The Value of a Brand Name by Aswath Damodaran

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Aswath Damodaran, Professor of Finance at NYU Stern discussed how to valuate a brand at the L2 Innovation Forum.

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  • The value of a brand name should be visible either in the margin (if the firm exercises pricing power) or the sales/capital ratio (if the firm uses brand name to sell in larger quantities..)
  • In the first column, Coca Cola is valued with its current characteristics - high margins, high returns, reasonably high growth - all of which can be traced to its brand name power. In the second column, we revalued Coke using the margins of a generic manufacturer (Cott). The ripple effects of the lower margins can be seen in lower return on capital (margin * sales to cap ratio) and lower growth. The net effect is a almost an 80% drop in value. That is the value of the brand name.
    Alternative approaches:
    Coke’s ROC = Generic ROC (instead of magins)
    If no generic companies exist, the industry average can be used as a base to get a measure of relative brand name value.
  • The Value of a Brand Name by Aswath Damodaran

    1. 1. Aswath Damodaran The value of a brand name: Thoughts on “luxury” marketing It is not rocket science… Aswath Damodaran http://www.damodaran.com
    2. 2. Aswath Damodaran Is the price difference here for brand name? Dell 15” Laptop $ 800 Apple 15” Mac Book Pro $ 1200
    3. 3. Aswath Damodaran How about in this case? Honda Acura $ 50,000 Ferrari $ 250,000
    4. 4. Aswath Damodaran And this? Rolex Oyster $ 10,000 Fake Rolex Oyster $125
    5. 5. Aswath Damodaran I know you are getting tired… but one final test… CVS Aspirin $1.50/100 Bayer Aspirin $ 6.79/100
    6. 6. Aswath Damodaran The power of a brand name One of the benefits of having a well-known and respected brand name is that firms can charge higher prices for the same products, leading to higher profit margins. The larger the price premium that a firm can charge, the greater is the value of the brand name. In practice, people attribute to brand name value what should really be attributed to product quality, styling, service and reliability. Brand name value is easiest to compute for products and services where the only or primary reason for price differences is brand name (and not quality or service or other product characteristics).
    7. 7. Aswath Damodaran Here is my example… Coca Cola $ 4.00/ 6 pack Generic Cola $ 2.00/ 6 pack
    8. 8. Aswath Damodaran The Value of a Brand Name Coca Cola With Cott Margins Current Revenues = $21,962.00 $21,962.00 Operating Margin (after-tax) 15.57% 5.28% Sales/Capital (Turnover ratio) 1.34 1.34 Return on capital 20.84% 7.06% Growth rate during period (g) = 10.42% 3.53% Cost of Capital during period = 7.65% 7.65% Value of Firm = $79,611.25 $15,371.24 Value of brand name = $79,611 -$15,371 = $64,240 million
    9. 9. Aswath Damodaran Propositions about brand name value Proposition 1: Brand name value is one of the most sustainable competitive advantages in business. Proposition 2: Creating a significant brand name is as much a function of luck and serendipity as it is of advertising. Proposition 3: The value of a brand name rests on illusion. Preserve the illusion. • The Coca Cola Corollary: Taste does not matter • The Tiger Woods Corollary: As a general rule, tying your brand name value to a brand name spokesperson can be a dangerous proposition. While there may synergy involved, damage to the spokesperson can damage the brand name. Proposition 4: Even valuable brand names can lose value, if they are not nurtured and treated as significant assets. • The Diffusion factor: Brand name value does not always travel well across products and regions. • Measurement factor: Letting accountants put a value for brand name will lead to management by accounting value, a recipe for disaster.
    10. 10. Aswath Damodaran Propositions about brand name value Proposition 1: Brand name value is one of the most sustainable competitive advantages in business. Proposition 2: Creating a significant brand name is as much a function of luck and serendipity as it is of advertising. Proposition 3: The value of a brand name rests on illusion. Preserve the illusion. • The Coca Cola Corollary: Taste does not matter • The Tiger Woods Corollary: As a general rule, tying your brand name value to a brand name spokesperson can be a dangerous proposition. While there may synergy involved, damage to the spokesperson can damage the brand name. Proposition 4: Even valuable brand names can lose value, if they are not nurtured and treated as significant assets. • The Diffusion factor: Brand name value does not always travel well across products and regions. • Measurement factor: Letting accountants put a value for brand name will lead to management by accounting value, a recipe for disaster.

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