measuring brand value

patrick collingssagacite

image by david mcchesney

as the contribution of brands has become appreciated so has the need to

value them

“...customer equity is the preamble of financial equity. Brands have financial

value because they have created assets in the minds and hearts of customers.”

Jean-Noël Kapferer

“...customer equity is the preamble of financial equity. Brands have financial

value because they have created assets in the minds and hearts of customers.”

Jean-Noël Kapferer

the value contribution of the brand

brief history of brand valuation

types of valuation models

review of four valuation models

the looming brand bubblein th

is s

essi

on

brand valuation is one type of measure, and a relatively new one

has risen in prominence as the brand’s contribution to the market capitalization of an

organization is appreciated

80% of Google’s $125 billion market capitalization is attributed to its brand

Coca-Cola2009 Rank: 1 (1 in 2008)2009 Brand Value: $68,734m (3%)

100 Best Global Brands

IBM2009 Rank: 2 (2 in 2008)2009 Brand Value: $60,211m (2%)

100 Best Global Brands

Microsoft2009 Rank: 3 (3 in 2008)2009 Brand Value: $56,647m (-4%)

100 Best Global Brands

GE2009 Rank: 4 (4 in 2008)2009 Brand Value: $47,777m (-10%)

100 Best Global Brands

Nokia2009 Rank: 5 (5 in 2009)2009 Brand Value: $34,864m (-3%)

100 Best Global Brands

33%average contribution to value of a company

15%average contribution to value of a company

in an emerging market

the rise of brand valuation

the valuation of brands started to emerge in the

1980s

photo by Youssef Abdelaal

Former UK-based Grand Metropolitan was the forefront of placing the value of

brands on a balance sheet

British firms used brand valuations primarily to boost their balance sheets

in 1988, UK food conglomerate RHM relied heavily on its brands to defend itself against a hostile takeover

treatment of acquired goodwill changes

the big difference is that brands are no longer amortized over their useful life

they can now claim indefinite life and their value assessed annually

better but no cigarjust yet

photo by Zach Rathore

brand valuation useful for

in mergers and acquisitions by more accurately assessing the value of the

various parties

decisions on business investments and performance by making brand asset comparable to other company assets

decisions on brand investments within a brand portfolio, market segmentation

or distribution channel

decisions on the cost of licensing the brand to subsidiaries or third parties

raising of funds by allowing brands to be used as collateral

but which brand valuation to usetherein lies the problem

2008 Brand $m Brand $m

1 Coca-Cola 66 667 Google 86 057

2 IBM 59 031 GE 71 379

3 Microsoft 59 007 Microsoft 70 887

4 GE 53 086 Coca-Cola 58 208

5 Nokia 35 942 China Mobile 57 225

in South Africa, Interbrand valued Vodacom’s brand at R6,5 billion and

Brandmetrics valued the brand at R21 billion.

the answer lies in very different approaches

valuation approaches

market research | financial analysis

market research financial analysis

financial segments into three

Cost approach - amount of money required to reproduce the brand

Market approach - also known as the comparable approach to similar

brand transactions

Income approach - argues that the value of the brand is the discounted

cash flow from future earnings attributable to the brand

four valuation models

Millward Brown

WPP

Y&R

Omnicom

TBWA

Interbrand Brand Metrics

“When given a monetary value, abrand increases its power as a business

driver and planning tool”

Joanna SeddonCEO Millward Brown Optimor

Collecting the data

Data for the evaluation is first drawn from the researched opinion of thousands of brands in 17 categories by knowledgeable consumers

and B2B customers across 31 countries

BondingThe brand’s advantages are unique:

“it’s my brand”

AdvantageThe brand is better than most brands

in the category

PerformanceThe brand is acceptable quality and

does what it is supposed to

Relevance The brand meets their needs

Presence They are aware of the brand

No Presence Have not heard of the brand

Data for the evaluation is also is sourced from Bloomberg, analyst reports, Datamonitor industry reports, and

company filings with regulatory bodies.

corporateearnings

brandedearnings

brandedintangibleearnings

branded earnings

branded intangible earnings X brand contribution

Portion of intangible earnings attributable to the brand, this percentage

originates from the consumer and B2B customer research

“The Brand Contribution is rooted in real-life customer perceptions and behavior, not spurious

‘expert opinion’: in some categories, brand is important — luxury, cars, or beer, for instance. In

categories like motor fuel, on the other hand, price and location play a very strong role.

