What is Brand Valuation? Financial Brand Equity, Methods and Choice

What is Brand Valuation?

Brand Valuation is the process of estimating the total financial value of a brand. It involves assessing the monetary worth of a brand’s influence on consumer behavior, market position, and overall contribution to a company’s revenue.

Problem of Brand Separability

Brands are seen as an important source of income for the company as it gives them a competitive advantage in the markets. Many factors are associated with brand value in terms of quality, brand awareness and communication. Brand value is the measurement of a brand’s financial worth which is calculated based on the price consumers are willing to pay for the brand and it is also affected by the worth of the competitor’s products.

Brand equity is the value of a product or brand through the perception of customers and their experiences with using the brand. Brand equity is seen as the belief, ideological values, impressions, associations and attitudes that are created and fixed in the minds of the people connected with the brand. Brand equity changes perceptions of brand value.

In the words of Stephen B. Shepard, A great brand is a promise, a compact with a customer about quality, reliability, innovation and even community. And while the concept of the brand is intangible, brand equity is far from it.

Brand value and brand equity are intricately linked yet they represent different, attributes. Many business organisations prefer to separate the brands in the portfolio since it is effective in building brand equity for each brand that increases its appropriate value and does not have negative issues with the other brand. Several economists believe that just focusing on the attributes of brand equity does not guarantee sales that increase market share.

The performance of the brand can be seen by purchasing decisions made by the customers at the given price and market situation. Brand value is influenced by brand equity where the brand equity contributes positively in terms of increased revenues in favour of the brand. Brand value is also influenced by the brand scope, pricing decisions, positioning, segmentation and more.

Hence, it is seen that brands generate value for the business through the sales volume and profitability due to the various resources of the firm and by reducing costs. Brand value contributes to the business through its brand assets of trademarks, patents, channels and more and they are not related to customers directly. These assets help the organisation to create and leverage brand equity which is very important for the firm.

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Valuation of Brands

The brand valuation process is the monetary economic value that is expected from the brands that are used by the firm for managing their brands. Brand valuation is the total value of tangible and non-tangible assets of a business. It is the process used for calculating the overall financial value of a brand, which is calculated by the amount of money a person or company is willing to pay for it.

Brand valuation depends on brand equity, financial performance of the brand, customer perception and more. Brand valuation creates a framework for measuring the key drivers of the brand and the brand is empowered by various criteria and interests that add value to the firm.

For example, brand value of Amazon in 2018 was $150.8 billion. In terms of market capitalisation and revenue, Amazon is the largest Online business.

According to Ajimon Francis, the Indian head and CEO of global brand consultancy, Brand Finance, “It (Brand Value) is a measure of several factors such as the loyalty of customers, the ability of a brand to keep offering newer products and technology and the connection with consumers, who give it a premium.”

Brand valuations are used by the firms to measure their return on brand investment and for developing the right investment strategies for the portfolio of brands. Brand value is the financial worth of the company and its assets and it is used for many purposes by the company.

It has a significant role to play during:

• Mergers and acquisitions
• Licensing of brands
• Financing
• Brand reviews
• Budget and allocations
• The balance sheet of the company

There are three main methods used for defining brand valuation, which are:

• Cost-based approach
• Market-based approach
• Income-based approach

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Financial Brand Equity

The strategic role of a finance organisation is to deploy assets and resources for the best business financial returns and also for managing the risks involved. Brands are important assets of a company and brand equity provides value to the company where the firms with positive brand equity can charge high premiums for the products.

Since a brand with positive brand equity is preferred by the customers and is well recognised it helps with increasing the market share. Being the main component of intangible assets, the brand equity gains a competitive edge due to differentiation from others and it determines the market value of a firm. For maximising the impact of brand equity on the financial results, firms must align their business drivers and marketing metrics.

From the business point of view, the benefits of a strong and recognisable brand are:

• Premium pricing and higher margins
• Increasing the value of the company
• Stock market performance
• Improved financial ratios

The valuation of brand equity has several methodologies and the commonly used method for calculating brand value is done by predicting future earnings derived from the brand and calculating the net present value which helps with accounting for the brand assets on the balance sheet.

