by Joanna Seddon, Managing Partner, Presciant and Nikhil Gharekhan, Managing Partner, Presciant
How should you use brand valuation? Brand valuation should drive strategy.
I hate the term “brand valuation.” Not that there is anything wrong with it—there isn’t—it’s perfectly correct. But it gives completely the wrong idea. It is associated with a fixed, point-in-time number. That is the least interesting part of brand valuation and absolutely not the point of it.
I’m partly to blame as the creator of one of the major brand valuation rankings, the BrandZ ranking of the world’s most valuable brands. The problem started with analysts and accountants, who use brand valuation mostly for tax accounting purposes. But it is the rankings that have done the most to spread the idea that it’s all about the number. This could not be further from the truth. Brand valuation is not about a number. The number is only useful in that signals to CEOs, CFOs and the financial community that brands matter.
Brand valuation is a strategic tool for identifying how to grow the value that the brand can add to your business. This is why I tend to prefer the phrase “brand financial analysis.” Here are the key ways to use this kind of analysis:
Different ways to use the brand valuation model
Use brand valuation models to optimize strategy and drive financial growth for the company. Here’s what marketers can do with brand valuation.
1. Brand strategy
- Brand purpose & positioning: Given the diagnostic nature of a proper brand valuation, marketers can identify the revenue-generating decision-factors and attributes the brand needs to address. They can use the tool to quantify the potential financial value gained by different positioning options and select the financially optimal brand purpose & positioning.
- Brand architecture: By understanding the relative contribution to financial value of the master-brand and sub-brand, marketers can optimize the use of these brands and the relationships among them. They can also apply the brand valuation framework to optimize brand portfolios through a financial value, brand equity, and growth lens. The tool allows marketers to develop brand transition strategies which will mitigate risk and generate greatest value.
- Customer experience: While traditional research can identify levers of customer experience, incorporating those levers into a brand valuation framework can quantify how they contribute to financial value. Armed with this knowledge, marketers can prioritize investments across touchpoints according to expected financial returns, and gain increased payback from investment in customer experience.\
2. Brand leverage
- M&A: Brand valuation is an essential tool to maximize financial outcomes in transactions such as mergers, acquisitions, divestitures and IPOs. During deal sourcing, it allows executives to identify target companies that will create greatest financial uplift through pro-forma brand value analysis. During due diligence, it gives companies an edge in negotiations with a brand value assessment of the target. And post-closing, it helps identify optimal brand migration strategies based on financial impact.
- Alliance and sponsorship strategy: The framework can be used to identify which other brands to associate with using robust brand value-based criteria. Marketers struggle to demonstrate the returns from sponsorship investments in terms that convinces their CFOs. Brand valuation can measure sponsorship ROI in financial terms.
- Brand licensing: Marketers often determine licensing rates using comparables or historical precedents. With brand valuation, they can quantify the true intrinsic value that their brand adds to a partnership and determine the most favorable licensing rates and royalty payments from third party licensees, with credibility during negotiations. Organizations can also identify appropriate rates for a brand holding company strategy, or internal charge back of marketing department services.
3. Brand investment
- Marketing investment: Brand valuation goes beyond econometric approaches by helping marketers prioritize marketing investment according to short-term and more enduring returns. They can determine optimal marketing budget levels and allocation across products, brands, segments, and geographies. The approach establishes an ongoing decision support tool for business units in brand and marketing investment.
- Business case: By stating the impact of brand in finance language, brand valuation helps marketers build a credible business case for investments in terms the CFO cares most about—revenue and profits growth, incremental discounted cash flows, and expected share price gains.
4. Brand measurement
- Establishing a brand valuation framework allows marketers to put in place metrics for ongoing tracking of the brand equity as well as financial value and demonstrate the success of brand and marketing initiatives in creating value. With this approach, marketers can communicate progress using financial metrics directly relevant to CEO, CFO and Board.
