock price fell by 26% in a day. Despite the decline in smoking rates, the Philip Morris brand has won back consumers and re-established its dominant position at a lower price.
  • New Coke: In the textbook description, Coca-Cola found itself in competition with its own brand and lost miserably. Coca-Cola was worried that the upstart Pepsi could erode its domestic market share and decided to shift production to a new formula: New Coke. In doing so, they stopped the original Coca-Cola production-they have been producing lucrative products for more than a century. The response was so great that the new Coke was eliminated within a few months and the classic Coca-Cola re-entered the market.
  • Apple: In the 1990s, computers became faster, better, and most importantly, cheaper. By providing operating systems on all these machines, Microsoft has made billions of dollars. Apple is making expensive machines, and as the company’s struggles have shown, no one wants cheap computers. In 1997, Steve Jobs returned to Apple with the new idea of ​​making more expensive computers. The difference is that Jobs doubled Apple’s brand promotion efforts and finally launched the “PC vs. Mac” campaign. Apple still makes very expensive machines, but it does a better job of making people want them.

How to evaluate brand value

Although we can see the value of the brand to the company, the brand is still regarded as an intangible asset. Investors tried a variety of methods to separate the brand from the balance sheet to arrive at a number. Three main methods have gained attention.

1. divestment of assets

The easiest way to assign value to a brand is to calculate the company’s brand equity. This is a simple calculation. You subtract identifiable tangible and intangible assets, such as patents, from the company’s corporate value. The remaining number is the value of the company’s brand equity. The obvious flaw is that it does not consider revenue growth, but it can well reflect how much of the company’s value is goodwill.

2. Product to product

Another way investors try to explain brands is to focus on the company’s pricing power. In short, they want to know how much premium the company can charge over competitors’ products. This premium can then be multiplied by the units sold to arrive at an annual figure for the value of the brand.

The name, logo, color and slogan are all part of the company’s brand.

3. Strengthening methods

Although it is too time-consuming and not practical for individual investors, the method behind it Interbrand The ranking is the most complete. By adopting methods similar to those described above and combining them with proprietary measures of brand strength and the brand’s role in consumer decision-making, Brand Room Provide an overall measure of brand equity for the company it measures.Unfortunately, Brand Room Free analysis of all companies that investors want to know is not provided.

Double-edged invisible

Whether you have a general understanding or dig into more specific numbers, most investors are happy to own brand equity. Of course, Coca-Cola’s brand advantage is one of the economic moats Warren Buffett talked about.However, brands can cut in both directions.

Although it is intangible, the company is very likely to destroy or tarnish its brand equity. Chief Executive Gerald Ratner jokingly called his company’s jewelry “complete rubbish”, severely damaging Ratners’ image. In addition to losing market value, the company changed its name to Signet to distance itself from the discredited Ratner brand.

Bottom line

For investors who have already paid a premium for brand equity, Ratner is a cautious story. Brands are fickle beasts, difficult to cultivate and easy to kill.

In other words, a solid brand and the price premium it brings are very attractive to investors, and for good reason. The power of a brand can help a company win in a price war, thrive in an economic downturn, or simply increase operating margins and create shareholder value.

Like the brand itself, the willingness of premium investors to pay for stocks with brand advantages is almost entirely a psychological choice. Of course, a stock with a lot of brand equity is always “worth it”, no matter if anyone is willing to buy it.


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