Brand valuation:what it means andwhy it matters Over recent years, intangible assets have become more important tobusinesses operating in a wide variety of industries. This in turn has put apremium on being able to come up with credible ways to value brands.
David Haigh and Jonathan Knowles report
product, service or company with an emotional brands play an impor tant role in generating significance over and above its functional value and sustaining the financial per formance of is a substantial source of value creation.
businesses. With high levels of competition and excess capacity in vir tually ever y industr y, dramatic shift in the sources of value creation strong brands help companies differentiate from tangible assets (such as proper ty, plant, equipment and inventor y) to intangible assets why their products and ser vices are uniquely (such as skilled employees, patents, business systems and brands). This is reflected in the In an environment in which the functional differences between products and ser vices capitalisation. The aggregate market-to-book invisibility by the adoption of Total Quality ratio of the S&P 500 (the broad-based index of the 500 leading companies in the US) rose establishing meaningful differences between steadily from an average of around 1.4 at the beginning of the 1980s to around 3.5 in the mid 1990s. It accelerated rapidly in the late satisfy not just the functional requirements of 1990s to reach a peak of 7.3 at the height of your customers, but also their more intangible needs. It means understanding not just what your products can do for them, but also what A market-to-book ratio of 4.7 implies that the tangible assets of a business account for under 25% of the value that investors are different levels. Brands have three primar y functions – navigation, reassurance and account for the remaining 75%. In this context, it is not surprising that the topic of brand customers to select from a bewildering array valuation is generating significant interest.
of alternatives. Reassurance – theycommunicate the intrinsic quality of the product or ser vice and so reassure customers There is currently no standard classification for at the point of purchase. Engagement – they intangible assets. The pioneering work of Leif Edvinsson and Michael Malone put forward two basic classes of intangible asset: human capital and structural capital. Asked to distinguish them, Leif Edvinsson is said to have remarked: essentially functional assets into relationship “Structural capital is what is left when the human capital has gone home for the night”.
psychological connection between the brand and the customer. This ability to endow a number of different categories of intangible 18 Brands in the Boardroom IAM supplement No.1 asset. We believe that it is useful to identify highly-acclaimed book Value-based Marketing four broad categories of intangible asset that (2000), he wrote: “Many senior managers suppor t the superior market per formance of have noticed a paradox in how firms perceive patents, software, recipes, specific know- marketing at the ver y top of the agenda … At how, including manufacturing and operating including product trials data, information paradox will never be resolved until marketing • Business process intangibles: these include professionals justify marketing strategies in Professor of Marketing at Columbia University • Market position intangibles: for example, marketing people talk about what they do, the retail listings and contracts, distribution variables they cite aren’t the ones that the customer satisfaction and market share are all metrics, and they are nice to know about.
shareholder value, market capitalization, • Brand and relationship intangibles: these return on assets and return on investment. In include trade names, trademarks and trade marketing, people don’t talk that way.” symbols, domain names, design rights, trade We believe that two things are necessar y to dress, packaging, copyrights over associated suppor t the effective communication of the logotypes, advertising visuals, and written per formance: a more precise definition of the copy. In addition, associated goodwill (the brand asset; and a robust methodology for general predisposition of individuals to do quantifying the shareholder value that is business with one brand rather than another One of the great challenges in marketing is that there is no uniform definition of brand: industr y. Pharmaceuticals is an industr y in the term is used differently by different people which knowledge assets are of par ticular significance. Retailing is an industr y where assets. In our experience there are three different concepts all of which are sometimes developed by Wal-Mar t and Dell) are major sources of financial value. Airlines is an First there are logos and associated visual industr y in which market position assets (in elements. This is the most specific definition the form of landing rights at popular airpor ts) of brand focusing on the legally protectable, are primar y drivers of competitive advantage.
visual and verbal elements that are used to differentiate one company’s products and goods, luxury items, media and some types of consumer durables, brands may well represent demand for those products and ser vices. The the single most important form of intangible main legal elements covered by this definition asset. Even in sectors that are driven largely by technology and research, brands play a vital role in translating a company’s technical trademarks and trade symbols need to carr y competencies into market success. Effective associated goodwill in the minds of customers based on the experience or reputation of high increasingly important element of business strategy and determinant of the valuation This definition of brand is useful in the context of licensing agreements because it covers the core elements of the asset being marketing. Instead it has given rise to what Peter Doyle, the former Professor of Marketing at War wick University in the UK, has dubbed owners, academics and practitioners often the “marketing paradox”. In the preface to his Brands in the Boardroom IAM supplement No.1 19 preference of other audiences to do business trademark and associated intellectual proper ty with the organisation. For example, the brand rights. Under this definition, brand is extended may favourably affect staff, suppliers, business to encompass a larger bundle of intellectual partners, the trade, regulators, and providers of proper ty rights. Marketing intangibles such as capital. The benefits of a strong organisational domain names, product design rights, trade brand are increased demand and distribution dress, packaging, copyrights in associated but also lower costs of materials, personnel, logotypes, adver tising visuals and written copy For the purposes of this article we refer to are often included in this wider definition. the first definition as trademark. The second definition we refer to as the brand. The third intellectual proper ty rights included in the definition we refer to as the branded business.
