Brand Valuation—Why and How to Do It

Why you need to conduct a brand valuation

There are two main reasons:

  1. Brand is a valuable asset

Brand is often seen as a cost, an expense, associated with advertising and indulgence. The brand budget is the first to be slashed when times are tough or other things compete.

In fact, brand is one of the most valuable assets of any company. This is true across industries, markets, B2B, B2C, for-profits and nonprofits. The value of intangible assets has risen exponentially since the 1970s, as we transitioned from a manufacturing to a knowledge economy. Over 90% of the stock market value of the S&P 500 now comes from intangibles. There are two major types of intangibles: Intellectual Property (technology, patents, and R&D) and brand. While IP represents the largest share of intangibles, brand accounts for most of the rest (a quarter to a third of total shareholder value according to our analysis).

If brand is a valuable company asset, it should be treated as such. This means invested in, put to work to generate revenues and profits and held accountable for results.

  1. The value of brand is largely untapped

Investors are constantly seeking the illusive ‘alpha’, the competitive edge that leads a company to generate additional revenue and profit growth and market share gain. McKinsey, Bain and other consulting firms have scoured the supply chain, which is mostly played out. Brand represents a hidden source of potential value, ‘brand alpha’, which very few companies have untapped. Some of the luxury goods brands have come close (for example, Louis Vuitton); most companies have a major unexploited opportunity. This is my purpose, and that of our brand consulting company, Presciant – to help companies unleash the full value creation potential of their brands.

How do you untap the hidden value of your brand?

The first step is to quantify the value that your brand is creating for your business today. For this you need to do a brand valuation.

Once you have a baseline and know what your current brand value is, you can then use the brand valuation model to identify the levers to pull to untap additional value from your brand. This may mean changes not only to your marketing strategy, but also to your operations, technology, talent and commercial strategies, as well as your innovation priorities. You can run scenarios to quantify the revenue and profit potential of different strategies, investment levels and budget allocation and determine which will generate the greatest immediate and lasting value for you at an acceptable level of risk.

This article, the first in a series about brand valuation, will address the first step – brand valuation. Succeeding articles will examine how to use the brand valuation model to identify how to accelerate business growth.

The different brand valuation methodologies

There are three main ways to determine the ‘what’ i.e. to get to a financial brand value number. Only one will also give you the ‘how ‘i.e.  identify the levers of brand value creation and enable you to run scenarios to discover what actions to take to maximize the value that brand can add to your business.

Each methodology has a number of different variations and permutations, some better than others. If you want details, the best source is the ISO 10668 standard for Brand Valuation.

  • Cost-based

The value of the brand is defined as the money that has been invested in it, or the cost of replacing or recreating it. It should be obvious, however that it’s possible to spend a lot of money on a brand without generating a lot of value. It might have been spent on the wrong things and most of it wasted. On the other hand, some marketers manage to generate a great deal of value from their brands with relatively small but well-directed investment. This approach is quite obviously invalid and should not be used.

  • Market or comparables based

Brand value is measured by looking at how much similar brands were sold or licensed for. There are two major issues with this. First, it’s very difficult, and often impossible, to find truly comparable transactions. Secondly, even if you do, you are highly unlikely to be able to discover how the comparable valuation was done, and whether it had any validity. The only empirical validation of a transaction value is that it was accepted as reasonable by both sides.

  • Income based

This method takes a standard business valuation model, based on projecting future earnings or cash flows and discounting them back to a net present value. The difference is that it values the portion of income which can reasonably be attributed to brand. This can be done through different types of analysis, including:

  • Price premium, the extra margin which the brand generates,
  • Volume premium, the additional revenues which result from customers preferring to purchase the brand over competitors
  • Residual earnings, the profit left over after a capital charge has been deducted for the other assets employed in the business
  • Royalty relief, the future royalty streams which the brand could generate if it was not owned but licensed (suffers from the same advantages and disadvantages as comparables analysis)
  • Comparison with the income of a product in the same category which is unbranded (the problem here is that everything, even store brands generate incremental value – think of Kirkland)

The income method is the only one which starts from the customer, and (when a price or volume premium approach is taken) analyses how good a job the brand is doing at influencing the purchase decision. It reveals how the brand drives value and identifies brand strengths, weaknesses and opportunities. Unlike the others, it is actionable. In our view, it is the only one that should be used.

How to do a brand valuation

There are 5 simple steps to producing a robust, yet simple and actionable brand valuation:

  1. Model design

Define what the purpose of the brand valuation is. What do you want to use it for? What questions do you want it to answer? This determines how should segment the model:

  • What brand or brands are you valuing? Are you looking at the corporate masterbrand or an individual product or service brand?
  • Do you just need a global measurement of brand value and brand impact on financial results?
  • Or do you need specific results and actions by country, by product division, by different customer and other stakeholder segments?
  • Which competitors should be included in the analysis?
  1. Financial model
  • Involve the finance or strategic planning function. Work with them to obtain financials for each segment included in the brand valuation model. You will need a relatively simple set of data:
  1. 3-5 years revenue profit and cash flow forecast data
  2. Calculation of perpetuity i.e. the revenue and profit growth assumptions to use beyond that
  3. The company WACC (Weighted Average Cost of Capital)

 

  1. Build the financial model using the approach the finance department prefers, generally:
  • Either a Discounted Cash Flow model or
  1. Economic Value Added (EVA model)

At this point you will have a standard business valuation model; nothing to do with brand.

  1. Brand driver analysis
  • Design and conduct a quantitative brand research study (aided or not aided by AI) among customers prospects and other stakeholders as relevant Or, if a robust brand health study already exists, obtain the raw data
  • This study should include:
  • Drivers of decision making (demand drivers)
  • Brand and competitor brand performance on drivers
  • Key metrics of brand appeal (e.g. preference, advocacy, brand love)
  • Key metrics of strength
  • Analyze and rank the drivers of demand in order of importance
  • These will include factors such as product quality, customer service, availability and price
  • Regress or correlate levels of brand appeal against the drivers. This is the same approach as used in customer satisfaction research, the difference is that the dependent variable is ‘brand’ not ‘satisfaction’
  • This will give you both the overall role of brand in driving demand, and the brand’s impact on each driver
  • The analysis should be done for each segment included in the model and for the brand and competitors
  • The output is a quantitative measurement of the contribution of the brand to driving earnings or cash flows. The logic is:
  • The customer decision to select the brand over competitors drives 100% of revenues
  • This gives you the percentage of future revenues or earning streams that can be reasonably attributed to brand.
  1. Brand discount rate
  • Start with the discount rate used by the company.
  • You can stop there, but we consider it best practices to add on a specific factor related to the risk of the brand
  • Create a spreadsheet model of the strength of the brand compared to competitors.
  • From a financial point of view, the level of brand strength equates to the level of attached to the future cash flows attributed to brand
    • The model should include metrics which measure both the quantity of the brand (i.e. how present it is in the marketplace), and the quality of the brand (e.g. level of customer satisfaction).
  1. Brand valuation
  • Using a standard financial valuation approach, apply the brand risk rate to the portion of future earnings or cash flows attributed to brand
  • Discount it back to a net present value

This gives you a lot.

  • The overall value of the brand
  • Brand strengths, weaknesses and opportunities
  • Competitor brand strengths and weaknesses

But this is just the beginning, the foundational piece. Once you have the brand valuation model in place, you can then ask it questions, run scenarios and link brand strategy and investment options to financial ROI.

This strategic application of brand valuation (the part we love the most!) will be the topic of my next article.

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