Brand valuation models the financial impact of brands
When done properly, brand valuation sets up a diagnostic measurement of the value that the brand is currently creating for shareholders. It’s easy to understand how this works if you think about what brand is. We define brands as a set of associations in people’s heads which lead them to prefer one brand over its competitors (sometimes called the “cupboard of memories”). It is this preference that drives purchase and creates an incremental stream of revenues and profits that the business wouldn’t have otherwise.
Brand valuation sets up a model of how the brand creates value by impacting the drivers of customer decision making. Once you have the model of brand decision making, the fun begins. You can say “What if?”, run different brand strategy and investment scenarios, and identify the one that will generate the greatest financial returns.
How you design the brand valuation model has a big impact on what you can do with it. It’s horses for courses – how in-depth you need it to be depends on the question you want it to answer.
Two factors increase the number of ways in which you can use brand valuation:
- Valuing competitors’ brands as well as your own. This makes it possible to compare the effectiveness your brand in driving profits with the competition and spot opportunities to get more value from your brand. It’s easy to do – you can collect customer data for their brands not just for yours.
- Segmenting the model by geography, product/service, and/or customer segment. You should always segment by geographical market, if you possibly can, since the strength and equity of any brand may vary dramatically. Segmenting by product/service and by customer segment enables to target more effectively.
Brand valuation in action
Here are some examples of how you can use the brand valuation model both to add more value to the existing business, and to drive growth through expansion into new businesses and markets:
1. Add more value to the existing business
The interesting thing about brand is that it impacts every factor driving the purchase decision. Brand is not just and often not mainly about marketing recall and impact. It is built by and impacts back on perceptions of product features and quality, customer service, technical support, and price (Walmart’s brand for example, is built on “everyday low prices,” luxury brands on ultra-high pricing). Opportunities to untap more brand value may be found anywhere in the business.
When our team conducted a valuation of the Bank of America brand, segmented to a regional level, it revealed a major brand weakness in retail banking customer service, especially in Texas and the Midwest. In Florida on the other hand, innovative customer service was driving more value. The answer – the bank developed a new training program for all customer facing employees based on the learnings from Florida and implemented it nationally. The valuation also spotted that the company had a very strong brand on a small credit card business. They acquired a large credit card business with a very weak brand and rebranded it to theirs.
Brand valuation of one of the largest U.S. airlines, Southwest, showed that extremely cramped seating was dragging the brand down and impacting value. We analyzed the financial upside of more comfortable seating against the high cost of taking each plane out of service for two weeks to remove seats. The answer – the ROI was there and the airline did it. The valuation also found that the brand was immensely appealing to (more profitable) business customers, but was dedicating almost all its marketing budget to (less profitable) leisure travelers. The answer – the company reallocated its marketing budget and started advertising to business customers.
2. Generate new sources of growth by taking the brand to new places
A brand is a unique and wonderful intangible asset in that it can travel to new places. You can take a great brand off the existing business put it on other products and businesses and generate many times more than its original value.
There are two types of places you can go:
- To new product and service categories – brand extension
- To new geographical markets – brand expansion
You can do it yourself, or delegate the task to others:
- Take on the full capital costs of making new products, establishing facilities in new markets and reap the full financial rewards
- License your brand to third parties and let them take the lion’s share of the income in return for a risk-free stream of brand royalties.
Valuation can be used as a tool for figuring out where you should take your brand to make the most money. You need to conduct some additional research, to determine your brand’s fit with new categories and markets, assess how it will stand up against established competitor brands. Brand valuation will assess how much share you can grab and how much money you can make so you can select the most lucrative opportunity.
Marketers are driving blind if they are relying only on consumer perceptions, clicks, visits, and leads to develop brand strategies, shape customer experiences or set investment budgets. Brand valuation provides the line of sight to business value that can help make the most financially sound marketing decisions. It isn’t just a static number. Use brand valuation to untap brand alpha, the financial potential of your business.
Contact us to explore what brand valuation can do for your business.