Methods of Brand Valuation The various methods of brand valuation can be placed into four categories: (1) cost-based approaches; (2) market-based approaches; (3) income-based approaches; and (4) formulary approaches incorporating future benefits or comparative advantages. Cost-based Approaches This method considers the costs involved in creating the brand through the stages of research and development of the product concept, market testing, continued promotion during commercialization, and product improvements over time.
Historically based, this approach is the valuation technique that complies with standard accounting practice for valuating assets. It is also the most conservative method of valuation and provides little future-oriented information that is useful in the brand management process. However, this technique fails to capture value-added through the application of effective strategic brand management activities and processes. Market-based Approaches This valuation method is a much more externally focused approach.
It is based on an estimation of the amount for which a brand can be sold. This method requires being able to determine a market value. In the absence of an actual market for most brands, this can be a difficult estimation challenge. To circumvent this problem, proxies are created based upon how the financial markets estimate the value associated with the brand. One way to determine the financial market effects is to separate tangible assets from intangible assets. The market value created by the intangibles can be inferred once the entire value of the firm is determined.
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The consultants Trademark and Licensing Associates create a similar estimation by comparing the brand being valued to the performance of another substitute brand that is unrelated to the firm. The method is much more realistic if a similar brand exists in the marketplace for comparison purposes. Income-based Approaches The valuation process involves determining future net revenues directly attributable to the brand and then discounting to the present value using an appropriate discount rate. Several methods may be used to determine net revenue.
One method compares the brand's price premium to a generic product--one that exists in the marketplace without benefit of marketing investment and name ownership. A second method estimates the annual royalties associated with the brand, as in a licensing agreement. This approach to valuation is generally more applicable to brands competing in international markets. An alternative approach relies on the strength of brand name recognition to estimate revenue. The branded product is then compared to a generic product to estimate volume. Formula Approaches
These approaches consider multiple criteria in arriving at a brand value. The consulting firm Interbrand and Financial World magazine use similar methods that are based on an income approach. Interbrand developed its formula approach in the context of external financial reporting, but indicates that the approach to valuation is also very suitable for internal management purposes. The Interbrand approach uses a three-year weighted average of profits after tax as an indicator of brand profitability. In calculating brand profitability, Interbrand strives to consider only factors that relate directly to the brand's identity.
This is often difficult because the company may not consider specific functions as separate from the brand. For example, much of a brand's success might be attributable to the distribution system, which supports the brand but is likely not a key element of its identity. Once brand profitability is determined, a multiplier is attached to the calculation. The multiplier is created from an evaluation of brand strength based on seven factors, which are weighted according to Interbrand's guidelines. Leadership: This is the ability of the brand to function as a market leader and secure the benefits associated with holding a dominant market share.
Stability: Brands that retain their image and consumer loyalty over long periods of time are more valuable than brands without such stability. Market: Brands in certain product markets are more valuable than brands in other markets because of their ability to generate greater sales volume in a more stable environment with greater barriers to entry from competitors. Internationality: Brands that are international in scope possess the potential to expand the brand and are more valuable than regional or national brands. Trend: This is the ability of the brand to remain current in the perception of consumers.
Support: Brands that have been consistently managed and supported by the organization over time are much more valuable than brands that have functioned without any organizational investment. Protection: This factor relates to the legal issues associated with the brand. Brands that are protected by registered trademarks are more valuable in that the organization has the legal right to protect the brand. Financial World arrives at a valuation by estimating the operating profit attributable to a brand and then comparing it to an unbranded product.
The resulting premium associated with the brand is adjusted for taxes, and then multiplied by the above seven-item factor using Interbrand's assessment of brand strength. Aaker's "Brand Equity Ten" concentrates on five categories of measures to establish a comprehensive assessment of brand equity. Specific measures of price premium, satisfaction or loyalty, perceived quality, and leadership or popularity add a customer focus to the valuation methods. Other customer-oriented measures include perceived value, brand personality, organizational associations, and brand awareness.