definition of brand ver y widely indeed. In fact,tangible as well as intangible proper ty rights have been referred to as integral components There are two critical questions to answer in brand valuation. The first is exactly what is being valued. Are we valuing the trademarks, second impor tant question is the purpose of products. The reason that some argue a larger the valuation. An impor tant distinction can be bundle of intangibles should be included in the definition of brand is because consumer loyalty is created over a long period by many Technical valuations are generally conducted for balance sheet repor ting, tax planning, Protagonists of a more holistic definition of litigation, securitisation, licensing, mergers brand ask whether the Mercedes brand would purposes. They focus on giving a point in time premium without the benefit of Daimler Benz valuation that represents the value of the design, engineering and ser vice. Similarly they trademarks or of the brand as defined above. incomplete without the Ranitidine patent. The purposes of brand architecture, por tfolio without the genuine recipe and production process. This more holistic view is consistent valuations are based on a dynamic model of with the opinion that brand is a much broader the branded business and aim to measure the role played by the brand in influencing the key And that takes us to the holistic company or We recommend that the star ting point for organisational brand. The debate as to which ever y valuation – whether technical or intellectual proper ty rights should or should commercial - should be a branded business not be incorporated into the definition of brand valuation. This provides the most complete often leads to the view that brand refers to understanding of the commercial context of specific logo and associated visual elements, A branded business valuation is based on a the larger bundle of visual and marketing intangibles and the associated goodwill are earnings for that business discounted at the appropriate cost of capital. The value of the branded business is made up of a number of tangible and intangible assets. Trademarks programmes of an organisation all provide a basis for differentiation and value creation by more comprehensive bundle of trademark and represent a specific value proposition and for valuing trademarks or brands as defined This is the broadest definition of brand. It We can look at historic costs – what did it stresses the need for consistent communication cost to create? In the case of a brand one can with all stakeholder audiences. Rather than just look at what it cost to design, register, and increasing the preference of customers for buying the company’s products and services the rights. Alternatively, one can address what they might cost to replace. Both the historic 20 Brands in the Boardroom IAM supplement No.1 method are subjective but we are often asked franchise with both trade customers and end to value this way because cour ts may want to In our experience, it is ver y impor tant to It is also possible to consider market value, express the final valuation number in context.
though frequently there is no market value for This means explaining exactly what has been intangibles, par ticularly trademarks and valued, using what method, and what the key brands. Generally speaking, therefore, the insights are as to the influence of the brand most productive approach to brand valuation method, of which there are a number.
In this context, it is useful to remember that First there is the price premium or gross value is a function of three primar y variables – profitability, growth and risk. Investors care about the level of free cash flow generated by generic business as the metric for quantifying a company (profitability), the prospects for the value that the brand contributes. However, increasing those cash flows (growth) and the the rise of private label means that it is often hard to identify a generic against which the Understanding the contribution of brands to shareholder value therefore depends on being Economic substitution analysis is another profitability, growth and risk. The traditional approach - if we didn’t have that trademark or brand what would the financial per formance of approach above) fails to recognise the full value-creating power of brands because it problem with this approach is that it relies on confines the impact of the brand to the price premium that the branded product is able to The difficulties associated with these two It is impor tant to understand the impact of a brand on four major audiences in order to quantify the scale of its financial significance.
Under a royalty relief approach we imagine suppliers, staff and investors/financiers. For each of these audiences we analyse both the trademarks but licenses them from another extent and the nature of the awareness and business at a market rate. The royalty rate is usually expressed as a percentage of sales.
capture the impact of these on the behaviour This is the most frequently used method of of that audience. With consumers, the impact valuation because it is highly regarded by tax of brand health drives both profitability and authorities and cour ts, largely because there growth. With suppliers and staff the impact of are a lot of comparable licensing agreements brands is evident in lower costs and therefore in the public domain. It is relatively easy to calculate a specific percentage that might be financiers, the benefit of strong brands is paid to the trademark or brand owner.
This broader perspective on the business is economic return to the intangible capital. This involves four principal steps. The first is an appropriate segmentation of the market to principal value drivers of the business and ensure that we study the brand within its relevant competitive framework. The second step is to forecast the economic earnings of behaviour and staff and supplier relationships.
the branded business earnings within each of As such, it makes a substantive contribution the identified segments. These are the excess to understanding the sources and scale of a earnings attributable to all the intangible company’s competitive position. It quantifies assets of the business. The third step is to the size of the asset that the brand represents and – perhaps more important yet – identifies determine what propor tion of total branded ways in which the value can be enhanced. business earnings may be attributedspecifically to the brand. The final step is todetermine an appropriate discount rate based Brands in the Boardroom IAM supplement No.1 21 Brand Finance plc8 Oak Lane, London, TW1 3PA, UKTelephone: +44 (0) 20 8607 0300Facsimile: +44 (0) 20 8607 0301 Brand Finance (USA) Inc.
1430 Broadway, 17th Floor, New York, NY10018, USATelephone: 646 345 6782Facsimile: 212 658
David David Haigh is chief executive officer of BrandFinance. He qualified as a char teredaccountant with Price Waterhouse in London.
He worked in international financialmanagement then moved into the marketingser vices sector, firstly as financial director ofThe Creative Business and then as financialdirector of WCRS & Par tners.
He left to set up a financial marketingconsultancy, which was later acquired byPublicis, the pan European marketing ser vicesgroup, where he worked as a director for fiveyears. David moved to Interbrand as Directorof Brand Valuation in its London-based globalbrand valuation practice, leaving in 1996 tolaunch Brand Finance.
David is a fellow of the UK Char tered Instituteof Marketing.
Jonathan Jonathan Knowles is managing director ofBrand Finance USA and a passionate believerin the impor tance of brands in creating bothcustomer and shareholder value.
Jonathan’s exper tise in integrating thefinancial and marketing perspectives on brandis the result of practising brand consultingfrom both the analytical and creativeperspectives. Prior to joining Brand Finance hewas senior vice president of BrandEconomics,a brand strategy and valuation business basedin New York. His previous role as head ofconsulting for Wolff Olins, a leading corporateidentity and brand consultancy based inLondon, provided the experience of brandconsulting within a highly creative environmentand acted as a counterpoint to his analyticaltraining with the value-based strategyconsultants Marakon Associates.



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