Original Article

Valuing brands and brand investments: Key learnings and future expectations
Received (in revised form): 16th March 2009

Ove Haxthausen
is a partner of Millward Brown Optimor based in New York. He heads up the groups nancial valuation practice. Ove has more than 10 years experience advising corporations on issues of brand and marketing strategy, and more broadly on corporate growth and shareholder value creation. His work spans from value driven brand and marketing strategy, to marketing spend optimization across brand portfolios, brand growth strategies and implementation, and advice on brand acquisitions, divestitures and brand portfolio management. Brand valuation and marketing ROI are critical components across a lot of Oves work. Before joining Millward Brown Optimor when the group was founded, Ove worked as a management consultant with Mars & Co. and McKinsey & Co; he also helped build the boutique marketing innovation consultancy Fletcher Knight. Ove holds a civil engineering degree from the Ecole Spciale des Travaux Publics in Paris, France and an MBA in nance from the Columbia Business School. Ove is Danish, but has spent most of his life in France and the United States.

ABSTRACT The paper discusses the most recent learnings from the brand valuation and marketing ROI work at Millward Brown Optimor. It emphasizes brands as a collection of perceptions that lead customers to be more likely to buy a branded product. The paper looks at the various business issues that brand valuation can address. It also discusses the different valuation approaches available, with a particular emphasis on the intrinsic value provided by the economic use approach. The three fundamental questions at the heart of our economic use approach are articulated, bringing the nancial, market insight and strategic brand valuation issues together in a coherent single framework for valuing brands. The relationship between brand valuation and marketing ROI is also explored, with an emphasis on the need to measure all effects of marketing through a Total ROI approach in order to fairly trade-off effects across different marketing activities. Finally, there is a look at what future trends for brand valuation and marketing ROI may look like.

Journal of Brand Management (2009) 17, 1825. doi:10.1057/bm.2009.12 Keywords: brand valuation; marketing ROI; marketing spend optimization; marketing strategy; brand investment; brand strategy

Correspondence: Ove Haxthausen Millward Brown Optimor, 909 Third Avenue, 8th Floor, New York, NY 10022, USA E-mail: ove.haxthausen@ millwardbrown.com

INTRODUCTION
The concept of commercial brands is not new. In its current form, it is arguably a product of the Industrial Revolution. With

the advent of mass manufacturing technology, it suddenly became possible to produce goods that were consistent in form and quality. With rail transport and the

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Valuing brands and brand investments

automobile, such goods could be widely distributed. Mass produced and distributed products created the basis for building brands because they provided the ability to consistently deliver on a brand promise. The advent of mass media then created the advertising industry that allowed for consistent communication of the brand promise to consumers and prospects. The mass brand was born. While brands have been around for over a hundred years, the idea of valuing them is only about twenty years old. It is only more recently that brands have been widely seen as assets separate from the products and services they represent.1 This idea of brands as stand alone, valuable assets, has opened the possibility for brand expansions and brand transactions. It has also created the distinction between brand-building activities and other business-building activities. This paper discusses the most recent learnings from the brand valuation and marketing returns on investment (ROI) work at Millward Brown Optimor. It starts out by examining what brands really are and why it is useful to value them. We then look at how brands drive value and discuss different approaches for valuing them. The relationship between brand valuation and marketing ROI is also explored. Finally, there is a look at what future trends for brand valuation and marketing ROI may look like.

perceptions and expectations in customers mind. It also creates perceptions and expectations with other constituencies, including employees, investors, suppliers and other stakeholders, such as the public at large. For our purpose, we focus primarily on the most fundamental way in which brands create value. We quantify the effects that current and future customers brand perceptions will have on their decision to choose that brand over another.2 Brand perceptions with employees, suppliers and other stakeholders translate into value to the extent that they either contribute to customers choice (through marketing initiatives for instance) or lower costs. Examples of brands impact on costs include employees accepting to work for a brand they regard highly for a lower pay, or suppliers extending better prices to be able to reference a specic brand among their customers. Investors brand perceptions have more to do with value realization than value creation. While it is customers buying behavior that creates revenues and prots for the branded business, investors brand perceptions will impact how that value is being realized in nancial markets. Depending on the objective of a brand valuation exercise, we may look at the difference between a brands intrinsic value and the value that is currently being realized by that brand in the nancial markets.

