Companies invest a lot of resources, including time, talent and capital, in an effort to procure a positive status in the minds of potential customers. But how much value do companies really derive from cultivating brand names?
According to Aswath Damodaran, Professor of Finance at New York University’s Stern School of Business, a brand’s value is simply about the extent to which it can sell its goods and services at a premium price.
Damodaran presented on valuating brands at Friday’s L2 Innovation Forum. He noted that many marketers mistakenly attribute product quality, styling, service and reliability to a brand name’s value, when all brand value ultimately comes down to is pricing power.
“If you as a company tell me that you have a brand name, I’m going to ask you a question: ‘Do you have the power to charge a higher price for the same product?’” Damodaran said, “If your answer is no, I don’t think you have a brand. You may think you do, but I don’t think your brand has any value.”
To prove the value of brand names, Damodaran compared two companies making similar products: Coca-Cola and Cott, makers of RC Cola. “Soda is water with a bunch of sugar and a lot of crap thrown in. You can put whatever you want on the outside of the can, but there is really no difference between a cola and another cola. You may say that Coca-Cola tastes different — that’s what 100 years of playing with your mind does to you,” he stated. The cola business, then, is all about branding, not the product, he stated.
Damodaran valued Coca-Cola’s business at $79.6 billion, while the value of Cott was limited to $15.4 billion. To figure out the pricing premium, he simply subtracted Cott’s value from Coca-Cola’s value, arriving at a $64.2 billion total worth for Coke’s brand alone. That’s about 80% of the company’s value. Damodaran noted that the key number driving the valuation is the companies’ operating margins — Coca-Cola’s margin is 15.57%, while Cott’s is 5.28%. The typical company has an operating margin of 5-7%, so Coca-Cola’s margin is phenomenal. The bottom line: If Coca-Cola suddenly lost its brand name tomorrow, its operating margins would drop to around 5.28%, and it would lose $64.2 billion of value.
Wouldn’t we all love to have brand names as strong as Coke’s? Of course. The problem is getting there. Damodaran provided four insights into the core of branding that every marketer should keep in mind when pursuing a valuable brand name.
1. A Brand Is the Most Sustainable Competitive Advantage
Damodaran argued that brand name value is the “most sustainable competitive advantage known to business.” In Coca-Cola’s case, branding accounts for 80% of its value. Founded in 1886, the company is still going strong, with about the same brand personality.
He cited a study that looked at how long brand names endure. The top five brand names in 1925 were compared to the top five brand names in 2000. Three of the five brands survived the 75-year period. Damodaran asked, “How many competitive advantages do you know of that last 50, 60, 75 years?”
2. Luck and Serendipity Are Just as Important as Advertising
“Advertising can help, but it can’t be everything,” stated Damodaran. “In fact, I would argue that if you look at the value of brand names, the way they make it is a mix of some advertising, a lot of luck, and being in the right place at the right time.”
In an e-mail interview after his presentation, we asked Damodaran to elaborate on this concept that luck and serendipity are just as important as advertising. He responded:
“Take any of the big brand names of recent years: Crocs, Ugg, Under Armour… If you trace back their success, it cannot be because they came in firing on all cylinders. It was word of mouth, helped by networking (in this case among teens) and becoming fads… I am sure that there were other brands that were just as worthy that never made it.”
As the old adage goes, timing is everything.
3. Brand Value is an Illusion
As clearly demonstrated in the Coca-Cola example, branding is an illusion. Damodaran calls this the “Coca-Cola Corollary,” saying that taste doesn’t matter. “Taste is irrelevant here. It is an illusion,” he declares.
For marketers, he suggests, “Preserve the illusion.” When you mess with the illusion, you’re messing with the basis of how your brand is perceived. Damodaran pointed out the 1985 “New Coke” campaign, in which Coca-Cola rolled out a cola with new ingredients, replacing the original formula. This new formula was based on very expensive consumer research, which proved the new formula tasted better.
Although the tests said it was a hit, it turned out to be a marketing horror story. Receiving great backlash, Coca-Cola reintroduced the “original formula” and branded it as “Coca-Cola Classic,” learning that it wasn’t the taste that consumers wanted, it was the intangible emotional connections they felt with the brand.
Also relevant is the “Tiger Woods Corollary.” “If you mix your brand name with another brand name, watch out, especially if it’s a personal brand name,” he said. Do you think Nike foresaw any problems when it associated itself with Tiger Woods? I’m sure the flood of media coverage of his less-than-pious lifestyle was a complete surprise to the marketing reps at Nike.
“If you tie your brand name to celebrity brands, then you’ll essentially ride up with them, ride down with them, and you won’t control the brand name,” Damodaran said.
4. Even Valuable Brand Names Lose Value
If you have a valuable brand name, Damodaran recommends, “Don’t assume that value is going to stay intact forever. There are companies that have dissipated back into remnants… If you have a valuable brand name, hold onto it; preserve the image.”
Continue to nurture your brand’s image, “the illusion” as Damodaran would call it. Sometimes, the image is more valuable than the product itself.
What are your thoughts on the value of a brand name? Add them in the comments below.
See Damodaran’s full presentation from the L2 Innovation Forum below: