Aswath Damodaran 1

The value of a brand name:Thoughts on “luxury” marketing

It is not rocket science…

Aswath Damodaran

http://www.damodaran.com

Aswath Damodaran 2

Is the price difference here for brand name?

Dell 15” Laptop $ 800

Apple 15” Mac Book Pro$ 1200

Aswath Damodaran 3

How about in this case?

Honda Acura $ 50,000

Ferrari$ 250,000

Aswath Damodaran 4

And this?

Rolex Oyster$ 10,000

Fake Rolex Oyster$125

Aswath Damodaran 5

I know you are getting tired… but one final test…

CVS Aspirin$1.50/100

Bayer Aspirin$ 6.79/100

Aswath Damodaran 6

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).

Aswath Damodaran 7

Here is my example…

Coca Cola$ 4.00/ 6 pack

Generic Cola$ 2.00/ 6 pack

Aswath Damodaran 8

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 1.34Return 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

Aswath Damodaran 9

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.