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1. Importance of Brands.2. Financial Value of Brands3. Brand as Business Assets4. Brands on Balance Sheet5. Approaches to Brand Valuation6. Social Value of Brands7. Brands & Wealth Creation8. Brand in M&A

Brands - Importance➔ Economic importance➔ Social importance➔ Political importance

Economic importance1. Brands benefit all stakeholders.2. Strong brands drive share performance.3. Strong brands protect customers.4. Brands ensure business are accountable for their actions.5. Brands help business to cross geographic and cultural boundaries.6. Brands ensure competitive economy.7. Brands help economy to adapt and grow (innovation).

Social importance1. Wealth creation2. Improving living standards.3. Minimal unethical behavior.4. Provides more security & stability of employment.5. Increase investment in R&D.

Political importance1. Political symbol (“Brand America”)2. Bind people and culture together.

He who owns the brand owns the wealth.

Brands as Business Assets

Business assets creates business value.Business Assets - Tangible & Intangible assets.Tangible assets - Land, buildings, machinery, cash etc.Intangible assets - Brands, technology, patents, employees.

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Historically tangible assets were regarded as the main sources of business values. Intangible assets are always at the heart of corporate success, but rarely explicitly valued.

Increasing recognition of intangible assets came with the continuous increase in gap between companies book value and their stock market valuations.

Recent studies indicated that, over a period from 1975 t0 2005, the contribution of intangibles to the overall corporate value increased from 17% t0 80%.

This is specifically evident from the premium price paying for M&A.

Due to economic value of brands, they are the most important intangible asset. Brands can influence the choice of

➔ Customers.➔ Employees.➔ Investors.➔ Government authorities.

Brands are also durable compared to other intangible assets. For example, Coca-Cola is a 120 years old brand.

Various studies concluded that an average brand accounts for more than ⅓ of shareholder value.

Brands on Balance SheetWith new accounting guidelines, acquired goodwill needs to be capitalized on the balance sheet and amortized according to its useful life. However, intangible assets such as brands that claim infinite life do not have to be subjected to amortization. Instead, companies need to perform annual impairment tests.

If the value is same or higher than the initial valuation, the asset value on the balance sheet remains same. If the impairment value is lower, the asset needs to be written down to the lower value.

Key limitations are➔ Only acquired goodwill is recognized.➔ Problems with the quality of brand valuations for balance sheet recognition.

Approaches to Brand ValuationFor some companies, the brand is the most important asset they have. Having a brand like Google, Coca-Cola or Mercedes Benz almost guarantees business success.

The purchasing of brand is no longer merely an acquisition of a product, it also includes an intrinsic experience of a consumer and even reflects a certain lifestyle.

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A successful brand has loyal consumers, which ultimately reflects on sales value and brand owner’s market value.

The total brand value includes two aspects.1. Economic value2. Social value

Economic value - The economic value of brand in a company’s shareholder value is most visible when companies are being bought and sold. In 1989, Philip Morris paid 12.8 billion USD for Kraft, six times its net asset value.

Several studies have tried to estimate the contribution that brands make to shareholder value. The 2003 study by Interbrand, concluded that on average brands account for more than ⅓ of shareholder value.

Social value - A brand that has social value ensures success on the market. For individuals, the social value of a brand lies in the

➔ Consumer surplus➔ Freedom of choice➔ Possibility to express preference & personality by buying a certain brand.

Branded companies invest more in R&D, which in turn leads to a continuous process of product improvement and development.

Brand value means the financial value of the brand. The concept of brand valuation emerged in 1970. The ability to value and put a price tag on a brand may be useful for a number of reasons.

Basic brand evaluation approaches falls into 3 categories.1. Research based2. Financially driven3. Economic

Research Based ApproachesThis approach uses consumer research to assess the performance of brands. Research approach do not put a financial value on brands, they just measure the customer behavior and attitudes that have an impact on the economic performance of brands. They include a wide range of perspective measures.

➔ Brand awareness➔ Brand knowledge➔ Brand familiarity➔ Brand satisfaction etc.

The disadvantage of the research based techniques is that they do not differentiate between the effects of the brand on consumers and effects of other factors such as research, development & design.

A brand can perform strongly according to these indicators, but still fail to create financial & shareholder value.

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Financially Driven ApproachesFinancially driven approaches do not research consumer behavior, but are based on financial performance of a certain brand. Financially driven approaches include

1. Cost based approaches2. Comparables3. Premium price

Cost based approaches define the value of a brand as the aggregation of all historic costs incurred while bringing the brand to its current state. These costs can include

➔ Development costs➔ Marketing costs➔ Advertising costs➔ Communication costs etc.

