Brand & Customer Loyalty

What is a brand, really?

💡 INSIGHT

Buffett's test: 'If the company raised the price 10%, how many customers would switch?'. If <10% switch = strong brand. If >30% switch = weak brand. Coca-Cola, Apple, IKEA lose <5% at a 10% price increase. Generic goods lose 50%+ at the same increase.

The three levels of a brand

📖 DEFINITION

Brand equity = the added value a brand contributes to the product beyond its functional value. Often measured as premium price × volume. Coca-Cola has brand equity ~60% of the company's value (according to Interbrand).

Why brand is the hardest to build

A brand takes decades to build but seconds to destroy. IKEA built its brand over 80 years (1943-TODAY) through consistency: Swedish design, low prices, self-service, flat-pack, meatballs. Every interaction with the customer has strengthened or weakened the brand. Think of it as a trust bank — every positive customer experience is a deposit, every negative one a withdrawal. A moat-mature brand has 100 billion 'trust points' in the bank; a crisis withdraws 5 billion — survivable. A new brand has 1 billion; a crisis withdraws 5 billion — catastrophic. That is why young brands are vulnerable and mature brands resilient. H&M had a crisis in 2018 (racist ad headline) — the stock fell 10% in a week but recovered in 3 months thanks to a 70-year trust bank. A newly started clothing brand with the same crisis could have died. For the analyst: assess the brand's age and trust accumulation. A brand with 30+ years of history of a consistent customer promise is more resilient than a brand built on 5 years of marketing. ICA (90 years), IKEA (80 years), Atlas Copco (150 years), Volvo (98 years) — Swedish moat brands with a long trust bank.

⚡ KEY INSIGHTS Brand = the sum of customers' associations, not the logo Three levels: recognition → preference → loyalty (loyalty = moat) The trust bank analogy: decades to build, seconds to destroy Buffett's test: 10% price increase — how many customers switch? 2

Pricing power — what it is and what it is not

Pricing power is the ability to raise prices without losing customers in proportional quantity. This is the only correct economic measure of brand moat. A company can have 100% brand recognition but 0% pricing power — that is called a 'commodity brand'. For example, a Coca-Cola copy with a similar logo but no taste difference — customers buy only if the price is lower. On the other hand: Apple can raise the iPhone price 15% and lose <5% of customers — that is pricing power. Three components: 1) the customer's willingness to pay for the brand over the commodity price, 2) volatility in customer churn at a price increase, 3) the length of time the customer accepts the price. A company with true pricing power has: premium price 20%+ over commodity, customer churn <10% at a 10% price increase, and the customer comes back next time. So measure: compare the company's price with the commodity alternative (same quality, no brand). ICA Premium vs ICA Economy shows a premium price of ~15-20%. H&M vs Primark shows a premium price of ~10% (Primark cheaper but H&M has a stronger brand). Atlas Copco vs unknown Chinese compressor shows a premium price of 30-50%.

📖 DEFINITION

Pricing power = (Company's price − Commodity price) / Commodity price × 100. >20% = strong pricing power. <5% = commodity. Premium price × volume = brand equity.

NPS — Net Promoter Score

✓ TIP

The economics of the premium price

The premium price creates a cascade of economic advantages. Step 1: higher margins. If the commodity price is 100 SEK with 5% margin (5 SEK profit), and the premium brand charges 130 SEK with 25% margin (32,5 SEK profit) — the premium brand makes 6,5x more profit per unit. Step 2: higher ROIC. The premium brand has the same capital need (production, inventory) but higher revenue — ROIC becomes 3-5x higher. Step 3: advertising budget. The premium brand can spend 10% of revenue on marketing and still have a 20% margin; commodity companies cannot afford 5% advertising. Step 4: reinvestment cycle. The premium brand has more cash left over to invest in product development, store experience, digitalization — which further strengthens the brand. This is a 'virtuous cycle' — strong brand → higher margins → more advertising → stronger brand. Coca-Cola has driven this cycle for 130 years. Apple for 40 years. IKEA for 80 years. For the analyst: identify companies in this cycle. A moat-mature brand REINVESTS in itself — if the company cuts the advertising budget, they lose moat. H&M's problem 2017-2019 partly: reduced ad spend during the digital transition → the brand weakened → customers moved to Zara. The recovery in 2020+ came with increased advertising + brand refresh (& Other Stories, Arket).