It includes the steps:

• Financial analysis: The initial step involves the identification and prediction of the revenues generated from intangibles concerning the individual brands or the entire brand portfolio. The analysis is divided into different segments of markets, customers and distribution channels. The method is similar to the net Economic Value Added (EVA), where the cash flow from an opportunity is adjusted for the cost of resources used for generating the cash flow.
  
  
• Brand contribution: The next step is used for assessing the contribution of the brand to the demand and the preferences and association metrics are used for determining the proportion of intangible revenues connected with the brand.
  
  
• Brand value: The last step calculates the net present value of the expected earnings which is discounted by a rate that shows the risk of the future earnings. The discount rate takes into consideration the strength of the brand that helps enhance and speed the cash flow.

For example, how much of the overall sales in your industry is your brand taking in. The higher the percentage, the higher the brand value.

Brand equity is the overall measure of the brand strength which consists of the following metrics:

• Knowledge metrics: This measure a brand’s awareness and functional as well as emotional associations through the many stages of brand recognition.
  
  
• Preference metrics: These measures a brand’s competitive position in the market and how it benchmarks relative to rival brands.
  
  
• Financial metrics: This measure a brand’s financial value through the various parameters of:
  • Market share
  • Price premium
  • Revenue generation
  • Transaction value
  • Lifetime value
  • Growth rate

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Brand Valuation – Methods and Choice of Brand Valuation

Brands are valuable and intangible assets of the company and the brand value is determined through a combination of many direct and indirect processes. The direct process is determined by a price based on the investment made for the brand.

The indirect measurement depends on various variables such as the awareness of the brand, sources and the components involved with the brand image. Many studies have been used for finding the value created by the brand as a consumer brand or a corporate brand or maybe as a combination of both.

Brand valuation is not considered as a mainstream practice, but instead a niche. There are traditional methods available to measure the value of a business, but to value the Brand categorically there is a need to understand the modern ways which include measuring various attributes of a brand such as clarity, Protection, Commitment, Responsiveness, Authenticity, Relevance, Differentiation, Consistency, presence & understanding and assigning value to these attributes in monetary terms. There requires the experience of the valuers who can perceive and attach a monetary value to the intangibles.

There are several steps involved with forecasting and creating brand valuation models, which are:

• Identifying intangible assets and properties that contribute to the company’s brand assets
• Defining the non-brand assets and resources needed by the business for generating profits, cash flows and revenues for contributing to the financial performance and value
• Using valuation techniques for quantifying the value of the brand assets based on the cost, income and market approaches

In the words of Rani Cohen, Chief Marketing Officer Brand value is the ‘perceived value’, and how often people will choose one brand over alternatives. Brand value is important because when people perceive that a brand is distinct and aligns with their personal values, it’s a really powerful competitive advantage.

The financial worth of the brand is the monetary value and the market value assigned to a brand based on how the customers perceive the brand. This is calculated based on the current and future sales, as well as the potential for future growth.

In Terms of Costs

The cost-based method includes costs involved in creating or replacing the brand. For example, as per Statista.com, in 2021, Coca-Cola’s brand was valued at 87.6 billion U.S. dollars. It spends roughly 2.8 billion U.S. dollars on promoting its brands and products.

This method is further subdivided into the following methods:

• Historical cost method: The historical cost method is used at the initial stage of brand creation for brand valuation. The historical cost method isolates the direct costs and contributes to indirect costs. The approach includes the historical cost of making the brand as the actual brand value for the future.
  
  It is used on regular basis for the initial levels of brand creation at a time when the market applications and advantages cannot yet be identified, though the cost of creating a brand does not play a significant role in the present value.
  
  
  It can be explained through an example. If an accountant of ABC Ltd. spends two days a month preparing reports for the marketing department, is that a cost that can be capitalised for the brand? NO! The brand value as per the historical cost method of ABC Ltd. can be calculated by adding all the capital nature expenses of ABC Ltd.
  
