Bridge over ocean
1 November 1997 Financial Analysts Journal Volume 53, Issue 6

Franchise Margins and the Sales-Driven Franchise Value

  1. Martin L. Leibowitz, PhD

In a global environment, any one company's cost advantage from geographical locale, cheaper labor, or more-efficient production sites can always be replicated, in time, by a sufficiently strong competitor with access to today's free-flowing financial markets. Thus, the ultimate key to a superior margin will be price, not cost. High-value firms will be those that can develop and/or sustain a sales-driven franchise with premium pricing across a range of product markets. The incremental pricing margin beyond that available to a “new commodity competitor”—one who would be content to earn only the cost of capital—is the “franchise margin.” A sales-driven valuation model translates this pricing power into an estimate of capitalized firm value.

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