As global competition becomes tougher, the brand is one of the few assets that can provide long-term competitive advantage to corporations. Despite its commercial importance, its management still lags behind that of their tangible counterparts. When it comes to managing and measuring factory output the choice of measures is staggering, as are the investments in sophisticated computer systems that measure and analyze every detail of the manufacturing process, but very little is in place for the measurement of the brand asset. Although many brand measures are available, few can link the brand to long-term financial value creation.
As the importance of intangibles to companies increases, managers tend to install more value based brand management systems that can align the management of the brand asset with that of other corporate assets. While there is lack of detail about the contribution of brands and other intangible assets in the financial reporting of company results, investments in, and returns from tangible assets are reported at sophisticated and detailed levels.
For example, Coca-Cola’s balance sheet, income statement and cash flow calculations tell us about working capital, net fixed assets and financial investments, but little about the performance of the most important company asset, the Coca-Cola brand. The same is true for most other companies.
Current accounting regulations are deficient in their treatment of intangible assets. The increasing value placed on intangibles through mergers and acquisitions over many decades, has forced accounting standards to acknowledge and deal with intangible assets on the balance sheet. However, the standards deal only with the bare minimum, accounting for acquired intangibles, formerly known as goodwill. As a bizarre consequence, the value of acquired brands is included in companies’ balance sheets but the value of internally generated brands remains unaccounted for.
A closer look at some dimensions to brand evaluation:
There are numerous brand equity models that use consumer research to assess the relative performance of brands. These do not put a financial value on brands; instead, they measure consumer behaviour and attitudes that have an impact on the brand’s economic performance. Although the sophistication and complexity of such models vary, they all try to explain, interpret and measure consumers’ perceptions that influence purchase behaviour. They include a wide range of perceptive measures such as different levels of awareness (unaided, aided, and state of mind), knowledge, familiarity, relevance, specific image attributes, purchase consideration, preference, satisfaction and recommendation. Some models add behavioural measures such as market share and relative price.
Through different stages and depths of statistical modelling, these measures are arranged either in hierarchic order, to provide hurdles that lead from awareness to preference and purchase, or relative to their impact on overall consumer perception, for the purpose of providing an overall brand equity score or measure. A change in one or a combination of indicators is expected to influence consumers’ purchasing behaviour, which in turn will affect the financial value of the brand in question. However, these approaches do not differentiate between the effects of other influential factors such as R&D and design and the brand. They therefore, do not provide a clear link between the specific marketing indicators and the financial performance of the brand. A brand can perform strongly according to these indicators but still fail to create financial and shareholder value.
Financially driven approaches
Cost-based approaches define the value of a brand as the aggregation of all historic costs incurred, or replacement costs required in bringing the brand to its current state: that is, the sum of the development costs, marketing costs, advertising and other communication costs, and so on. These approaches fail because there is no direct correlation between the financial investment made and the value added by a brand. A Financial investment is an important component in building brand value, provided it is effectively targeted. If it isn’t, it may not make a difference. The investment needs to go beyond the obvious advertising and promotion and include R&D, employee training, packaging and product design, retail design etc.
Comparables: Another approach is to arrive at a value for a brand on the basis of something comparable, but comparability is difficult in the case of brands, as by definition, they should be differentiated, and thus not comparable. Furthermore, the value creation of brands in the same category can be very different, even if most other aspects of the underlying business, such as target groups, advertising spend, price promotions, and distribution channel are similar or identical. Comparables can provide an interesting cross-check, even though they should never be relied on solely for valuing brands.
Premium price: In the premium price method, the value is calculated as the net present value of future price premiums that a branded product would command over an unbranded or generic equivalent. However, the primary purpose of many brands is not necessarily to obtain a price premium, but rather to secure the highest level of future demand. The value generation of these brands lies in securing future volumes rather than securing a premium price. This is true for many durable and non-durable consumer goods categories. This method is flawed because there are rarely generic equivalents to which the premium price of a branded product can be compared. Today, almost everything is branded, and in some cases store brands can be as strong as producer brands charging the same or similar prices. The price difference between a brand and competing products can be an indicator of its strength, but it does not represent the only and most important value contribution a brand makes to the underlying business.
To capture the complex value creation of a brand, the following steps are recommended:
- Market segmentation. Brands influence customer choice, but the influence varies, depending on the market in which the brand operates. Split the brand’s markets into non-overlapping and homogeneous groups of consumers according to applicable criteria, such as product or service, distribution channels, consumption patterns, purchase sophistication, geography, existing and new customers etc. The brand is valued in each segment and the sum of the segment valuations constitutes the total value of the brand.
- Financial analysis: Identify and forecast revenues and earnings from intangibles generated by the brand for each of the distinct segments determined above. Intangible earnings are defined as brand revenue less operating costs, applicable taxes, and a charge for the capital employed. The concept is similar to the notion of economic profit.
- Demand analysis: Assess the role that the brand plays in driving demand for products and services in the markets in which it operates, and determine what proportion of intangible earnings is attributable to the brand measured by an indicator referred to as the ‘role of branding index.’ This is done by first identifying the various drivers of demand for the branded business, then determining the degree to which each driver is directly influenced by the brand. The role of branding index represents the percentage of intangible earnings that are generated by the brand. Brand earnings are calculated by multiplying the role of branding index by intangible earnings.
- Competitive benchmarking: Determine the competitive strengths and weaknesses of the brand to derive the specific brand discount rate that reflects the risk profile of its expected future earnings (this is measured by an indicator referred to as the “brand strength score”). This comprises extensive competitive benchmarking and a structured evaluation of the brand’s market, stability, leadership position, growth trend, support, geographic footprint, and legal protectability.
- Brand value calculation: Brand value is the net present value (NPV) of the forecast brand earnings, discounted by the brand discount rate. The NPV calculation comprises both the forecast period and the period beyond, reflecting the ability of brands to continue generating future earnings.
Overall, there is an increasing need for brand valuation from both a management and transactional point of view.
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