Cost based approaches fail because there is no direct correlation between the financial investment made and the value added by a brand.

Comparables approach is used to arrive at a value for a brand by observing and valuing comparables of different brands. Defining a comparable is difficult as by definition a brand should be differentiated and thus not comparable. Comparables can provide an interesting cross check. However, they should never be relied on solely for valuing brands.

Premium price is the price paid by a buyer for improved quality of the product. In this method, the price (premium price) is calculated as the net present value of future price premiums that a branded product would command over an unbranded or generic equivalent. This method is flawed because there are rarely generic equivalents to which the premium price of a branded product can be compared. In today's world, almost everything can be branded.

Both research based and financially driven approaches are essentially one dimensional. Research based approaches lack financial component, while financially driven approaches lack marketing component to provide a complete and robust assessment of the economic value of brands.

Economic Use ApproachThe economic use approach provides the multidimensionality to brand valuation as it combines brand equity with financial measures. This brand valuation includes both a marketing measure that reflects the security and growth prospects of the brand and a financial measure that reflects the earnings potential of the brand.

The total brand value comprises several tiers which when put together resemble a pyramid.

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Brand value is often identified with its most visibly attractive elements, but that is just the first tier (the top of the pyramid) of the overall brand value. Tier two contains financial measures such as brand’s profitability, income, and tax, while tier three contains measures of brand strength and market conditions.

Given this concept of economic worth, the value of a brand reflects not only what earnings it is capable of generating in the future, but also the likelihood of those earnings actually being realized. Interbrand’s brand valuation model is shown below.

Segmentation - Brands influence customer choices that varies depending on the market in which the brand operates. This is why, market is split into segments, may be based on consumption patterns, geography etc. The brand need to value in each market separately.

Financial analysis - Includes identification and forecast of revenues and earnings from intangibles.Demand / Market analysis - Assess the role that brand plays in driving the demand for products and services in the markets and determines what proportion of intangible earnings is attributable to the brand.

Brand Value(NPV of Future Brand Earnings)

Brand Discount Rate

Brand Earnings

Role of Branding Index

Brand Strength Score

Intangible Earnings

Demand Analysis

Competitive Benchmarking

Financial Analysis

Market Segmentation

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Brand earning - Is calculated by multiplying the role of branding index by intangible earnings.

Competitive benchmarking - Looks at the competitive strengths and weakness of the brand as well as the likelihood of the expected future earnings. Brand strength typically comprises seven components.

1. Geographic footprint (Spread)2. Leadership3. Stability4. Support5. Profit trend6. Consumer preference7. Legal protection

Brand strength score can be transformed into a discount rate using an S curve.

Brand value is the NPV of the forecasted brand earnings discounted by the brand discount rate.

Brand valuation systems are mainly used for➔ Strategic brand management➔ Financial transactions

Strategic brand management includes➔ Making decisions on business investments.➔ Measuring the return on brand investments.➔ Making decisions on licensing the brand.➔ Award & promote employees.➔ Organize & optimize the use of different brands.➔ Assessing co branding initiatives

The financial use of brand valuation include the following.1. Assessing the fair transfer prices for the use of brands in subsidiaries.2. Determining the brand royalty rates.3. Capitalizing brand assets on balance sheet.4. Determining the price in M&A or sales of company.5. Using brands for securitization of debt facilities.

Social Value of Brands

Brands & Wealth Creation

Brand AuditBrand audit is a comprehensive examination to assess the health of the brand, uncover its sources of equity, and suggest ways to improve and leverage that equity.

The scope of a typical brand audit includes

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➔ Brand vision & mission➔ Brand promise & values➔ Brand position➔ Brand personality➔ Brand performance

Brand audit dimensions are

Brand Inventory (Supplier side) Brand Exploratory (Demand side)Brand elements Awareness & favorabilitySupporting marketing programs Uniqueness of associationsProfile of competitive brands Customer based equity modelPOPs and PODsBrand mantra

Typical steps include1. Establish brand audit objectives, scope & approach2. Background about the brand.3. Background about the industries.4. Consumer analysis - motivation, perception, needs etc.5. Brand inventory6. Brand exploratory7. Summary of competitor analysis8. SWOT analysis9. Brand equity evaluation10. Strategic brand management recommendations