External measures of market share and market price and distribution coverage complete the set of criteria. Overall, the superiority of the formulary approaches lies in the comprehensive nature of these measures. The formulary valuation process allows for the most comprehensive assessment of all areas that have the potential to affect the ability of the brand to generate value for its owner. Brand valuation appears to be the most promising technique capable of illustrating the importance of the brand to managers while also bridging the different orientations between marketers and accountants.
Since the value of the brand can be expressed in monetary terms, all decision makers have a common point of reference. The measure of brand value may include subjective elements, but the lack of such a measure means that the importance of intangible assets may be overlooked. The use of brand valuation can help foster a recognition of a common goal for individuals in pursuing strategic objectives. Each discipline can contribute a substantial amount of expertise to the brand valuation process. This joint contribution can then assist the organization with brand management.
Cost Approach The cost approach is a valuation technique that estimates value based on the cost required to create the item. Under the cost approach, the actual dollars spent to build a brand are analyzed. While it is difficult to isolate and quantify all historic expenditures incurred in building a brand, it may be possible to identify external marketing costs, including media and promotional spending. This approach can be a highly conservative estimate of the brand value because the cost approach does not factor all costs incurred in building the brand.
For example labor costs, other overhead, soft dollar costs, the cost of trademark registration or internal marketing time, just to name a few costs, may not be specifically identifiable and therefore difficult to factor in. Additionally, the historical cost approach does not consider future economic benefits of a branding campaign. As media markets have become more competitive in recent years, the cost of recreating a brand would most likely exceed the historical cost even in real terms.
Therefore, the cost approach may be considered as a baseline value of a brand by which to measure future investment. Market Approach The market approach is a valuation method that estimates value based on actual market transactions. The market approach requires the collection of market data from comparable transactions and analysis of the data to estimate the value of the brand through comparison and correlation. AbsoluteBrand combines information and research from our proprietary databases and external market data. The market approach is helpful in researching for potential licensing transactions.
Income Approach The most accurate valuation of a brand is the present value of the incremental profit attributable to that brand. The income approach is based on the present value of an income stream. This approach to valuation is based on the assumption that if the brand’s underlying product or service did not own its trademarks it would need to license them from a third party trademark owner. Ownership of its trademarks therefore ‘relieves’ it from paying a license fee (the royalty) for the use of the third party trademarks.
It requires the development of income stream projections that are then discounted for risk and the time value of money, i. e. , “present-valued” as of a certain date. Under the income approach, a complex model integrates historic and forecast financial results, market risk and brand contribution. The result can be a static brand valuation as of a particular date or it can be transformed into a dynamic brand management model. A brand valuation under the income approach is comprised of three main variables: 1. Forecast Income Statements from the Branded Business.
The valuation model is segmented to reflect the relevant competitive environment within which the brand operates and forecasts are made. This information is gathered through management input and market research information. 2. Royalty. The brand is benchmarked and comparable brand royalty rates are researched and then applied to a forecast revenue streams. 3. Brand Risk Rates. The brand’s contribution to earnings is analyzed to establish the security of future brand earnings using consumer research and competitor review.
This approach utilizes sound valuation principles, namely the discounted cash flow analysis along with quantifiable market research and it relies on the forecast amount of operating earnings that are attributable to the brand. The future expected brand earnings are then present-valued using a discount rate that factors in the risks associated with achieving those future brand earnings. ? Cost-Based Approaches Cost-Based Approaches involve calculating the costs associated with: -- Creating the brand (market research, development of the product concept, arket testing, packaging, advertising, etc. ) -- Continued promotion through the product life cycle -- Product improvement over time and the insuring costs connected with the product improvement According to “Strategic Brand Valuation: A Cross-Function Perspective” by Karen Cravens and Chris Guilding (Business Horizons, July/August, 1999) the cost-based method “is the most conservative method of valuation and provides little future-oriented information that is useful in the brand management process. ”
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