Valuing brand names

If we accept the proposition that a brand name can have significant value, it seems logical to follow up by trying to estimate that value. The best way to think about how much of the value in a company comes from its brand name is to ask the hypothetical question: What will happen to this firm's value, if it lost its brand name tomorrow?

That question is not always easy to answer since the effects of brand name are everywhere in the firm and are not easily separable. They can affect the company's sales, its pricing policies and its financing costs. Getting a clean estimate of brand name value can range from difficult, to close to impossible, depending upon the company. As a general proposition, brand name value is easiest to value when:
a. There are no quality differences between a company's products and those of its competitors (other than brand name) in the sector.
b. There is at least one company in the sector that is truly "generic".

One reason I use Coca Cola in my brand name valuations is that I really cannot think of any reason why one soda should sell for a higher price than another, based on taste and quality. I know.. I know.. there is the secret formula, but making a cola or an orange soda does not strike me as incredibly difficult to do. Thus, I feel that any differences in margins between Coca Cola and a generic soda manufacturer have to be because of the brand name that Coke has built up over the last century. That is the ploy that I used to estimate that 80% of Coca Cola's value came from its brand name (in the paper that I linked to on the last blog post).

In contrast, think about trying to value Sony's or Apple's brand name. While both companies may have higher margins than their competitors, there are reasons other than brand name that we can attribute these differences to: quality in the case of Sony and a superior operating system and styling for Apple. Thus, what we assign as a value for brand name for these firms may in fact be a composite of many different competitive advantages.

Does this bother me? To me, valuing brand name, for the most part, seems to be a cosmetic exercise. It is not as if Coca Cola would ever be able to sell its brand name and stay a viable company. Thus, what I really want to be able to do is value Coca Cola as a company. The fact that I cannot then break this value down into parts seems to me a secondary problem.