Brands — A Topic Even More Mysterious Than Cryptography Itself
The King Of Brands Has Been Dethroned
Did you know Coca-Cola was, until recently, considered the most valuable brand in the world? The value of a brand is called “brand equity.” There’s even a dictionary definition for it:
“The commercial value that derives from consumer perception of the brand name of a particular product or service, rather than from the product or service itself.”
In other words brand equity is what a brand is worth over and above what the product itself is worth.
How Did Coke Get To Be King Of Brand Equity In The First Place?
Do you know where the “Coca” in Coca-Cola comes from? It comes from the coca plant, the source of cocaine. Cocaine was actually once the most important ingredient in Coca Cola. After all, oranges are the most important ingredient in orange juice, peanuts in peanut butter, and it was coca in Coca-Cola. Even to this day, both Coca-Cola and cocaine share the nickname “coke.”
Recall our definition of brand equity: “The value over and above what a product itself is worth.”
Now if you were to take out the main ingredient that gives a product all of its effectiveness — which is also what you’ve named the product after — almost all you’re going to be left with is brand value (and nearly worthless fillers like water).
This is what happened to Coca Cola!
In 1920 Cocaine Was Outlawed
Coca-Cola was forced by law to take out its main ingredient. So with necessity being the mother of invention, the folks at Coca-Cola were left with no alternative but to practically invent the idea of brand equity. Caffeine and sugar helped Coca-Cola keep some of its stimulant qualities, but let’s face facts: Coca Cola certainly no longer has the same kick it had back when it contained the powerful and addictive stimulant: cocaine.
When Coke lost its most potent ingredient, its brand equity actually went up — way, way up. This is just a fact of math. The product itself became worth less because of the removal of its most valuable ingredient, but the price did not drop.
That mathematically meant that the difference was made up by the brand equity!
The True King Of Brands
Reminding ourselves of this definition of brand equity — what a brand is worth over and above what the product itself is worth — wouldn’t you agree that without a doubt, the brand with the most equity in the world is in fact the U.S. dollar?
The product itself, after all, is just a rectangular piece of paper with some ink on it. Paper itself is hardly worth anything.
However, when stamped with the official mark of the dollar, the value of this paper is so high and so widely recognized that when Interbrand attempts to compare the brand equity of other brands to one another, they measure it using the brand of the U.S. dollar! Now there’s a powerful brand.
What other brand has a dedicated spot for its logo on the keyboard of every computer in the world? There’s for sure no Coca-Cola key on my keyboard.
The consumer perception of the U.S. dollar, both in America and just about everywhere else on earth, is extremely high. It’s the standard by which we judge the monetary worth of things. It’s what everything is priced in, at least in the U.S.
Economists have their own fancy term for everything, so they don’t call this phenomenon “brand equity.” Instead, they call the difference between what a dollar is worth and what a rectangular piece of paper is worth the “monetary premium.” But it means exactly the same thing — what a dollar is worth over what the product itself (a piece of paper) is worth.
How Did The Dollar Get To Be The True King Of Brand Equity?
The dollar’s brand equity used to be zero.
Interestingly, just like how Coca-Cola used to have something much more potent in it than it does today, the same is true of the U.S. dollar.
The dollar used to be fully 100% backed by and completely redeemable for pure, solid gold. Until 1933, one dollar was worth about one-twentieth of an ounce of gold.
Back then, the dollar’s brand equity was actually zero. The U.S. Federal Reserve bank would give you an ounce of gold for a $20 note. Then, in 1933, Franklin Roosevelt confiscated consumer gold and passed the Gold Reserve Act. Suddenly you needed $35 to get an ounce of gold.
But technically, the dollar still had no brand equity. It simply became worth one thirty-fifth of an ounce of gold. It also seems from the historical records that it became harder to get that ounce of gold then for your stack of one $20 note, one $10 note and one $5 note.
But then, suddenly, all at once, in August 1971, the dollar’s brand equity went from absolute zero to one whole dollar per dollar. Brand equity instantly went from 0% to 100%.
That was when the dollar was no longer backed by nor redeemable for gold. All the value that the world put on the dollar became, all at once, entirely brand equity.
And since all the dollars in the world were certainly perceived by all the people in the world to be worth more than just the Coca-Cola company, we can all agree then that the U.S. dollar’s brand equity was more than Coca-Cola’s brand equity. So we can safely conclude that since August 1971, the dollar has been the king of brand equity. It’s just simple math again.
Just as Coca-Cola managed to remain valuable without the cocaine in the product, the U.S. dollar remains very valuable without the gold backing it. That being said, it’s not quite as valuable as it used to be.
A Dollar Isn’t Worth What it Once Was
The purchasing power of a dollar has fallen since it became 100% brand equity. Back in 1971, a dollar bought about 900 milligrams of gold. It now buys less than 10 milligrams of gold. Ouch. You know how an open bottle of Coke loses its fizz after a while? Seems the same thing happens to dollars.
What We Can Learn From The Brands That Beat Coke?
According to Interbrand, the top brands that surpassed Coke in brand equity were Apple and Google.
Let’s remind ourselves yet again of the definition of brand equity — that it is what the brand is worth over and above what the product or service itself is worth.
Brands That Beat Coke Delivered More Than A Brand
Is it really true that we value Apple and Google not because of the value of what their products and services provide to us, but simply because of our brand perception? I don’t think so. I think Interbrand is wrong about the brand equity of these companies.
We use Apple products because they work really well. I wrote this article on a nine-year-old Macbook Pro! I did it using Google Docs, which is free! I researched the article with Google. There’s no reliable substitute for Google, especially for advertisers, who are the ones paying for it, since it is free to me.
No. When I think about it, I realize these companies have utility that goes way beyond the perceived value of their brand, and that this value was missed by Interbrand’s researchers.
What the people at Interbrand missed is this: the value of the products and services provided by Apple and Google is not measured in the cost of materials, but in the benefit we get through how computer code makes those materials do extraordinary things.
It Is The Code That Is The Fundamental Value
The brilliantly engineered software is not part of the brand equity — it is not something beyond the value of the product itself as indicated in the definition of brand equity. It is a part of the product itself. In many cases it is the product itself. The code is certainly the the most potent ingredient or the most important ingredient if we recall the terms we used in our discussions of Coca-Cola and the dollar.
Put concretely, if Interbrand analysts compare two similar office chairs, one with the Herman Miller brand and another with no brand, they’d say the brand equity of the Herman Miller chair is the difference in price between the two.
But by this methodology, those same analysts would look at a Mac without its operating system and software on it beside one with all that software and be stumped as to why the first would be worthless and the second would be worth thousands of dollars. This is because they aren’t considering the value of the code.
The Value Of The Digital Realm
Behold then, the value of the Digital Realm. It is different from the physical realm of weights, measures, commodities and goods. It is different also from the brand realm where a name and logo command value.
The Digital Realm is a third realm, which not everybody realizes actually exists. This is why legendary investors, like Warren Buffet, who recognized the brand realm value of Coca-Cola completely missed the boat on investments like Apple, Amazon and Google. And it’s why Interbrand thinks it is brand equity rather than code that makes these companies’ products profoundly valuable.
The Main Ingredient Is The Code — And It Is Still In There
What makes these companies’ offerings valuable is their computer code and the effects that code generates. The value is what the computer code actually does. It’s not what the perceived value is, but what its actual value is that makes these things we rely on every day so valuable.
The code creates capabilities that were previously impossible. It makes them not only possible, but easy, fast and cheap. The code makes these capabilities available not just to a few people, but to almost everyone on Earth.
But you cannot touch the code. You cannot weigh it. Measuring it by its…