The value of a brand name:
Thoughts on “luxury” marketing
It is not rocket science…
Aswath Damodaran
http://www.damodaran.com
Aswath Damodaran
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The value of luxury…

What is luxury?
 a condition or situation of great comfort, ease, and wealth
 something adding to pleasure or comfort but not absolutely
necessary
 something that is expensive and not necessary

How much would you pay for luxury?
• Whatever it takes… I am a creature of comfort
• Nothing… If I paid for it, it would no longer be a luxury
• You would have to pay me… luxury is for “spoilt” people
Aswath Damodaran
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From luxury to brand name…


If we define luxury narrowly as expensive products that are indulgences and
not necessities, it seems to be true that many companies or businesses that
offer these luxuries have “brand names” that they use to set themselves apart
from the competition.
Rather than value luxury, which lies in the eyes of the beholder, I will focus
on valuing brand name.
Aswath Damodaran
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The agenda



What is the power of a brand name?
What is the value of a brand name?
What lessons can we draw about “brand management” from brand
name valuation?
Aswath Damodaran
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What is the power of a brand name?

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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.
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
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Is the price difference here for brand name?
Dell 15” Laptop
$ 800
Aswath Damodaran
Apple 15” Mac Book Pro
$ 1200
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How about in this case?
Honda Acura
$ 50,000
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Ferrari
$ 250,000
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And this?
Rolex Oyster
$ 10,000
Aswath Damodaran
Fake Rolex Oyster
$125
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I know you are getting tired… but one final test…
Generic Aspirin
$1.50/100
Bayer Aspirin
$ 6.79/100
Aswath Damodaran
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Not all price differences are due to brand name..

It is important that we not attribute to brand name those price differences that
are due to other differences across products:
•
•
•
•

Quality differences
Design differences
Product feature differences
Service differences
This may seem like nitpicking but you need to identify your competitive
advantage correctly, before you can manage it.
Aswath Damodaran
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Here is my example…
Coca Cola
Aswath Damodaran $ 4.00/ 6 pack
Generic Cola
$ 2.00/ 6 pack
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The drivers of firm value…
Growth from new investments
Growth created by making new
investments; function of amount and
quality of investments
Efficiency Growth
Growth generated by
using existing assets
better
Terminal Value of firm (equity)
Current Cashflows
These are the cash flows from
existing investment,s, net of any
reinvestment needed to sustain
future growth. They can be
computed before debt cashflows (to
the firm) or after debt cashflows (to
equity investors).
Expected Growth during high growth period
Stable growth firm,
with no or very
limited excess returns
Length of the high growth period
Since value creating growth requires excess returns,
this is a function of
- Magnitude of competitive advantages
- Sustainability of competitive advantages
Cost of financing (debt or capital) to apply to
discounting cashflows
Determined by
- Operating risk of the company
- Default risk of the company
- Mix of debt and equity used in financing
Aswath Damodaran
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Valuing Brand Name: Coca Cola
Coca Cola
Current Revenues =
$21,962.00
Operating Margin (after-tax)
15.57%
Sales/Capital (Turnover ratio) 1.34
Return on capital
20.84%
Growth rate during period (g) = 10.42%
Cost of Capital during period = 7.65%
With Cott Margins
$21,962.00
5.28%
1.34
7.06%
3.53%
7.65%
Value of Firm =
$15,371.24
$79,611.25
Value of brand name = $79,611 -$15,371 = $64,240 million
Aswath Damodaran
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Proposition 1: Brand name value – The most sustainable
competitive advantage

Brand name value is one of the most sustainable competitive
advantages in business.
Aswath Damodaran
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Proposition 2: Creating a brand name – More art than science


While many firms view advertising as the engine for creating brand
name value, the link between advertising expense and brand value is
weak.
Creating a significant brand name is as much a function of luck and
serendipity as it is of design.
Aswath Damodaran
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Proposition 3: Brand name is magic: Don’t mess with the
illusion

The value of a brand name rests on illusion. Preserve the illusion.
•
The “New Coke” Corollary: It’s not the “secret formula”.
•
The Tiger Woods Caution: 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.
Aswath Damodaran
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Proposition 4: Nothing is forever
Valuable brand names can lose value or be destroyed


Even valuable brand names can lose value, if they are not nurtured and treated
as significant assets.
There are several reasons for brand name loss:
•
•
•
•
Aswath Damodaran
The neglect factor: If you take your brand name for granted and do not provide
reinforcement, you can lose it. (Quaker Oats)
The age factor: If your brand name value is attached to a generation, it will
decrease as that generation ages. (Reader’s Digest)
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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