Brand valuation - uses and abuses Brands, Media and Money Brand valuation can be a pretty dismal junk science 1. Estimating values by relating one brand to another’s purchase price or licence fee is just re-cycled guesswork. 2. Trying to determine brand specific cashflows by dissecting the profit and loss account is absurd. 3. Pretending that brand assets can be separable from technical or customer “assets” is illogical. 4. Finally most of the final calculated brand asset value is not really strictly brand valuation but business-forecasting as upwards of 80% of the brand value in a Discounted brand Cashflow Flow analysis (DCF) is in the “horizon” or terminal value - see graph. And forecasting can be a mug’s game. But knowing the brand value is very important Paradoxically brand value is probably even more important in preserving market share and price premia than most managers realise. Work in which I have been involved has shown that in some cases consumers are willing to pay up to 20 times the cost of goods for well branded products. This produces very profitable businesses with high return on (brand) investments. So what should you do? Firstly decide what you mean by brand value. I have seen the brand defined as anything between virtually the whole business - which is operating under the brand name - to effectively just the cost of the trademark. Neither of these is right.  Secondly be clear why you want the number For certain financial reporting purposes you are required to produce a single number. Often that has no useful management application. In my experience there are (at least) six good, specific, pragmatic business applications for brand valuation: 1. Better ROI measures. Many current measures underestimate brand ROI and fail to capture the full economic value of the brand in use. 2. Market segmentation. Segmentation is usually mostly an attitudinal exercise – but the usefulness of the exercise is improved by adding “brand willingness to pay” information. 3. Pricing information. You make your brand more preferable – but how much should you charge for this? Or should you trade price for volume? These decisions are often made without proper (e)valuation of the alternatives. 4. Licencing. Renting a brand name. Either by a third party or between divisions of a company. Usually there is a “going rate” for using a brand name in a new market derived from so-called comparables. This could well be an under or over-estimate. 5. Tax. Inter-country transfer pricing increasingly scrutinises the transferred Intellectual Property values – including brand values. Getting the right provable brand value in specific markets can be advantageous evidence. 6. Respect. Finally, and the weakest reason I think, simply knowing the brand value can have a useful effect when distributed within a corporation –  as a tool to encourage all mangers to protect and grow the asset. Thirdly recognise that you will have to use some consumer research To be pedantic, companies don’t really “own” the  brand asset, they really only own the exploitation rights. The actual asset resides in consumers’ heads. Their preferences, their trust and their willingness to pay for a brand is where the value resides. It stands to reason then that you can only accurately measure brand value if you measure consumer opinion. But a problem immediately arises. Asking consumers “how much extra would you pay just for the brand name?” is tantamount to asking them how irrational they are. Luckily an indirect method of asking the question exists: adapted conjoint research. This technique also fits reasonably well with progressive thinking on market research which aims to measure more implicit consumer values.  Using this approach I know how much I am willing to pay for the brand name alone on a BMW 5 series - about £5k as it happens. But more interestingly I know the world is divided on this. Some consumers rate it at £8k and others at £2k. It’s a polarised brand. The equivalent Mercedes is also biased in brand value - older and richer consumers value the name more highly. I also know values are lower in some non-UK European countries. Armed with information like this one can work out who is getting the “best bang for buck” in their category for their brand investments (e.g. companies like O2 and M&S in the RTE study we conducted). One can also work out (note bene HMRC) in which country the brand value was added! : Brand value - source of brand specific cashflows Brand value discounted cash flow <<<< Back to menu Brand premium