VALUATION SCOPE: WHAT IS A BRAND?

There is often confusion about what exactly a brand valuation is trying to achieve. Is it a value of the branded business? Is it a sum of past marketing expenses? Is it a valuation of customer loyalty? And so on. There are many different accepted brand denitions. One is A brand is a promise and the delivery of that promise, another is A brand is an identity and a reputation. A brands identity and promise creates

VALUATION OBJECTIVE: WHY VALUE BRANDS?

Most brand valuation literature tends to be very technical and process oriented. While a brand valuation is a nancial exercise that must be robust and thorough, it is important to keep in mind the underlying purpose of the valuation. Depending on why a brand is being valued the approach to the valuation may vary. The valuation is usually not an aim in itself. There is often an underlying business issue that needs to be

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addressed, and it is critical that that issue gets identied so that the brand valuation exercise does not just provide a number but actually addresses the business issue at stake. Brands are valuable because brand perceptions impact customers purchase choice. As such, brands are a source of competitive advantage. There are many contexts in which putting a value on a brand as a source of competitive advantage is important. Here are a few examples: Internal communications Being able to put a nancial value on a brand and establish that a brand accounts for a specic percentage of a companys share price drastically changes the role of the marketing function. From being a cost center, the marketing function is now the manager of one of the corporations most valuable assets, which has a direct impact on the companys share price. In a time of economic slump and cost cutting, Chief Marketing Ofcers often come to us to help them justify their role and budget as creators of shareholder value. Brand valuation is an ideal approach to make that point. Brand positioning and communication Brand valuation is not just about putting a number on a brand. In identifying the effects that brands have on driving purchase choice, we establish what attributes drive customer choice, and how a brand is aligned with each of these purchase drivers. We have helped many clients better align their brand positioning and communication with what matters most to customers and better differentiate the brand from key competitors. This is not always easy, particularly if a brand spans across multiple customer segments and product lines. Financial services brands

have been struggling with this. It is not easy to nd a common ground between what matters for a major corporation using a bank for commercial or investment banking services and what matters to retail customers with a bank account or a credit card. The trick is to nd common ground that is general enough to be relevant across customer and product segments while remaining grounded enough in the nancial services offering to be differentiating rather than too generic. Because our analysis is linked to nancial value, we can quantify the nancial potential of different brand positioning and communications options to identify the optimal brand strategy from a shareholder value creation standpoint; this is what is also referred to as a brands appropriable value.3,4 Brand value tracking and management Once a value has been put on the brand and a new brand strategy has been developed based on the opportunity identication resulting from the valuation exercise, the next issue is to track brand value. Brand value tracking and management ensures that new brand and marketing strategies deliver the expected results. Establishing a thorough brand value tracking and management program allows companies not only to improve the return on their brands but also to mitigate the risk and volatility associated with their brand assets.5,6 External growth As a company is looking to acquire new businesses, brand becomes an important consideration. Brands can justify a higher acquisition price, but only to the extent that the brand is maintained post acquisition. As businesses are integrated, brand architecture issues will arise related to the relationship between the acquired brand and the acquirer brand.

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Brand valuation establishes a nancial framework for quantifying brand architecture and brand strategy options related to business acquisitions. Brand licensing The basis for brand licensing is the assumption that by using the licensed brand, the licensee business will be able to acheive higher sales by impacting customers purchase choice. Brand valuation assesses that purchase choice impact and as such provides a way to assess the licensing fee that a licensee should pay a licensor for use of the brand. While a comparable transactions analysis is important to get an idea of what the market is typically expecting, a brand valuation exercise will provide a much stronger negotiation case by identifying how a particular brand impacts purchase choice and generates value for the parties. We often work with clients to bring a strategic perspective to their brand licensing activities. We begin by looking at brand permission and brand strength: Where do customers give the brand permission to go? Where is the brand perceived as strong? Then, we value the specic opportunities and help clients engage with potential licensee partners, while making a case for the brand.

BRANDS AT WORK: HOW DO BRANDS IMPACT VALUE?

