Every year, Brand Finance, a leading brand evaluation and strategy consultancy rounds up a list of the world’s top tier brands, ranking the Global 500 in terms of power and value, and outraging media globally. Just a few weeks ago, the 2017 ranking announced a new record from Apple Inc. for brand value, Twitter as the fastest growing brand, and Lego as the most powerful, but like other, Finance Monthly wanted to know why.

Here we hear from David Haigh, CEO of Brand Finance and the face behind the Global 500 rankings, who gives us the scoop on exactly why the brick building giant is a marketing champion.

Our announcement last week that Lego is the world’s most powerful brand created quite a media stir. However, it is useful for those with a financial mind to move beyond the headlines, to understand what such a powerful brand can do for the financial performance of a business and how to emulate its success.

Brand power (also known as brand strength) is the part of our analysis most directly and easily influenced by those responsible for marketing and brand management. In order to determine the strength of a brand we have developed the Brand Strength Index (BSI). We analyse marketing investment, brand equity (the goodwill accumulated with customers, staff and other stakeholders) and finally the impact of those on business performance. Lego scores highly on a wide variety of BSI metrics such familiarity, loyalty, promotion, marketing investment, staff satisfaction, price premium and corporate reputation.

The building blocks for Lego’s brand strength have always been present. Its appeal spans generations; as well as the creative freedom it gives children, the brand taps into the nostalgia of adults. It has generally avoided gendered marketing. By appealing to boys and girls equally Lego maximises the size of its target demographic. That approach also pleases parents, as concerns mount over the effect toys may have on the outlook and ambitions of children, and girls in particular.

However, this strong foundation did not stop the firm from reaching a point of near bankruptcy in the early 2000s. An overextended product range and problems with stock control had led the company to a nadir, where both brand equity and in particular financial performance had been heavily compromised.

The downward spiral was arrested following the appointment of ex-consultant Jørgen Vig Knudstorp, who discontinued unpopular lines and ensured that all products were compatible with the core range, both visually and mechanically, helping to reverse the dilution of the brand. A clear brand architecture was established with the bright red Lego square clearly endorsing all lines. Since then a decade of repeated marketing and financial successes have transformed Lego’s fortunes.

The release of the Lego Movie in 2014 provided the final push required to make it not just a very powerful brand, but the world’s most powerful brand in 2015. The film was both a critical and commercial success (it was the top grossing film of 2014 in the UK and Ireland), providing not just immediate revenue but also an unrivalled marketing tool. The first sequel, the Lego Batman Movie will be released on February 9th. Its predicted impact has helped Lego regain its top position, lost to Disney in 2016. Further releases are planned for September 2017, March 2018 and 2019, which will continue to build the brand for years to come.

Brand strength should not be viewed in isolation however, rather the brand must be examined in the context of the business in which it operates. For that reason, as part of our analysis of brands we look at the value as well as the strength of the brand. Having calculated the BSI score, we then determine a range of possible royalty rates for brands in that industry sector by reviewing comparable licensing agreements sourced from an extensive online database. The brand strength score is applied to the royalty rate range to arrive at a specific royalty rate for the brand. For example, if the royalty rate range in a brand’s sector is 1-5% and a brand has a brand strength score of 80 out of 100, then an appropriate royalty rate for the use of this brand in the given sector will be 4.2%. The royalty rate is then applied to historic and forecast revenue data to determine the revenues for which the brand is responsible. Brand revenues are then discounted post tax to a net present value which to determine the brand value.

Knowing the value of a brand helps to maximise financial returns in a number of ways. Most fundamentally, it provides a true picture of the value of a business. Internally generated intangible assets are generally omitted from company accounts, which means that they are often overlooked, leaving businesses undervalued. Brand valuations can therefore help entrepreneurs to achieve a fair price for their business, rather than selling themselves short. Similarly, a comprehensive view of a brand valuation can help defend against hostile takeover. This was in fact how the very first brand valuation, back in 1988, was used. For an acquiring organisation, brand value should be a critical concern too, it can help to identify value propositions but equally, identifying a sub-par brand should be a point of due diligence. Finally, when franchising or licensing, a brand valuation is essential leverage to set the optimum price, as Lego will know from its panoply of media licensing deals.

A valuation of the transferrable brand asset therefore has key uses. However, Brand Finance also conducts detailed assessment of a brand’s overall financial value to a business, beyond the value of the asset that could be theoretically transferred. Knowing the total ‘brand contribution’ value and the drivers behind it allows you to determine where marketing focus is urgently required, where it will generate the greatest return on investment and where it should be abandoned altogether in favour of a rebrand.

Brands affect a variety of stakeholders however, not just customers. Blue-chip employers are able to pay lower wages and attract applicants in greater numbers due to their brand prestige and the endorsement effect for alumni. Strategic partnerships are easier to form, regulators are more easily persuaded and media influencers, though fickle, are more likely to cover and promote well-known, respected brands. Even hard-headed financial audiences such as investors & debt providers are influenced by the power of a brand to the financial advantage of the controlling organisation. Trust is, naturally, a hugely important consideration for lenders and so their relationship with a brand is critical.

The same applies to investors, however of even greater interest to them is recent research showing that investment in the most heavily branded organisations (those where brand value accounts for the highest proportion of enterprise value) can nearly double returns from the market as a whole.

How can the average brand hope to emulate Lego? The firm has clearly been at pains to rebuild and preserve the strength of its brand. This can be achieved with an ultra-conservative approach, one which brands such as Ferrari have employed in the past, however that leads to missed opportunities for credible brand extension that could generate huge returns. In contrast, Lego has invested heavily in research, providing a thorough understanding of what underpins brand strength, so that commercial opportunities can be pursued without compromising the brand.

In truth, it can take years to accumulate the brand equity required to create, maintain and leverage a brand of such strength. However, with so much financial value underpinned by brands, even the slightest change to strategy or marketing investment can yield (or cost) millions.