Brand Valuation

We have seen how many businesses have successfully aligned themselves despite the instantaneous economic recession caused by the Covid-19 shutdown.

Companies fail to realize that with proper care and handling, a structured brand valuation can be as robust a source of strategic inspiration as any other crucial diagnostics on the dashboard.

Brand Value v. Equity

I don’t know about others, but I often found myself using the two interchangeably, assuming to be the same concept. Well, they are not. So let us look at a formal definition first;

Brand equity refers to a value premium that a company generates from a product with a recognizable name compared to a generic equivalent.

There are three essential components: consumer perception, negative or positive effects, and the resulting value.

Brand equity could be considered as an extension of brand recognition, but with the added value in a particular name more so than recognition.

For example, Louis Vuitton, a brand with strong equity in the fashion industry, retains its iconic image and reliability through the use of unique, high-quality materials. Viewed as a luxury brand, the company stands first in the list of luxury brands. It is known for its range of products, from luxury trunks to ready to wear watches, shoes, etc. to its iconic bags.

How do we measure brand equity? By identifying and tracking consumer brand knowledge structures. And by assessing the actual impact of brand knowledge on consumer response to different aspects of marketing.

Brand value, on the other hand, is the financial worth of the brand

Businesses need to estimate how much the brand is worth in the market — in other words, how much would someone purchasing the brand pay?

Brand Valuation

So how can we actually put a value on a brand?

What you’ll notice is, there is no such thing as a value for the brand. Before you stop taking me seriously, let me explain. The value has a different meaning, in different contexts, and for different players in the industry.

Let’s think of reasons one might wish to value a brand.

Since 2005, in most of the world, we need to value the brand when we acquire a company. We have to think about the assets acquired and split out.

One might also think of valuing a brand for taxation purposes. How much value does the brand bring to the business overall? Even though one might not be paying royalty or a license fee, how much value is it creating so that you can recognize the value creation in there for a tax, that part of the value creation, in this domain?

We might also think of brand valuation when it comes to brand damage. Suppose somebody else has damaged your brand, they’ve damaged your reputation; now, what is the amount of that damage? If you are licensing your brand to a third party, they’re paying royalties. All of those are reasons for valuing a brand. But most importantly, you’re also valuing a brand for the purpose of driving your business, for the managerial decision-making.

To achieve that, you have to understand your business model and understand where the brand provides leverage within that business model? Then make the right resource allocation decisions as a manager, and think about where to allocate your effort.

Let go back to corporate value going back just to 1975; about 85% of corporate value was what we consider tangible assets. That’s the cash your sitting on, your buildings, your machinery. Physical things you can actually own and sell. And only about 15% were intangible assets, which might be brands, patents, technology, maybe some licenses you held or some contracts that you have with your customers, maybe the retailer.

However, coming back to today’s world, about 80% of businesses’ value are these intangible assets. And depending on which industry you’re in, the brand is often one of the dominant aspects of that intangible value, if not the most dominant value of that intangible.

Valuation Methodologies

Broadly, there are three approaches to it. So one of the valuation methodologies is what we call the income-based approach, which deals with the volume and price premium.

Another approach is a cost-based approach. The primary question you ask here is about how much money one invested in marketing to build this brand? This typically works for young players and start-ups. If we sell them, we can value it. Or what would it have cost for me to pay the royalties and license the brand, and then I’m getting relief from that royalty by owning the brand. That’s another way to think about it.

The third approach is called a market-based approach, where we look at, have there been comparable transactions in the past? Is there some kind of a guideline, a benchmark we can adhere to?

Typically, one would use a combination of these approaches.

Now, another question that follows here is: why do we see these as fundamentally different approaches?

One is by valuing the brand as it contributes to the business’s value as a whole, in all of its different ways. What the brand finance approach does is to look at the value of the trademark itself. Not just in terms of how the trademark generates value for businesses, but what if we took it and said here, hey, you can license this.

Ergo, the need to understand fundamentally what my business model is.

Where does the brand provide value in that business model? Over what period of time does it provide that value? You discount it to the present, and that’s when you start understanding the brand’s power.

One interesting way to look at branding is that it is not the pizza toppings, where it’s a separate product feature. It’s really an ingredient, maybe like the yeast that makes your dough expand in the first place — where it is integral to the whole business.

And that’s why the brand’s value is fundamentally different from the valuation we can put on the trademark at the end of the day.