Your brand. It’s a lot more than just your business name or logo. It’s how you’re perceived in the minds and hearts of your customers and prospects.
And guess what? Your brand may actually be worth something. Have some equity. Some actual monetary value that — should you ever decide to sell your business — would help make up the total value of your company.
The challenge (or paradox) is that while your brand does have some sort of value, it’s very hard to pin down.
How do you figure out the value of your brand?
Let’s look at how purchases are made.
When you shop for groceries, you’ve got several brand options to choose from in every category. One of those options is usually a generic or bargain product.
Think about which you choose and why.
For me, it depends on the product. Sometimes — when price is more important and there is no discernible difference to me in quality, I go with the generic version. Other times, when I want to be sure that I get the full flavor I’m after, I’ll choose my favorite brand. And sometimes, when I find something totally new and I’m not sure, my brand associations may spill over into my decisions about purchasing this new item. If it’s a brand I trust, I may be more likely to buy it.
When we trust a brand and find it relevant to our lives, we select the products and/or services associated with that brand over those of competitors, even if we have to pay more.
And when a brand’s promise is so strong that it exceeds any one product (e.g. people will buy any product based solely on the name), the business that owns that brand has the power to leverage it to enter new markets or to charge higher prices. That is how a brand holds value. And in financial lingo, we call that brand equity.
Brand Equity translates simply to your ability to charge a certain price. If you can’t charge a premium price, then you don’t have any brand equity. (Not necessarily brand value, which is a different animal altogether.)
A simple comparison of two brands
As an example, let’s look at the difference between Coca-Cola and Cott (the makers of RC Cola):
Aswath Damodaran, Professor of Finance at NYU Stern discussed how to valuate a brand at the L2 Innovation Forum in 2010. In particular, he compared Coke and RC:
“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.”
For him, the cola business is all about brand perception, not the actual product.
At the time of his presentation, Damodaran valued Coca-Cola’s business at $79.6 billion, while the value of Cott was limited to $15.4 billion. Coke therefore, had a pricing premium of $64.2 billion total (the difference between the two brands’ equity). 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%. Typically, a company in that industry has an operating margin of 5-7%, so Coca-Cola’s margin was phenomenal.
The bottom line: If Coca-Cola suddenly lost its brand name, its operating margins would drop to around 5.28%, and it would lose $64.2 billion of value.
Factors that make up a Brand’s Value
Brand equity is just one of the factors that can increase the financial value of a brand. Other elements include (but aren’t limited to): changing market share, profit margins, consumer recognition of logos and other visual elements, brand language associations made by consumers, consumers’ perceptions of quality and other relevant brand values.
Did your eyes glaze over? Yep, me too.
Unless you’re in love with the numbers side of things, the process of figuring all this out can be a little overwhelming.
But what it all means is that in order to understand the true value of your brand, you need to look at more than just your brand equity. You also need to understand:
- Your investment for developing your brand visuals (the logo and other marketing materials). How much time and money did you spend? And how much would a business normally spend on this? (Did you spend more, less?)
- How much of the market share do you currently have? Is your market local or global?
- How well-known is your brand? If you were to survey a random sample of your target audience, what percentage would recognize you?
- How loyal are your customers? How large is your customer list and how quickly is it growing?
These are all factors of your brand’s value. But they don’t really give you a hard and fast number.
According to the entry on Wikipedia: “Brand equity and brand value are strategically crucial, but famously difficult to quantify. Many experts have developed tools to analyze this asset, but there is no universally accepted way to measure it.
My best advice: Build a strong brand. Nurture it. Guard it. It’s your most sustainable competitive advantage.
And when you get ready to sell your business (you do have an exit strategy, right?), you can then enlist the help of a qualified valuation expert to help you determine your brand’s value.
A few branding reminders:
- Word of Mouth is going to either rocket you into the stratosphere or kill your business. It all depends on what people are saying. (Give them something good to talk about!)
- It’s all about the perception, not the reality. It’s about the intangible emotional connections your customers have with your brand.
- You can help or hurt your brand by the company you keep. Think about what happened with Nike when the Tiger Woods scandal broke. It probably wasn’t something they ever anticipated happening. But it did. And they had to deal with it. Your sponsorships, strategic partnerships, referrals and associations all matter.
Focusing too much on the dollar value of your brand isn’t something I usually recommend. It’s much more productive to focus instead on building the strongest brand that you can.
Tea Silvestre is the founder of the Tastiest Small Biz Brand Awards (public votes are still being accepted) and a marketing consultant who helps her clients find and share their Secret Sauce with the world. Check out her online class (How to Find Your Secret Sauce) if you’d like to zero-in on how to make your business stand out from the crowd and attract new customers with an addicting brand.
© 2011 Tea Silvestre | All rights reserved.
Photo Credit: Mike Licht, NotionsCapital.com