  
• Replacement cost method: This method includes brand valuation by taking into account the investment and expenditure needed to replace the brand with a new one that provides equivalent utility to the company.
  
  For example, when replacement cost is used, the worth of a specific brand may be 100 crores, but the cost of launching the same brand is only 5 crores, with a success rate of 10%. Hence the brand value according to the replacement cost method is only 50 crores (5 crores*10).
  
  
• Conversion model: The conversion model approach takes into account the amount of awareness that needs to be generated for generating a level of sales. This technique could be based on conversion models that involve taking the level of awareness and the output so generated may be used for deciding the cost of obtaining new clients and would be the replacement fee of brand equity.
  
  For example, if based on experience, the accountant estimated that the amount of awareness for the current level of sales is 50 crores, this estimated cost can be used for two purposes; firstly to determine the cost of new customer acquisition and also for the determination of brand equity replacement cost. Here, the sum of the profit will equal the value of the existing awareness.
  
  
• Customer preference model: According to this method, the value of the brand is calculated by observing the growth in recognition and evaluating it to the corresponding growth in the market proportion.
  
  
  For example, if the customer prefers brand B over brand A, the value of brand B will be higher irrespective of the cost of launching or replacement cost. The brand value in this approach is calculated based on the market share of a brand.

According to Market Price

The other effective method for determining brand value is the market-price method which refers to the total amount that is spent for buying a brand and is connected with the maximum value that a customer is willing to pay for it.

This method is normally used for typically selling the brand and consists of following:

• Brand sale comparison method: This approach is also referred to as the comparable approach and it involves the valuation of the brand by analysing the current transactions concerning similar brands in the industry. In other words, it is the amount that the third party is willing to pay and the method takes the premium that has been paid for similar brands that the company owns.
  
  For example, a company is going to pay two times the sales for a brand that is similar to the subject brand. This multiple is then applied to those brands that are in the ownership of the company.
  
  
• Brand equity based on equity evaluation method: Brand equity can be divided into:   
  • Demand enhancing component: It takes into account advertising and results in rate premium profits.
  • Cost-benefit component: It is acquired by the brand during new product introductions and through economies of scale in distribution. The price of brand equity is anticipated using the financial market value.
    
    
• Residual method: This method is used when the marketplace capitalisation is subtracted from the net asset value. It gives the value of the intangibles which is the brand. For example, if a company’s net asset value is 50 crores and its market capitalisation is 10 crores, the brand’s value can be calculated by subtracting the market capitalisation from the net asset value. The brand value will be 40 crores (50 crores-10 crores).

According to Potential Earnings

The brand valuation method is carried out according to potential earning or the income-based method which is used for the valuation of future net income that is directly due to the brand for deciding on the value of the brand. This method of brand valuation is very effective since it provides the future ability of a brand and the brand value is useful when compared to the open market valuation.

The different strategies used with this approach are:

• Royalty relief method: This method of brand valuation is very popular and it includes the royalty that a company would need to pay for using the trademark if they wish to license the brand.
  
  In this method, the auditor decides on the underlining base for the calculation, determines the appropriate royalty rate and the growth rate and the predicted life and discount price for the brand. For example, Asahi India Glass paid ` 20.5 crore as royalty payment.
  
  
• Differential of price to sale ratios approach: The differential of price to sale ratios approach is used for calculating the brand value. It takes into account the distinction between the expected price to sales ratio for a branded corporation and the price to sales ratio for an unbranded organisation and multiplies it by the sales of the branded organisation. The approach is used mainly since the information is readily available.
  
  
• Price premium method: The method of the price premium is that a branded product must sell for a premium over a conventional product. The Price Premium Method calculates the brand value by multiplying the price differential of the branded product concerning a generic product by the overall quantity of branded income. It works on the assumption that the brand generates an extra advantage for consumers, for which they’re willing to pay a bit extra. ‰‰
  
  
• Brand equity based on discounted cash flow: The problem faced by this approach is that the Discounted Cash Flow does not rightly take into account assets that don’t produce the present cash flows. The benefit of this method is that it takes into account the increased working capital and fixed asset investments. The method can be used simply since the information is readily available.