In the Qualitative Assessment, one of the key inputs you can provide is the positioning of the company you're valuing. Under this section, you'll see two options: Premium and Commodity.
What Do "Premium" and "Commodity" Mean?
These terms are used to capture how a company is perceived in relation to its competitors. While "Premium" and "Commodity" can have different meanings depending on the industry, they generally refer to the perceived quality and differentiation of a company’s products or services.
Premium: If a company’s products or services are viewed as higher quality or more desirable compared to its competitors, it is considered a "Premium" offering. This perception typically reduces the company’s risk, leading to a lower cost of equity premium.
Commodity: On the other hand, if the company's offerings are seen as interchangeable with others in the market, it is considered a "Commodity." Companies in this category often face higher competition and can be viewed as riskier, potentially leading to a higher cost of equity.
Why It Matters
The choice between "Premium" and "Commodity" helps assess the overall risk profile of a company. A Premium position suggests lower risk, while a Commodity position implies higher risk, affecting the company's cost of equity.
By accurately assessing the company’s positioning, you can better gauge its relative risk and make more informed decisions in the valuation process.