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We will now review five methods used to measure the value of a brand.
The first approach aims to calculate the brand’s value on the basis of its historic costs. These are the aggregated investment costs, such as marketing, advertising and R&D expenditure, devoted to the brand since its birth. However, an assumption is being made that none of these costs were ineffective. By virtue of little more that its heritage, a 10O-year old brand is more likely to have had more investment than a 20-year old brand. The management team needs to agree how the historical costs should be adjusted for past inflation. Since several years have to pass before it is evident whether the brand is successful, when should a company start to include the brand value in its balance sheet? Another drawback of this method is that it ignores qualitative factors such as the creativity of advertising support. The value of a brand also depends on unquantifiable elements, such as management’s expertise and the firm’s culture. Finally, there is also the question of financially accounting for the many failed brands that had substantial sums spent on them, out of which experience the successful brand arose. Overall this approach to brand valuation raises many questions and without well-grounded assumptions could be problematic.
Another approach is that of comparing the premium price of a branded product over a non-branded product – the difference between the two prices multiplied by the volume of sale of the branded product represents the brand’s value. However, it is sometimes difficult to find a comparable generic product. For example, what is the unbranded counterpart of a Mars Bar? This method also assumes that all brands pursue a price- premium strategy. It is clear that the brand value of Swatch or Daewoo for example could not be assessed on this basis when equivalent competitive brands are sold at a higher price.
Some have proposed valuing brands on the basis of various consumer-related factors, such as recognition, esteem and awareness. These are all important elements of brands and high scores on these are indicative of strong brands. However, it is very difficult to derive a relationship from an amalgam of these factors to arrive at an objective valuation. For example, most consumers are aware that Rolls-Royce is a famous brand, but what value should be placed on it? Worst of all, however, is the fact that there are many famous brands, such as Co-op, with very little value attached to them.
Yet another way of valuing a brand is to assess its future earnings discounted to present-day values. The problem, however, with this method is that it assumes buoyant historical earnings levels, even though a brand may be being ‘milked’ by its owners. One of the most widely accepted ways of assessing the brand value is provided by Interbred (Birkin 1994). In order to determine brand value, a company must calculate the benefits of future ownership, i.e. current and future cash flows of the brand, and discount them to take inflation and risk into account. The Interbred approach is based on the assumption that the discount rate is given by a ‘brand multiple’, representative of the brand strength. For example, a high multiple characterizes a brand in which the firm is confident of a continuing stream of future earnings and consequently represents low risk for the company. This also translates into a low discount rate.
The Inter brand method is similar to deriving a company’s market value through its price I earnings (P IE) ratio. This provides a link between the share capital and the company’s net profits and thus the brand multiple can be applied to a single brand within the company to calculate its value’. Just as the P/E ratio equals the market value of the company divided by its after-tax profit, likewise the brand multiple equals the value of the brand divided by the profit generated by this brand, i.e.
P/E = Market value of equity/Profit
Brand Multiple = Brand Equity/Brand Profit
To calculate the brand value, we multiply the brand profit by the brand multiple –
Brand profit x Brand multiple = Brand equity
When calculating the brand profit several issues need to be considered. A historical statement of the brand’s profit is first required since as a good approximation tomorrow’s profits are likely to be similar to todays, provided there is no change in brand strategy. The brand profit should be the post-tax profit after deducting central overhead costs. There may be instances where the same production line is used for both the manufacturer’s brand and several own labels. Where this is the case, any profits arising from shared own label production need to be subtracted.
The next stage in arriving at a realistic assessment of the brand’s profit is to deduct the earning that does not relate to brand strength. For example, a firm may market two brands of bread.
One competes through major grocery stores against other branded breads, and the other may be sold to a few distributors who sell this with related products through door-to-door delivery. Both brands may show similar brand profits, yet the profit of the first brand is heavily influenced by the strength of branding, while the profit of the second brand is much more dependent on the few distributors with their distribution systems. To eliminate the earnings which do not relate to branding the most common approach is charging the capital tied up in the production of the brand with the return expected from producing a generic equivalent.
When looking at historical profits, to reduce the effect from any unusual year’s performance the previous three year profits are averaged. Following the logic of other forecasting systems, the more recent profits are likely to be more indicative of future profits. Therefore, a three-year weighted average is used, applying a weighting of three to the current year, two to the previous year and one to the year before that. These aggregated profits are then divided by the sum of the weighting factors, i.e. six in this case. If though a change in strategy for the brand is envisaged these weightings need to be reconsidered finally, each year’s profits should be adjusted for inflation.
Having calculated the brand’s profit, the brand multiple then needs to be calculated. This is found through evaluating the brand strength since this determines the reliability of the brand’s future earnings. Inter brand argue that a brand’s strength can be found from evaluating the brand against seven factors.
| Strength factor | Maximum Score |
| Leadership | 25 |
| Stability | 15 |
| Market | 10 |
| Internationally | 25 |
| