Brand valuation

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Brand valuation is the process of estimating the total financial value of a brand. A conflict of interest exists if those who value a brand were also involved in its creation. [1] The ISO 10668 standard specifies six key requirements for the process of valuing brands, which are transparency, validity, reliability, sufficiency, objectivity; and financial, behavioral, and legal parameters.

Contents

Brand valuation is distinct from brand equity.

Brand value

Traditional marketing methods examine the price/value relationship in terms of dollars paid. Some marketers believe customers perceive the value to mean the lowest price. While this may be true for commodities, some branding techniques are moving beyond this evaluation. [2]

Brand valuation emerged in the 1980s. [3] [4] Early pioneers in brand valuations included the British branding agency, Interbrand, [5] led by John Murphy [6] and Michael Birkin, [7] which is credited with leading the concept's development. [8] Millward Brown was also a leading brand valuer. [9]

Both companies maintained "Top 100" lists of companies by valuation. [10] In 1989, Murphy edited a seminal work on the subject: Brand Valuation – Establishing a true and fair view; [11] and in 1991, Birkin laid out a brand earnings multiple models of brand valuation in the book, Understanding Brands. [12] [13] [14] A 2009 paper identified "at least 52" brand valuation companies. [5]

Valuation methodologies

There are three main types of brand valuation methods: [15]

The cost approach

This is based on the cost of creating the brand. [5] The fundamental premise of the cost approach is that it should not be worth more than it would cost to build an equivalent. The cost of building a brand minus any expenses is reflective of market value.

The market approach

In this approach, the market price is compared. This valuation method relies on the estimation of value based on similar market transactions (e.g. similar license agreements) of comparable brand rights. [5] Given that often the asset undervaluation is unique,[ clarification needed ] the comparison is performed in terms of utility, technological specificity and property, considering the asset's perception by the market. Since the market approach relies on comparisons to similar assets, it is most useful when there is substantial data available regarding recent sales of comparable assets. [16] Data on comparable or similar transactions may be accessed through the following sources: [17]

  1. Company annual reports.
  2. Specialized royalty rate databases and publications.
  3. Court decisions concerning damages.

The income approach

This approach measures the value by reference to the present value of the economic benefits received over the rest of the useful life of the brand. [5] There are at least six recognized methods of the income approach, with some authorities listing more. [5]

  1. Price premium method – estimates the value of a brand by the price premium it generates when compared to a similar but unbranded product or service. This must take into account the volume premium method. [5] [9] [18]
  2. Volume premium method – estimates the value of a brand by the volume premium it generates when compared to a similar but unbranded product or service. This must take into account the price premium method. [18]
  3. Income split method – this values the brand as the present value portion of the economic profit attributable to the brand over the rest of its useful life. This has problems in that profits can sometimes be negative, leading to unrealistic brand value, and also that profits can be manipulated so may misrepresent brand value. This method uses qualitative measures to decide the portion of economic profits to be accredited to the brand. [18]
  4. Multi-period excess earnings method – this method requires a valuation of each group of intangible assets to calculate the cost of capital of each. The returns for each of these are deducted from the present value of future cash flows and when all other assets have been accounted for, the remaining is used as the value of the brand. [18]
  5. Incremental cash flow method or Excess Margin – Identifies the extra cash flow in a branded business when compared to an unbranded, and comparable, business. However, it is rare to find conditions for this method to be used since finding similar unbranded companies can be difficult. [5] [18]
  6. Royalty relief method – Assume theoretically a company does not own the brand it operates under but instead licenses the use from another. The royalty relief method uses available data of similar arrangements in the industry and assigns the value of the brand as the present value of future royalty payments. [5] [18]

Uses of brand valuation

Common purposes are:

Interbrand classifies these uses of brand valuation in three categories: [19]

  1. Financial applications (e.g. mergers and acquisitions, balance sheet valuation, investor relations)
  2. Brand management applications (e.g. brand portfolio management, resource allocation)
  3. Strategic / Business case applications (e.g. brand architecture, brand repositioning)

Criticism

One research paper states that "many of the methodologies [of brand valuation] used in practice are not theoretically sound". [5] One critic, Mark Ritson, writing in Marketing Week in 2015, said he had previously suggested that "despite the power and prestige of big valuation firms Interbrand, Millward Brown and Brand Finance, there was a possibility that much of what they do was bollocks". [20] He reported on research which found variation between brand valuations: "The average valuation was as likely to overstate a brand's value by more than 500% than it was to get within 20% of the actual price paid". [20]

Future developments

It has been suggested by Tony Juniper that factoring the effects companies have on the environment into brand valuation may support better understanding and addressing of environmental risks. [21]

See also

Related Research Articles

The discounted cash flow (DCF) analysis, in financial analysis, is a method used to value a security, project, company, or asset, that incorporates the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management, and patent valuation. Used in industry as early as the 1700s or 1800s, it was widely discussed in financial economics in the 1960s, and U.S. courts began employing the concept in the 1980s and 1990s.

<span class="mw-page-title-main">Mergers and acquisitions</span> Type of corporate transaction

Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

<span class="mw-page-title-main">Pricing</span> Process of determining what a company will receive in exchange for its products

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the marketplace, competition, market condition, brand, and quality of product.

Brand equity, in marketing, is the worth of a brand in and of itself – i.e., the social value of a well-known brand name. The owner of a well-known brand name can generate more revenue simply from brand recognition, as consumers perceive the products of well-known brands as better than those of lesser-known brands.

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value.

<span class="mw-page-title-main">Valuation (finance)</span> Process of estimating what something is worth, used in the finance industry

In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.

<span class="mw-page-title-main">Fair value</span> Financial estimation of potential market price

In accounting, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated with production or replacement, market conditions and matters of supply and demand. Subjective factors may also be considered such as the risk characteristics, the cost of and return on capital, and individually perceived utility.

In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will overall rise in value, while overvalued stocks will generally decrease in value. A target price is a price at which an analyst believes a stock to be fairly valued relative to its projected and historical earnings.

In economics and accounting, the cost of capital is the cost of a company's funds, or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate new projects of a company. It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.

Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors and shareholders. Enterprise value is one of the fundamental metrics used in business valuation, financial analysis, accounting, portfolio analysis, and risk analysis.

Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exchange Commission are usually bought and redeemed at their net asset value. It is also a key figure with regard to hedge funds and venture capital funds when calculating the value of the underlying investments in these funds by investors. This may also be the same as the book value or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding held by investors, thereby representing the net asset value per share.

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing to pay or receive to effect a sale of the business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest.

Valuation using discounted cash flows is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money. The cash flows are made up of those within the “explicit” forecast period, together with a continuing or terminal value that represents the cash flow stream after the forecast period. In several contexts, DCF valuation is referred to as the "income approach".

In economics, valuation using multiples, or "relative valuation", is a process that consists of:

Intellectual property assets such as patents are the core of many organizations and transactions related to technology. Licenses and assignments of intellectual property rights are common operations in the technology markets, as well as the use of these types of assets as loan security. These uses give rise to the growing importance of financial valuation of intellectual property, since knowing the economic value of patents is a critical factor in order to define their trading conditions.

The following outline is provided as an overview of and topical guide to finance:

The following outline is provided as an overview of and topical guide to marketing:

Return on marketing investment (ROMI) is the contribution to profit attributable to marketing, divided by the marketing 'invested' or risked. ROMI is not like the other 'return-on-investment' (ROI) metrics because marketing is not the same kind of investment. Instead of money that is 'tied' up in plants and inventories, marketing funds are typically 'risked'. Marketing spending is typically expensed in the current period.

Intellectual property valuation is a process to determine the monetary value of intellectual property assets. IP valuation is required to be able to sell, license, or enter into commercial arrangements based on IP. It is also beneficial in the enforcement of IP rights, for internal management of IP assets, and for various financial processes.

