In a company selling branded products at premium prices, the prime directive is to protect the brand. The brand - your customer's belief in what you stand for as a company - is why your customers trust you. The brand is what allows you to charge a little more or merit a larger market share than companies selling no-name products. That little bit more translates into future incremental cash flow for investors for many years. The present value of this stream of future incremental cash flow is brand equity, the only way I know how to build long-term value for shareholders.

Anything you do that erodes the brand will destroy value. I ran into one of these value destroyers this week in one of our companies. A customer called and wanted to know who to talk with about buying scratched and dented units. I told him we do not make products with scratches or dents, but that he was free to put them on himself after he bought the (perfect) new product from us. He said, "Yes you do, I buy them that way from you guys all the time."

I felt like Better Midler in Ruthless People. When she learned that her husband had refused her kidnappers' ransom demands and they were offering to discount the ransom she complained, "I've been kidnapped by K-Mart".

In a prior time, when our company was managing for cash, rather than long-term value, the managers had begun selling S&D units -- products that had been scratched or dented during shipping -- at a steep discount to our normal prices. In the short term, it made a lot of sense. It saved the company the cost of shipping the damaged products back to the factory. It saved the cost of repairing or re-working the imperfect products. And it put a few extra dollars in the kitty at the end of the year. But in the long term, it was a bad idea.

Clearance programs grow faster than crab grass, and they are harder to get rid of. Over the years, our customers had learned to expect the discounts, and started to call and request damaged product. Our sales team had developed price lists that included both full prices and scratch-and-dent prices for every model we sell. We had orders in the system for S&D product that we could not fill because the factory didn't make enough mistakes to fill the orders. One sales person had five sticky notes on her computer screen for customers waiting for bad units. Another employee told me they had spoken with a commercial customer who only ever bought our seconds because our discount prices were so attractive.

We had succeeded in creating a market for products we were trying hard not to produce. And we had succeeded in becoming our own worst competitor.

Every company struggles with this problem to some degree. As long as humans make mistakes, there will always be second quality products. Managers often try to find places to park bad product that are far enough away from their core market that their best customers won't detect the odor of rotting product. But I have never seen it work.

Being a subtle guy, I asked the managers if they knew where I could buy a factory second Porsche, or a scratch and dent Mercedes. Or how I could buy a Tiffany diamond necklace that had suffered shipping damage. Premium companies selling premium products for premium prices don't sell junk - period. They work very hard to make sure they produce perfect products the first time. If, by chance, a bad product comes off the production line or a unit is damaged in shipping, they do not discount it. They destroy it. It is better to drive over the product with a bulldozer than tarnish the brand.

Don't get me wrong. There is a place for discount brands and factory seconds in the world - our competitor's showrooms. But not in our showroom.

I like finding problems like this because they are so easy to fix. Like the man who finds himself at the bottom of a hole, the first step is to stop digging. We informed every sales and customer service person that we would never again ship a second-quality product. We tore up the old price lists and printed new ones with no scratch and dent prices. We reminded the whole company that we were in business to sell premium products and deliver premium service to our customers. We called the customers who had placed orders for bad product and explained the factory outlet is now closed. We would be glad, however, to fill their orders with premium product at a fair price. And we hung a big picture of a bulldozer on the wall to remind ourselves what we stand for. The problem only took one day to correct.

This may cost us a few dollars in the short term, but it will help protect our brand. In the long-term this will make our company more valuable. I am willing to wait.

Protect the brand. Protect the brand. Protect the brand. That's all you really need to know to build long term value in a business.