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BRAND VALUATION

APPROACHES
Brand Valuation Approaches:
Overview
Description Comment
Price premium Values a brand on the basis of Practical approach
valuation
the premium consumers are Neglects margin perspective
willing to pay for it
Royalty-based
Establishes brand value as Royalty rates difficult to
valuation net-present value of (likely) obtain
annual royalties

Brand margin Derives brand value from Reflects a brand's net earnings
valuation brand profitability (brand value to its owner
revenue minus brand Relatively complex
investment)
Brand discounted
Values a brand by discounting Establishes net present value of
cash flow valuation total net cash flows brand
attributable to the brand over Dependent on identification of
lifetime of brand discount rate and of future
Discounted cash flow revenue
Detailed and informative
Interbrand approach
valuation approach High degree of subjectivity
Includes market, brand
strength and legal aspects in
analysis
PRICE PREMIUM VALUATION

Brand premium approachdescription Brand premium approachassessment

The brand premium approach establishes brand The brand premium approach provides a financial
value based on the premium consumers are willing value for tracking purposes
to pay for a brand relative to a non-branded product
Easy to calculate at frequent intervals
Information readily available (also for
Brand value = Price premium x volume competitors)
Summed over categories Outcome similar to more complex methods
with regard to ranking
Volume-premium change analyses help
understand market dynamics and possible
A non-branded benchmark does not always
growth strategies
exist
- Proxy benchmark price = average of
three lowest price competitors but must be used with some caution
(joint market share > 1.5%)
Absolute values change depending on
benchmark and base year
Neglects level of brand investment, i.e., a
margin perspective
ROYALTY-BASED VALUATION

Royalty approachdescription Royalty approachassessment

The royalty approach establishes brand value as the The royalty method has been used extensively in
net present value of the annual royalties the the valuation of intellectual property but is less
company could hope to receive if it licensed the suitable for brand valuation due to several reasons
right to use the brand
Royalty rates uncommon in most markets
(owners will want to exploit successful
brands themselves)
Brand value =


(Royalty rate x sales)n Often only covers small fraction of total
(1+r)n brand sales
Royalty rate (expressed as % of annual sales)
n=I
dependent on several conditions Generally reflect market conditions markedly
different from brand's main markets
- type of market (often underdeveloped)
- agreed level of advertising and
marketing expenditure
- minimum sales level
- margin included
BRAND MARGIN VALUATION
Brand margin approachdescription Brand margin approachassessment

The brand margin approach values a brand's Brand margin approach is a more "correct"
earnings reflection of the value of a brand to the company
Brand value = Brand revenue - incremental Values a brand's net earnings
brand investment

but requires too detailed and often not available


Brand revenue information
Result of price premium and volume Difficult to separate brand investments from
other investmentsparticularly in multi-
Using brand premium approach
brand company
Limited data availability especially for
Brand investment competitors
Sum of all brand-related costs Necessary to make major assumptions
which consequently make the outcome
Includes ATL, BTL, incremental product
questionable
costs (product quality, R&D) as well as
brand-related investments in sales,
distribution, etc.
Brand BRAND MARGIN
VALUATION:

Related Earnings
RM - R = QM(PM - CM) - Q(P - C) - MKTG - R&D - IMP - INV

Marginal revenue (RM-R) from a brand has three


sources
A demand (QM) which is higher than that (Q) of an identical
product with an unknown brand
An eventual price (PM) which is higher than the price P of an
equivalent unbranded product
Production and distribution costs (CM) which are lower (due to
the economies of scale) than those (C) of an unbranded product
from which should be subtracted

The cost of marketing the brand (MKTG)


R&D costs
Taxes on the excess income (IMP)
Return on capital invested (INV)
BRAND MARGIN VALUATION:
Brand Sensitivity Method
Brands do not matter for everybody
Some buyers base their spending on price or availability
of products
The Brand Sensitivity method for calculating
brand-related earnings takes this into account
SPM = [RM - (t x ATM)] x Sensitivity x Awareness
RM is the total income generated by the brand
t is the average return on capital
ATM is the tangible assets used for the brand's activities
Brand sensitivity is calculated by asking consumers
questions on the importance of the brand to their decision
Awareness captures the percentage of consumers who
know the brand in question
BRAND DISCOUNTED CASH FLOW
VALUATION
Brand DCF approachdescription Brand DCF approachassessment