Premium pricing is the practice of keeping the price of one of the products or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. Premium refers to a segment of a company's brands, products, or services that carry tangible or imaginary surplus value in the upper mid- to high price range. The practice is intended to exploit the tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction. A premium pricing strategy involves setting the price of a product higher than similar products. This strategy is sometimes also called skim pricing because it is an attempt to “skim the cream” off the top of the market. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market or when the seller cannot save on costs by producing at a high volume.

References

  1. ↑ Campaign for Independent Brand Valuation
  2. ↑ Knapp, Duane E. (2000). The Brand Mindset . New York: McGraw Hill. pp.  24–35. ISBN   0-07-134795-X.
  3. ↑ Geoffrey Foster (1 October 1989). "There's No Accounting for Brands". Management Today .
  4. ↑ Soto J., Tatiana (April 2008). Methods for Assessing Brand Value: A Comparison Between the Interbrand Model and the Bbdo's Brand Equity Evaluator Model (Thesis). Diplomica Verlag. p. 14. ISBN   978-3-8366-5872-0.
  5. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Salinas, Gabriella; Ambler, Tim (2009). "A taxonomy of brand valuation practice: Methodologies and purposes". Journal of Brand Management. 17 (1): 39–61. doi:10.1057/bm.2009.14. S2CID   167333325 . Retrieved 18 October 2020.
  6. ↑ Janet Hull, Marketing Society How marketers should use brand valuation Retrieved 16 March 2017
  7. ↑ Heather Farmbrough (16 July 1987). "Birkin's Brand of Ambition". Financial Times .
  8. ↑ Frank Zeccola (9 September 2009). "New Branding Trends to Watch: Former Omnicom Vice-Chief Birkin Says PR Trumps Others in Driving Brand Value, Points to Mobile and Experiential Marketing as Future Focus". Bulldog Reporter. Retrieved 16 March 2015.
  9. 1 2 3 Trent, Lindsey; Mohr, Jakki (2017). "Marketers' Methodologies for Valuing Brand Equity". The CPA Journal. Retrieved 18 October 2020.
  10. ↑ Dailly, Julian (29 July 2016). "What Coca-Cola's slide down global brand rankings really tells us". The Guardian. Retrieved 18 October 2020.
  11. ↑ Murphy, John (ed.) (1989). Brand Valuation – Establishing a true and fair view. Hutchinson Business Books, London. ISBN   0-09-174261-7.
  12. ↑ Debjoy Sengupta (23 May 2003). "Infosys Brand Value Up 3.18% In Fy03". Business Standard . Retrieved 6 April 2015.
  13. ↑ Chuck Pettis (2001). TechnoBrands: How to Create and Use ?Brand Identity? to Market, Advertise and Sell Technology Products. iUniverse. p. 211. ISBN   9781462099573 . Retrieved 6 April 2015.
  14. ↑ Boersma, J. M.; Van Weelden (1991). Understanding Brands. London: Kogan Page. p. 80.
  15. ↑ ISO 10668 and brand valuations: a summary | BVR's IP Management & Valuation Wire
  16. ↑ Fernando, Jason. "What Does "Market Approach" Mean?". Investopedia. Retrieved 2020-07-14.
  17. ↑ "Archived copy" (PDF). Archived from the original (PDF) on 2020-09-22. Retrieved 2020-10-19.{{cite web}}: CS1 maint: archived copy as title (link)
  18. 1 2 3 4 5 6 Clark, Ray. "Measuring the Value of Brands" (PDF). Retrieved October 18, 2020.
  19. ↑ Rocha, Mike (2014). "Financial applications for brand value". Interbrand.
  20. 1 2 Ritson, Mark (22 April 2015). "What is the point of brand valuations if those doing the valuing are so off target?". Marketing Week. Retrieved 18 October 2020.
  21. ↑ Juniper, Tony (9 September 2013). "How can brand valuation help business to account for natural capital?". The Guardian. Retrieved 18 October 2020.
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