Kurzweil A.7

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Brands 

What we'll learn:

1) What is a brand?

2) Why does one brand cost more than another?

3) What does a panda have to do with stocks?

You're getting ready for work and you look in your closet. Hmmm, you think. Pretty humdrum. Uninspired. "My wardrobe definitely needs some help here," you say to yourself. 

So after work, you head to a department store to buy a shirt. You're then faced with a question: Which brand do you look for?

You're probably going to look for something you recognize. Branding helps people distinguish one product from another, in all sorts of ways: the color, the quality, the name, the catchy slogan, or the sense of pride that connects to a product.

Think of detergents: Do you always buy Tide because you think it cleans better than the rest? Or Downey because you think it makes your clothes softer?

Perhaps you grab the generic, store-named one because it costs less than the others. This is all a part of branding — whatever makes you pick one product over another.

So when your hand reaches toward the shelf for that one brand, you are investing in that product and its company. In a way, you're trusting that company has your needs in mind.

And because you can count on getting exactly what you want, you might pay more for it. A shirt with a name brand is going to cost you more than an unknown label. Why would you pay more?

Because you trust the company made the shirt well, and that the brand acts as a guarantee that you're going to get exactly what you've come to expect from that brand.

In terms of buying a shirt, people are willing to pay $75 for a brand-name shirt, rather than a similar, generic shirt for $55. Why? The quality of how the shirt was made is probably better, and people get enjoyment from wearing a recognized brand.

Now it probably didn't cost the brand-name company more to make the shirt than it did for the non-branded company. Let's say it costs $35 to put that shirt together, all told.

At the end of the day, the brand-name company goes home with $40 in profit while the generic company only takes home $20.

But there's another factor at play here, too: It's also about who you are and how you see yourself. Advertisements characterize the product's qualities and they also paint a picture of who is likely to buy this kind of product.

Companies build brands that resonate with people's identities or their core beliefs. When people wear the "Save the Panda" T-shirt, they're identifying themselves with eco-issues.

They want to display that fact to the world. That makes them feel good or makes them feel greener.

People who see that shirt will think certain things about that shirt-wearer, and that will make the buyer feel good. When buyers feel good about the products they've selected, they are going to tell their friends or go back and buy the same item again.

That brings us back to companies and how word of mouth helps them — and their stocks.

So we recommend that you think about companies the same way you think about brands. Like buying a shirt based on quality and return on your money, you would also buy shares based on the quality of a company and likelihood of returned value.

And remember this: Solid brands make for solid companies.

So that's a brand — and by the way, we really do think we should save the pandas. They're so darn cute, aren't they?

Three Facts to Wow Your Friends at a Party

1) The value of the Coca-Cola (KO) brand — the iconic red-and-white can, the history, and the famous advertisements — is said to be worth more than the actual formula used to make Coke.

2) In 1988, Philip Morris purchased Kraft (KFT) for six times what the company was worth on paper because they felt what they were really purchasing was Kraft’s brand name.

3) There is an actual mathematical formula to calculate the value of a brand’s name.

Fancy a Game of Polo? 

That shirt you're wearing? Someone's got to tell you: It's not so nice looking. It's old, a little ratty, and the style looks like something Don Johnson might wear circa Miami Vice.

In other words, you need to go buy a new shirt.

You've narrowed it down to two choices: one is from the Gap (GPS), and the other one is from Polo Ralph Lauren (RL). The Gap shirt costs $20 and the Polo shirt costs $40.

They look pretty similar, they both feel solid, and they're both 100 percent cotton. But in the end, you go with Polo. Why?

Well, you aren't just paying for the material or the look when you buy a shirt. Sometimes, you're paying for something you can't see or touch. You're paying for the brand.

So when you pick that Polo shirt, you're also buying the idea of yachting on the Cape with your friends, who sport gorgeous loafers and perfect tans.

Meanwhile, the Gap shirt tells people you're a regular, down-to-earth, hang out type of guy.

You see what we're talking about? Brands like Polo are so powerful that they can get consumers to pay more because of the way the brand makes them feel.

It may sound crazy, but this kind of thing happens all the time. If you're walking into a party and you want to impress people, you'll probably feel more comfortable strolling in with your fancy Polo shirt than a Gap shirt.

It doesn't really matter what the shirt looks like — what matters is what the brand represents to you and everyone else.

So next time you're thinking of buying a stock, ask yourself if the company has a powerful brand. If they do, you might be willing to pay a little bit more for that magical "extra" that the brand possesses.