Brand DCF approach applies same Apparently "exact" financial measure of brand
methodology as company DCF values
Provides a strong link to company cash flow
and total shareholder return


Brand (Free cash flow)n
Value
n=1 (1 + r)n But too many assumptions required with too little
= added value
Assumptions concerning the lifetime of the
brand, all future cash flows and the right
Brand related earnings discount rate

+ Depreciation of brand assets Severe data separability issues
+ Interest payments - How to separate brand-related earnings
+ Reserves (due to brand) from
Investment in brand assets non-brand related?
- Are brand assets at all accounted for?
- How have brand investments been
= Free cash flow of brand financed?
- Brand related part of reserves?
Calculation of competitive brand values
almost impossible
INTERBRAND'S VALUATION
METHOD
Interbrand approachdescription Interbrand approachassessment

Interbrand uses an "economic use" valuation The Interbrand method is detailed and informative
but has some limitations
A brand can be valued by assessing its net
contribution to the current owner in its current Can hardly be integrated into a tool to be
use now and in the future used on a more frequent basis
Valuation consists of 4 elements Difficult to calculate the brand value of
competitors due to requirement for detailed
Intangible earnings are isolated through a
company information
detailed Financial Analysis
High degree of subjectivity when calculating
A Market Analysis establishes the Role of
brand value
Branding Index (RBI) indicating the
importance of branding in the market being Consumers' view of a brand not considered
examined
Cost of offering a brand is not included
- brand earnings equals intangible
earnings times RBI
The Brand Strength Analysis shows to what
extent brand earnings can be realized over a
longer period of time
The legal situation of the brand is assessed in
the concluding Legal Analysis

Source: Interbrand (1997).


INTERBRAND'S VALUATION
METHOD
Stage 1: Stage 2: Stage 3:
Financial analysis Market analysis Brand Strength Analysis

$
Operating earnings
x % Role of Branding Index
/ %
Discount factor
- Charge for tangible
capital

Earnings from intangibles Brand earnings Discounted cash flow

Stage 4: Legal analysis

Brand value = Value of discounted cash flow to year 5 + estimated residual


value after year 5
Source: Interbrand (1997).
INTERBRAND'S VALUATION
METHOD: Financial Analysis
Approach Example

Aim Gross Sales


Accurate and reasonable cash flow
Less costs of: Duties
forecasts based on reliable historical
Discounts
data
Production
Method Distribution
Selling
Intangible earnings are derived from
Marketing
gross sales by deducting all tangible
Tangible asset replacement/
earnings
depreciation
Problems Central Overheads
Financing charge for
Data problems, e.g., can all costs be tangible assets employed and
allocated precisely? working capital employed
Forecasting problems, e.g., how
accurate/ how far into the future can Exclude: Amortization of intangibles
estimates be made? Extraordinary items
Access to detailed internal company Resulting in: Fully absorbed intangible
information is required earnings
Brand value of competitors cannot be
calculated easily
Source: Interbrand (1997).
INTERBRAND'S VALUATION
METHOD: Market Analysis
Approach Example

Aim RBI's for selected industries


Identify what proportion of intangible
earnings can be attributed to the brand Perfume 90-95%

Method PCs 65-75%


Drivers of competitive success are
analyzed and weighted on a Luxury goods 70%
percentage scale
Importance of brand for each driver is
judged on a scale from 0 to 5 Food and drink 55%
Role of Branding Index =
(importance of driver x importance Financial services 30%
of branding)
Brand earnings = intangible earnings x Automotive 30%
RBI
Problems Retail 15%
Judgments are highly subjective
Must be done within a homogenous Pharmaceutical 10%
market or product segment
Utilities 0%

Source: Interbrand (1997).