Furthermore, as markets develop, consumer priorities and the role of brand may change.”

Millward BrownBrandZ 2009 report

branded intangible earnings X brand contribution X brand multiple

Growth potential of the branded earnings is taken into account. The multiple, that ranges between

one and ten, is derived from financial projections, market valuation and Voltage

BrandAsset Valuator (BAV) is Young & Rubicam's comprehensive global database

of consumer perceptions of brands: 350,000 consumers,19,500 brands, 44

countries, 173 studies since 1993

The BAV research is based on four key pillars: differentiation, relevance,

esteem and knowledge

DifferentiationMeasures the strength of the brand’s meaning and distinctiveness. Successful brands are strongly differentiated. The more differentiated, the more likely it will be used and less likely it is to be substituted.

RelevanceIf a brand is not relevant, or personally appropriate to consumers, it will not attract or retain them. Relevance powers penetration.

Relevance + Differentiation = Brand StrengthD

iffer

entia

tion

Rel

evan

ce

D>RThe most healthy brands

have greater differentiation than relevance. “Room to grow, brand has power to

build relevance”.D

iffer

entia

tion

Rel

evan

ce

D<RMore relevance than

differentiation equals potential commoditization. “Uniqueness has faded, price becomes the

dominant reason to buy”.

EsteemEsteem reflects popularity and quality. Esteem relates to how well a brand fulfills its implied or stated consumer promise. It requires differentiation and relevance to have preceded it, but it can outlive both of them

KnowledgeKnowledge captures intimacy and understanding, it is the end result of all the marketing and communications efforts and experiences consumers have had with a brand. Consumers understand and remember those brands that demonstrate high knowledge.

Esteem + Knowledge = Brand StatureE

stee

m

Kno

wle

dge

E>KMore esteem than

knowledge means “I’d like to get to know you better”.

The brand is better liked than known.

Est

eem

Kno

wle

dge

E<K

Too much knowledge can be dangerous. “I know you and you’re nothing special”. The

brand is better known than liked.

Brand Stature(Esteem & Knowledge)

Bra

nd S

tren

gth

(Diff

eren

tiatio

n &

Rel

evan

ce)

low high

high

BAV Power Grid

Brand Stature(Esteem & Knowledge)

Bra

nd S

tren

gth

(Diff

eren

tiatio

n &

Rel

evan

ce)

low high

high

Brand Stature(Esteem & Knowledge)

Bra

nd S

tren

gth

(Diff

eren

tiatio

n &

Rel

evan

ce)

low high

high

eBay

00

03

06

Brand Stature(Esteem & Knowledge)

Bra

nd S

tren

gth

(Diff

eren

tiatio

n &

Rel

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low high

high

Google

0603

http://www.thebrandbubble.com/explore/

give it a try at

Best known of the brand valuation methodologies. Created to find an

approach that incorporated marketing, financial and legal aspects

photo by Darren Hester

Interbrand starts by assigning sales to individual brands &projecting five years ahead

intangiblesintangibles

Identifies earnings attributable to intangible assets and identifies brand’s contribution, this multiple is known as the role of branding index

Future earnings are discounted to arrive at net present value

Discounts calculated with current interest rates and the brand’s overall risk

profile

Criteria Weighting Notes

market 10%brands in growing or established markets where consumer preferences are more enduring would score higher

stability 15%long-established brands in any market would normally score higher, because of the depth of loyalty they command

leadership 25% a market leader is more valuable: being a dominant force and having strong market share matters

profit trend 10%long-term profit trend is an important measure of brand’s ability to remain contemporary and relevant to consumers

support 10%brands receiving consistent investment and focused support usually much stronger, but quality of support is important

geographic spread 25% brands that have international acceptance and appeal are inherently stronger than regional or national brands

protection 5% securing full protection for the brand under international trademark and copyright law

“The final result values the brand as a financial asset. BusinessWeek and Interbrand

believe this figure comes closest to representing a brand's true economic worth.”