From a practical standpoint, how do brands impact the purchase choice? A brand can command any combination of a price premium and a volume premium. Brand perceptions can lead customers to choose to buy a given brand at a higher price. Brand perceptions can also lead customers to just be more likely to buy that brand rather than another, at the same price. Brands can have different price/volume premium proles. A luxury brand, such as

Prada, commands a high price premium, but at the expense of a volume discount. On the other side of the spectrum, a lower price mass brand, such as Timex, commands a substantial volume premium but at the expense of a price discount. There are also brands that command both price and volume premiums, such as CocaCola. As brands grow, the price/volume premium equation may change. For a more mature luxury brand, there is a clear temptation to lower the price to get access to a larger but more price sensitive market, to spur growth. This road is frayed with traps. A key reason why a luxury brand is attractive in the rst place is that it is exclusive and expensive. One approach is new product introductions. Rather than lowering the price of existing goods, the brand introduces a line of lower-priced items, possibly under a sub-brand. In the early 1970s, the French jeweler Cartier launched les must de Cartier, lines of lower priced luxury items, to revitalize a declining luxury products market. While the strategy was initially successful, it subsequently degenerated with the introduction of items with too low a price point or too poor a brand t (Cartier cigarettes among others). Presence in lower end channels further exacerbated the problem. Many apparel and fashion brands now have their lower end sub-brands. One of the most wellknown examples is probably Ralph Lauren who has achieved a wide range of price points. For women, for example, the offering ranges from the lower end Lauren products sold in department stores to the high end Black Label designer products sold exclusively in Ralph Lauren stores. Hence, brand valuation is about assessing how brand perceptions can impact customers decision to buy a product or service by making them more likely to buy it or more likely to buy it at a higher price.

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BRAND VALUATION APPROACHES

How to value brands? Just like any other asset you can value brands based on costs, market comparables or future economic use. Attempts to value a brand based on the costs associated with building it are usually awed. The issue here is marketing ROI. As we will discuss later in this paper, marketing ROI can vary widely. Spending money unfortunately does not always lead to creating value, so valuing a brand based on costs associated with its building is a perilous exercise. Market comparables, when available, provide a good basis for checking more in-depth valuations. Brands are all unique, making valuations based on comparables less robust. However, comparables will, when used correctly, provide a valuation range supported by actual transactions in the market. This can be particularly useful when a valuation is performed in the context of a brand transaction, such as a brand sale or a licensing agreement. There are two types of market comparables approaches: Straight brand value comparables. These will usually require some analysis to adjust for the relative sizes of the brands underlying businesses. Royalty relief. The idea is to value a brand based on the estimated royalty stream that the brand could command if it were licensed out. This approach relies on establishing a royalty rate for the brand based on comparable royalty rates in the market. Economic use is the primary emphasis of our work and of this paper. The idea is to assess the economic impact that the brand has on the underlying business and to value the brand as the present value of the future cash ows it generates. Because the economic use brand-valuation exercise is based on an understanding of customer choice, the analysis has to be performed

at a segment level, so that segments where the brand is likely to play a different role in the purchase choice are valued separately. Market research as well as client interviews will provide a basis for establishing the optimal segmentation for valuation purposes. Practical considerations, such as nancial data availability, may also play a role. From a nancial standpoint, our approach is consistent with accepted industry norms for economic use brand valuation. For each business segment, the rst step is to build an underlying nancial forecasting model. Just like for any other forecasting exercise, we will have to determine the appropriate forecasting period as well as growth assumptions during that period and terminal value assumptions. The underlying issue here is the context in which the brand is being valued. Is the valuation assuming business as usual or are we assuming entry into new markets or segments? Are there any specic changes in market and competitor dynamics that the forecasts need to capture? How far ahead can we assume that the growth of the business will be different from the category growth? And so on. The forecasting period will typically reect the period for which we will assume that the business has a different growth rate from the category or where we will expect changes in protability relative to competitors. Terminal value assumptions will typically be based on average valuation multiples in the category when such multiples are available. Otherwise, they may be based on expectations of perpetual growth in the category. Starting with segment level free cash ows to all investors, we subtract the return expected by investors in the tangible assets of the business to calculate the economic prot on tangible assets. The question then becomes how much of that economic prot is due to the brand as opposed to other intangible assets. Economic prots are a sign of competitive advantage. Hence, we address the nancial question by asking the

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Table 1: The three fundamental brand valuation questions Financial Strategic Customer insight

What part of What part of What role does the business the business the brand economic prots competitive play in driving on tangible assets advantage is customer is attributable to attributable to choice? the brand? the brand?

