Mirror Mirror on the Wall, Who is the Most Valuable of Them All

Forbes has issued the list of the most valuable brands for 2015. Apple is at the top of the list for the fifth consecutive year with the estimated value 145,3 Billion dollars, followed by Microsoft, Google, Coca Cola, IBM. There was no change in the first five position compared to last year, the most significant one is that Facebook jumped from the 18th to the 10th position.

What is common in them? What can we learn from their success? How can our business’ or our client’s brand become that valuable?

Descriptive brands – resist the temptation

Bill’s Computer or Microsoft? Quicknetsearch or Google? When starting a company it is easy to fall into the trap of choosing a praising, descriptive brand name. This is wrong, since an average name will never attract many buyers. But more importantly such names are cannot even be considered brand names in the narrower sense. Trademarks’ (which can be considered as the legal counterpart of brands) function is to distinguish between different products or services. It cannot fulfil this task if it does not stand out from the crowd. Every entrepreneur thinks that his product is good, reliable, cost-efficient etc. and he is not ashamed to advertise it. There is nothing wrong with that of course but this kind of marketing strategy must not be confused with choosing a good brand name. In extreme cases the sought trademark is not even registered since the intellectual property offices cannot register such slogans that lack any distinctive character as a result of being totally descriptive. There is a loophole though. If the trademark contains some graphic element it can pass the offices’ scrutiny however t will never be a good brand.

However “Nice eyelashes” and  is basically the same from the consumer’s point of view. Avoid descriptive thus non-distinctive brand names at all costs. At the beginning when the company’s products or services are little known it can help consumers to notice but on the long run, the benefits of a unique trademark’s distinctive power exceed the cost of strategic market introduction.

How to choose a killer brand name?

1. Must harmonize with the corresponding product

This aspect is of great importance in case of logos and figural trademarks. Just imagine trying to sell cosmetics for men with a trademark depicting a pink cat! It would be also strange in case of word trademarks to have a disharmonious brand name for our product, such as Black & White or Kaputt (German word for kaput) for a new HD TV set. It is also advisable to choose a brand name that harmonises with your company name.

2. Must be attractive in all languages

In case of European trademarks, an absolute ground for refusal is the conflict between the brand and the accepted principles of morality in any of the languages of the EU. Besides, it is advisable to check the meaning of your brand name in the languages of other Member States of the EU. Ford’s compact car, Pinto for example sounds reasonably neutral in English and in many languages, however, in Portuguese it is a synonym for male genitals.

3. Must be available in all countries

Today, you may be thinking about your local market only; you may not even start exporting your goods tomorrow, but what will you do the day after tomorrow? Do you really want to rename your product when your sales is heading north at a rate of knots? Or, even if the name itself is all right, what happens if your brand name is already protected in a neighbour country? Such situations are better left unexplored by checking the name and applying for protection throughout the entire European Union.

The additional costs of thinking and searching Europe-wide are relatively low at the beginning of the naming procedure. The application fee for an EU trademark is only a couple of times of that of a national trademark.

4. The domain must be available as well

It is probably a common understanding that the importance of the Internet will rise further in the near future. As of today, most of the Internet addresses evolved into business names used by consumers to remember where to find certain information or service. Search engines also provide invaluable assistance, but good domain names are essential even in such cases. It would be funny to find Samsung or never-even-heard-of electronic products at sony.com. It would also be strange if consumers found completely different products by a completely different brand name. It would not be as strange for the consumers (who can easily switch and purchase from that site), as it would be for you. It would be more than strange when your business started to fall back, and it would be definitely embarrassing to be unable to get the domain name.

How much is a brand worth?

The most successful brands are worth billions of dollars. But how to determine their value? We grow accustomed to assets providing value for a company. But a brand is intangible, thus it is an intangible asset. However, the case is not that simple. The value of a brand is not always represented in the books, yet take away the brand of the most successful companies, and they would collapse like a house of cards.

How much is a brand worth?

The value of a brand is strongly connected to the so called goodwill of a company which is, in fact, an intangible asset. When someone pays more than the fair market value of the net assets upon purchasing an existing business, we call it goodwill. That could be an approximation for determining a brand value, but isolating which part of the goodwill is the representation of the brand value and which is something else could prove to be a quite challenging endeavour.

A brand’s value could be raised by obtaining proper legal protection and investing capital into its marketing, the latter of course requiring enormous and continuous efforts. But keep in mind that strictly from an economist’s point of view, the value of a brand is not determined by invested money, only the likely profits it would provide over a period of time.

So to determine the value we only have to estimate the likely profits and apply a discount rate to calculate the net present value. It does not even matter whether the brand and its marketing, as an investment is financed by equity or debt, so it can be assumed that the investment is financed by equity only, dealing with the debt as a separate project, thus allowing us to calculate with the adjusted present value.

However, the case is not as simple as we might first think. First, it could be difficult to assess the likely profits which are the results of the brand itself. Second, since brands are unique, it is rather difficult to determine the cost of capital (missing a truly comparable alternative), thus the discount rate. These two factors make it rather complicated to assess the true value of a brand.

Nowadays there are firms specialized in estimating a brand’s value and they use different methodologies. Forbes’ calculation is available here, which is based on the average earnings before interest and taxes, taking several other factors into account, like tax rates, the role the brands play in each industry and the average price-to-earnings ratios. It should be noted however, that companies without U.S presence were not even considered to be on the list (e.g.: Vodafone) but still, the results and conclusions are worth looking into.

Nevertheless, the success stories of brands and the increasing importance of marketing all point in the same direction: brands, thus trademarks are becoming more and more important factors in success. So if you dare to dream big, do not be shy, register your trademark and make sure that your brand is not misused.

Marton Csirik & Adam Szalai
Georg Pintz & Partners