Brand Value is, in simple terms, “the bottom-line profitability difference between an offer sold in a branded condition and the exact same offer sold by another company in an unbranded condition.”
Products with a nearly identical look, feel and function as Apple’s iPhone and iPad can be purchased in China, but these products must be sold at prices less than half the price of an Apple product. The over two times price premium commanded by Apple is what we call Brand Value.
Imagine two identical products are sold by two different companies – let’s say one is the manufacturer of a famous brand of luxury goods and the other was founded by some of its former employees using identical equipment, materials, craftsmanship and so on. Manufacturing costs are the same.
With the exception of the costs associated with maintaining and communicating the brand, the top line price premium commanded by the branded provider flows heavily to the bottom line. Having high Brand Value converts a much higher percentage of revenue into net income.
Using the scenario from above, we can construct this simplified income statement:
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In the un-branded case the product’s purchase price is 100 US dollars, while in the branded case the price is twice that at 200 US dollars.
Cost of Goods Sold (COGS) in both cases is 50 dollars, producing a Gross Margin (or Gross Profit) of 50 dollars un-branded and 150 dollars branded.
The assumed sales and general and administrative (SG&A) expenses are higher for a branded product to cover marketing, staff training, policy development and other expenses associated with maintaining the brand’s value for a branded offer. In this analysis the SG&A assumed for the branded offer is twice the cost of the un-branded offer.
GOP (Gross Operating Profit) produced by the un-branded offer is 25 dollars while GOP produced by the branded offer is 100 dollars.
Keep in mind that this simplified model is based on a purchase price difference of only two times, although it could be much bigger. For instance, the Hermès Birkin ladies handbag sells for 5,500 euros (about 7,500 US dollars) – much more than only two times that of an equivalent un-branded version.
Preserving Brand Value in China is an important part of overal strategic considerations for any new China market-entrant. Especially for B2B brands, modestly adjusting the value proposition of the brand to adapt it to China’s unique requirements is another important consideration.
Building Brand Value is good business!