underlying strategic question: What part of the business competitive advantage is due to the brand? In customer insight terms, that question becomes What is the brands impact on customers purchase choice? The equivalency between these three fundamental brand valuation questions is at the heart of our brand valuation approach (see Table 1). We address the customer insight question through market research. Statistical analysis of market research allows us to assess the impact that brand perceptions have on customers brand preference, looking both at volume and price impacts. The rst step is to assess the drivers of choice, both in terms of volume (what drives a customer to buy more of a particular brand) and price (what drives a customer to be willing to pay more for a particular brand). We then look at how the brand impacts each of these choice drivers. For instance, if one is looking to buy a car that is safe (safety being the primary driver of choice), one can do research on safety ratings and then pick the car that has the highest ratings. One can also pick a car whose brand one perceives as being the safest, based on advertising, word of mouth and other brand impressions. In the latter case, brand has a signicant impact on safety perceptions. Of course, there is some connection between the two If a car receives top safety ratings, the brand may be perceived as safe in the future, regardless of the cars subsequent safety scores. Because we are able to capture how brand perceptions impact each purchase driver, we are able to assess how well the

brand is aligned with what matters most in customers purchase decision. We can then identify and quantify opportunities for better aligning the brand with key purchase drivers, and for better differentiating the brand relative to its competitors. This is where our approach becomes much more than a valuation exercise, it becomes a brand strategy exercise informed by the nancial quantication of specic strategic options for the brand. Clients value this approach because it leads to specic, actionable insight on how to optimize the value the brand brings to the business. Once future prots attributable to the brand have been identied, these prots will be discounted to calculate the present value of future brand prots, that is, the brand value. This raises the issue of the discount rate to use. The question is: How volatile are the future prots generated by the brand likely to be? Or otherwise stated: How likely is the brand to be able to sustain its impact on customer choice in the future? As a starting point, we look at the underlying business cost of capital. We then adjust it to reect the relative risk of the brand. A benchmarking of the brand vs key competitors on metrics of brand size as well as brand quality allows us to score the brands strength. We look at competitive brand strength as a measure of the brands likelihood to sustain its competitive advantage in the future. This brand strength score is then applied to the business equity beta to adjust it within a range determined by statistical analysis. Beyond providing a brand discount rate, the brand benchmarking analysis is also useful in identifying the brands general strengths and weaknesses relative to competitors. This is critical input for future brand streategy direction, to ensure that brand impact can be sustained over time. Depending on the context of the valuation, the general approach outlined above can be adjusted. For instance, if the question is: Which part of the companys current

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market value can be attributed to the brand? we will start with the companys current market value, subtract the book value of tangible assets and then apply market research insight to assess the percentage of intangible assets than can be attributed to the brand. That value can then be contrasted with a full value potential achieved through a more thorough forecasting exercise to assess the percentage of the brands full value potential that is currently captured by nancial markets and determine a strategy for full realization of the brands value in the market. As a brand valuation expert, Millward Brown Optimor is a promoter of the importance of brands and brand value management in delivering and sustaining superior shareholder value. The publication of our annual BrandZ Top 100 ranking in the Financial Times is part of that effort. Our ranking shows the importance of true market insights, gathered through quantitative market research, in determining brand value. The ranking is based on publicly available nancial data, industry data from Datamonitor as well as market insights from the global BrandZ brand equity market research conducted annually by WPP. As such, we believe our ranking provides the best indication of global brand value available without access to proprietary company data.

MANAGING BRAND VALUE: OPTIMIZING BRAND INVESTMENTS

Once a brands value is known and a strategy has been put in place to optimize its value, the question becomes How much investment is needed and how do we optimize our marketing dollars by media channel, campaign, and so on? This is the marketing ROI problem. The rst step to addressing the ROI issue in a comprehensive way is to recognize the need for an ROI metric that at least conceptually captures all marketing effects.

