Unwrapping the Mysteries of Brand Valuation

Brand value is how much the company can sell an item at a price higher than what the supply/demand curve determines. The deal is incorporated into the company’s share price; however, it can be discovered through PEG analysis.

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Competitive Market Dynamics in Theory

To succeed, it is necessary to transport ourselves into a different universe in which we can make three minor changes to our current economic realities:

In our imagined world, In our world of fantasy, we can imagine that the elasticity of the demand will be zero. Regardless of the price, consumers demand the same quantity of goods.

Another minor change we will likely see is that demand for every item is inexhaustible.

Consumers are entirely rational in what could be the most significant leap from reality. Suppose they see an equivalent product initially offered for $30 becomes available by a competitor at $25. In that case, the customers will change to the $25 offer again, assuming it’s similar.

Based on these factors, it becomes evident that we can offer an infinite amount of any item, as long as it is the cheapest cost manufacturer offering the product.

We’ve firmly established ourselves in the marketplace and decided to branch out as a business. As a result, we choose to develop T-shirt companies that provide a single white T-shirt. The T-shirt we offer is of high quality. However, there is no trademarked product. However, we offer our T-shirts for sale at $20. The entire cost of this T-shirt (including the production and shipping, salespeople, etc.) is just $2. The $2 amount results from a carefully designed supply chain that is no one – regardless of their connections, resources, or technologies. Could make a better product at a lower cost. We earn an average of $18 per T-shirt, and given that the demand is inexhaustible, we’re fast on our way to substantial wealth.

But, when our rival (we’ll refer to them as “Kim’s Tees”) sees our success, they follow our example. Kim can optimize their supply chain; consequently, producing the white T-shirt costs only $2. Kim’s Tees decides to offer the shirt for $18. They are satisfied with their revenue of $16.

However, we are hesitant to take a stand. We offer our shirt at $15. Kim’s Tees is $14. We go up to $13, and the list goes on… until we provide the shirt at $2.01.

Competitive Market Dynamics in Reality

Let’s go back to the real world. If we were in”the “real world,” two small changes would occur. However, neither affects the argument I’m trying to convey:

Since demand isn’t unlimited and there is typically a downward-sloping curve of the market (more things are demanded when the price decreases), There would be a set amount of white T-shirts ordered at a particular price (e.g., for the cost of $5.00 1,000 T-shirts would be purchased, however at $4.00 then 2,000 T-shirts will be bought). The goal is not to concentrate on the steepness of the curve; instead, to recognize its existence. It is present within the “real world.”

Within the “real world,” economic rents aren’t the same as profit. Economic rents cover capital expenses. So, suppose a shirt costs $2 to produce, and the capital cost is $0.20 for each shirt (given how risky a t-shirt manufacturing business can be). In that case, it will never be lower than $2.20 (or whatever profit-maximizing value of the supply/demand curve determines).

If you’re listening to this warning, “This guy Greg is all wrong; tons of companies can continually charge a significantly higher price than production on relatively commoditized items,” you’re not right.

How to Calculate Brand Value?

In this sense, let’s employ a straightforward term: Brand value is the price at which the product can be sold at a price higher than what the demand/supply curve requires.

When it comes to assessing the value of a brand, one method is to determine the margins of each product and then compare them with other brands. If one firm can make greater profits from an identical product, we can conclude it is because its brand has become more powerful. However, numerous factors can cause this to be a bit off-base – and supply and demand curves might not precisely match.

Another option is to think about the companies in a holistic way. When investors spend more per dollar of profits of Company A than those of Company B, all other things being equal, we can say that the brand for Company A is more potent than Company B’s.

The Importance of the PEG Ratio

In general, the measurement of the amount an investor can pay for a dollar’s worth of earnings is called the Price/Earnings Ratio. But this ratio also includes growth expectations for the company in question. Therefore, we could calculate the PEG (“Price/Earnings multiplied by growth”) that standardizes the expected growth. Suppose the companies are providing the same services and services. In that case, we’d expect the PEG proportions to be approximately similar (other specific factors can affect the price of a stock, and this will ultimately affect the PEG; however, we’d expect them to be roughly the same).

Assessing Brand Valuation in Athletic Apparel and Luxury Goods

To help illustrate this concept, Let’s examine a selection of publicly traded brands in the field of athletics: Lululemon, Nike, Adidas, Puma, and Under Armour. Due to the general similarities and fungibility of the product offerings, we don’t anticipate seeing any significant brands from these brands. Some people may be willing to pay for Nike or. Puma, but at some level, the running shoes are still running shoes, and the brand’s name can only provide a certain amount of value. In addition, athletic brands make functional products, which means that buyers purchase their products for functionality in addition to their appearance – if not even more.

As you will see from the graph, our prediction was generally correct. There is little difference in these PEG proportions for the five companies, with the two outliers (Lululemon and Under Armor) 0.4 PEG units of the average.

On the other side, some businesses sell only the brand. Most people know the fact that there is a significant markup on their products. However, they are willing to pay for the more substantial impact (social standing, “loyalty,” etc.) associated with the name. The companies are usually known by the term “luxury brands.” We will use Hermes, Salvatore Ferragamo, Burberry, and Prada to examine these brands.

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