BusinessWeek

Developed by south african academics, adopted by TBWA’s Disruption consultancy,

now with Prophet

featured inkevin lane keller’s

strategic brand management

Applies an accounting definition of an asset - resources under the control of an enterprise that will generate future

economic benefits for the enterprise - to brands

economic profitstarts by calculating

(economic profit is the amount of after-tax profit a company earns that exceeds the cost of capital the company has used in operating the business)

uses the delphi forecasting techniqueto calculate economic profit owing to brand

called the resource recognition procedure

The resource recognition procedure starts with experts representing major

functions sitting with a facilitator to identify drivers of economic profit

1 supply chain management 10 marketing support

2 brand 11 market knowledge

3 control of costs 12 market dominance

4 consistent product quality 13 sales force

5 brand loyalty 14 high barriers to entry

6 margin management 15 procurement

7 human resources 16 process knowledge

8 customer relationships 17 innovations

9 pricing 18 leadership

Through an iterative process reduce list to 5 to 8 items and weight their importance. a score of between 0 and 10 to assigned to each item to indicate the influence of the

brand

1 supply chain management 10 marketing support

2 brand 11 market knowledge

3 control of costs 12 market dominance

4 consistent product quality 13 sales force

5 brand loyalty 14 high barriers to entry

6 margin management 15 procurement

7 human resources 16 process knowledge

8 customer relationships 17 innovations

9 pricing 18 leadership

brand premium profitthe scores are summed to produce

which is the portion of economic profit attributable to the brand

media titles 80 - 90 %

fmcg 65 - 75%

retail 63 - 67%

insurance 50 - 55%

b2b 45 - 60%

energy 45 - 50%

portion of economic profit attributable to the brand

brandmetrics takes a long viewthen

using category expected analysis andbrand knowledge structure

The ability of a brand to sustain economic profits is a function of its category

Category evaluated according to longevity, stability, competitive activity, vulnerability

Criteria scored and assessed to produce years out of 40 for notional dominant brand and out of 10 for marginal brand

c a t e g o r y e x p e c t e d l i f e a n a l y s i s

Expected lifein years

40

0

Expected life fordominant brand

Expected life formarginal brand

Market research determines awareness and associations, reduced to score out of 100

Highest scores and lowest represent notional dominant and marginal brands, mathematically transformed into years

Brand being evaluated scored in the same way to produce unique number of years for brand

brand knowledge structure analysis

Expected lifein years

40

0

Expected life fordominant brand

Expected life formarginal brand

Brand knowledge structure in percentage

100

Positioning of competing brands along this line

Brand premium profit projected into future and discounted back to the present

If all so logical then why do the different

valuation models differ so much

There are areas in the valuation methodology that are subjective and/or

assumptive

their little black boxes

photo by Andrew Magill

“The valuation of brands is still a relatively new concept... brand valuation is without

question partly art and partly science”Interbrand

“Many marketing experts, however, feel it is impossible to reduce the richness of a brand to a single, meaningful number, and that any formula that tries to do so is an abstraction

and arbitrary”

Kevin Lane Keller

“The seemingly miraculous conjuring up of intangible asset values, as if from nowhere,

only serves to reinforce the view of the consumer skeptics, that brands are just high

prices and consumer exploitation”

Michael Perry, chairman of Unilever

and that’s not the end of it

the premise is that there is a $4 trillion dollar bubble hiding in the economy

that is twice the size of the sub prime mortgage market

Businesses, and the financial markets, think that brands are worth more than the

consumers who buy them

and what the valuation models suggest is that brand valuation is increasing

Perception Reality

If brand value is increasing so should brand trustBrands are less trusted than ever: trustworthy

ratings dropped almost 50% over the last 9 years

If brand value is increasing, brands should be more liked and admired

Brands are less liked and respected. Esteem and regards for brands fell by 12% in 12 years.

If brand value is increasing, brands should be better known

Brands are less salient than ever. Awareness of brands fell by 20% in 13 years.

If brand value is increasing, quality perceptions of brands should be increasing as well

Consumers feel brands are less quality. Brand quality perceptions fell by 24% over the past 13

years

If brand value is increasing, more brands should be clearly differentiated

Brand differentiation declined in 40 of 46 categories and only 7% of prime time commercials

had a differentiating message

patrick collingssagacite

e: patrick@sagacite.co.zam: +27 (0)83 616 0967w: www.sagacite.co.zab: www.collings.co.zat: pjcollings (follow me on twitter)