INTERBRAND'S VALUATION
METHOD: Market Analysis
Retail Gasoline U.K. Retail Gasoline U.S.
Brand = Role of Brand = Role of
Driver Weighting x Weighting x
dependence branding dependence branding
Location 31 % 0% 0% 27 % 0% 0%
Network 12 80 10 8 60 5
Price 25 0 0 16 0 0
Site Design 3 60 2 3 60 2
Site Cleanliness 3 40 1 3 40 1
Related Services 3 20 1 3 20 1
Other Services 6 20 1 8 40 3
Promotion 6 20 1 5 20 1
Advertising 5 100 5 4 100 4
Quality of Product 3 100 3 14 100 14
Credit Acceptance 2 40 1 8 70 6
Premium Gasoline 2 40 1 1 20 0
100 % 26 % 100 % 37 %

Weighting the relative importance of the business driver for the business assessed through customer research
Brand Dependence the importance of branding in that driver
RBI The importance of branding to the business

Source: Interbrand (1997).

Copyright 2003 INSEAD, Fontainebleau, France. 12


INTERBRAND'S VALUATION
METHOD: Brand Strength Analysis
Approach Example

Aim Criteria for assessing brand strength


Establish the likelihood that the brand
will actually generate forecasted Market (maximum score: 10 points)
earnings, i.e., build risk profile of Stability of the market (technological
brand progress, fashion changes), entry
Method barriers,
The strength of the brand is valued Stability (maximum 15 points)
along 7 key dimensions History of brand, consistent brand
Each key dimension is broken down management,
into sub-categories Leadership (maximum 25 points)
The overall brand strength figure is Market dominance, influence,
used to determine the discount rate Internationality (maximum 25 points)
The discount rate is then applied to Ability to break national and cultural
brand earnings barriers,
Trend (maximum 10 points)
A leading international brand scores
around 70 points (out of 100), an Long term trend of the brand,
average brand achieves 30-40 points Support (maximum 10 points)
For global brands a brand strength Brand investment: amount, quality,
analysis is needed in every market consistency,
Protection (maximum 5 points)
Brand strength is assessed from a
management, not a consumer Legal status,
perspective
Source: Interbrand (1997).
INTERBRAND'S VALUATION
METHODYear -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Net Sales 440,0 480,0 500,0 520,0 550,0 580,0 620,0 650,0
Operating earnings 66,0 72,0 75,0 78,0 82,5 87,0 93,0 97,5

Tangible capital employed 220,0 240,0 250,0 260,0 275,0 290,0 310,0 325,0
Charge for capital (5%) 11,0 12,0 12,5 13,0 13,8 14,5 15,5 16,3

Intangible earnings 55,0 60,0 62,5 65,0 68,8 72,5 77,5 81,3
Brand earnings (75%) 41,3 45,0 46,9 48,8 51,6 54,4 58,1 61,0

Tax rate 33% 33% 33% 33% 33% 33% 33% 33%
Tax paid 13,8 15,0 15,6 16,3 17,2 18,1 19,4 20,3
Post-tax brand earnings 27,6 30,0 31,3 32,5 34,4 36,3 38,7 40,7
Discount rate 15%
Discount factor 1,0 1,15 1,32 1,52 1,75 2,01
Discounted cash-flow 31,4 28,3 26,1 23,9 22,1 20,2

Value to year 5 152,4


Annuity 135,3
Growth 0%
Brand value 287,7

Source: Interbrand (1997).


MANAGING BRAND VALUE
Take a comprehensive approach to brand value
Brand value=net present value of brands future cash flows

Determine future sales volume and prices

Additional value creation through the option to create brand
extensions
Perceptual variables at the level of the consumer underlie brand
value

Need to measure and quantify levels of awareness, attitude,
Identify and quantify sources of value creation

Tangibles such as product features or sales outlets

Intangibles such as service quality and staff morale
Understand and map how the resources interact with each other
Establish a systematic and dynamic perspective on the
relationship between brand value and its sources
CONCLUDING COMMENTS
Copying best practice doesn't always work
Brands have different market positions and belong to
organizations that have different skills
Perceptual variables are critical and should be
quantified
They begin moving in new directions long before classic
financial measures, and are much better strategic indicators
A brand has value, but not just one value
The earnings of a brand are influenced by the way it is
managed as well as by the strength of competing brands
A brand may have different values to different firms
Short-term measures can destroy long-term value