The various methods of brand valuation can be placed into four categories: (1) cost-based approaches; (2) market-based approaches; (3) income-based approaches; and (4) formulary approaches incorporating future benefits or comparative advantages.
This method considers the costs involved in creating the brand through the stages of research and development of the product concept, market testing, continued promotion during commercialization, and product improvements over time. Historically based, this approach is the valuation technique that complies with standard accounting practice for valuating assets. It is also the most conservative method of valuation and provides little future-oriented information that is useful in the brand management process. However, this technique fails to capture value-added through the application of effective strategic brand management activities and processes.
This valuation method is a much more externally focused approach. It is based on an estimation of the amount for which a brand can be sold. This method requires being able to determine a market value. In the absence of an actual market for most brands, this can be a difficult estimation challenge. To circumvent this problem, proxies are created based upon how the financial markets estimate the value associated with the brand.
One way to determine the financial market effects is to separate tangible assets from intangible assets. The market value created by the intangibles can be inferred once the entire value of the firm is determined. The consultants Trademark and Licensing Associates create a similar estimation by comparing the brand being valued to the performance of another substitute brand that is unrelated to the firm. The method is much more realistic if a similar brand exists in the marketplace for comparison purposes.
The valuation process involves determining future net revenues directly attributable to the brand and then discounting to the present value using an appropriate discount rate.
Several methods may be used to determine net revenue. One method compares the brand's price premium to a generic product--one that exists in the marketplace without benefit of marketing investment and name ownership. A second method estimates the annual royalties associated with the brand, as in a licensing agreement. This approach to valuation is generally more applicable to brands competing in international markets. An alternative approach relies on the strength of brand name recognition to estimate revenue. The branded product is then compared to a generic product to estimate volume.
These approaches consider multiple criteria in arriving at a brand value. The consulting firm Interbrand and Financial World magazine use similar methods that are based on an income approach.
Interbrand developed its formula approach in the context of external financial reporting, but indicates that the approach to valuation is also very suitable for internal management purposes. The Interbrand approach uses a three-year weighted average of profits after tax as an indicator of brand profitability. In calculating brand profitability, Interbrand strives to consider only factors that relate directly to the brand's identity. This is often difficult because the company may not consider specific functions as separate from the brand. For example, much of a brand's success might be attributable to the distribution system, which supports the brand but is likely not a key element of its identity. Once brand profitability is determined, a multiplier is attached to the calculation. The multiplier is created from an evaluation of brand strength based on seven factors, which are weighted according to Interbrand's guidelines.
Leadership: This is the ability of the brand to function as a market leader and secure the...