Not all marketing activities have the same objectives. Certain activities, such as consumer promotions, are calls to action designed to generate immediate changes in purchase behavior. A price discount coupon may trigger the recipient to go to the store quasi-immediately for redemption. Other marketing efforts, such as advertising, are demand-building activities, which will have lasting impact on brand perceptions7 but may only impact purchase behavior at the next shopping trip, not immediately. Sales response modeling, the typical approach to marketing ROI, looks at direct effects of marketing activities on sales. It, therefore, does a good job at capturing the effects of call to action activities, but will not capture all demand-building activities. Trying to optimize marketing budgets based on traditional sales response modeling results alone will therefore typically lead to too much emphasis on price discounts and other promotional activities with the risk of destroying brand value. We have seen cases in consumer goods categories where there was a direct link between promotional activity and deterioration in brand perceptions and longer-term purchase intent. We address this issue through equity response modeling that looks at how marketing investments impact brand perceptions and then at how brand perceptions impact the sales that have not already been accounted for through more traditional sales response modeling.8 The analysis looks at the indirect effects on both volume purchased as well as price. We then look at how indirect equity sales effects decay over time, year over year. The combination of direct marketing effects with indirect shortand long-term effects provides what we call Total ROI, a fair basis for comparing different marketing efforts, calls to action as well as brand-building activities. Our equity response modeling provides a bridge between brand valuation and marketing ROI. While brand valuation looks

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at how brand perceptions at a point in time impact purchase choice, equity response modeling looks at how specic marketing activities impact brand perceptions and then purchase choice. Total ROI provides us with a fair crossmedia view of past marketing investment returns. The question still remains how to optimize future budgets. In order to answer this question, we develop spend optimization models that predicts sales and prots by brand and by category, respectively, based on marketing spend levels as well as other factors impacting sales, such as pricing, innovation levels, campaign quality, competitive actions and spend and so on. These models allow us to simulate optimal future spend levels across brand portfolios, product categories and marketing channels, based on any nancial objective: optimize revenues, prots, ROI, business value or any combination of the above. We can also constrain spend based on external budget imperatives. The models also allow exploration of what if ? scenarios What if the key competitor drops prices? How should our marketing spend respond to that? Should we also change our pricing? If marketing spend is ineffective for a particular brand, do we need to review the brand positioning or the campaign message? Beyond just business as usual spend optimization, these models become powerful strategic forecasting tools. For many clients, this is becoming a part of their annual marketing budget and strategic planning exercise. Our analysis takes a broad, strategic look at a complex brand and category portfolios, typically spanning some 15 to 25 brands and categories, and about ve different spend types for each of these brand/category entities. We are not trying to optimize in-year campaign deployment or provide tactical media planning insight, we are looking at broader annual buckets of spend to identify major opportunities for resource optimization across the portfolio.

THE ROAD AHEAD

We continuously strive to rene our analysis of how brands and marketing efforts impact nancial performance. Establishing a Total ROI metric was an important step for us in linking brand valuation and marketing ROI from a conceptual as well as practical standpoint. The road ahead will include further efforts to streamline the link between total brand value and the effects of specic marketing and brand-building efforts. Marketing ROI will become a much more strategic tool that will inform not just marketing budget planning but also brand positioning, pricing, innovation strategies and so on. A forecasting model, however sophisticated, will always have its limitations, which should be well understood from the start. Financial models will never replace strategic thinking but can help provide a robust framework for informing strategic choices. This is where brand valuation already is today and this is where marketing ROI is getting to, by providing the dynamic insight into how brand value is being created.

REFERENCES
(1) Madden, T.J., Fehle, F. and Fournier, S. (2006) Brands matter: An empirical demonstration of the creation of shareholder value through branding. Journal of the Academy of Marketing Science 34(Spring): 224235. (2) Hollis, N. (2008) The Global Brand. New York, NY, USA: Palgrave Macmillan, p. 69. (3) Leone, R.P. and Reggio, R.D. (2008) Chasing brand value: Fully leveraging brand equity to maximise brand value. Journal of Brand Management 16( January/February): 249. (4) Mizik, N. and Jacobson, R. (2003) Trading off between value creation and value appropriation: The nancial implications of shifts in strategic emphasis. Journal of Marketing 67(January): 63. (5) Abrahams, D. (2008) Brand Risk. Aldershot, England: Gower Publishing. (6) Haxthausen, O. (2007) Risk jockey. Marketing Management, March/April, 3538. (7) Dekimpe, M.G. and Hanssens, D.M. (1995) The persistence of marketing effects on sales. Marketing Science 14(1): 121. (8) Cain, P.M. (2005) Modelling and forecasting brand share: A dynamic demand system approach. International Journal of Research in Marketing 22: 203220.

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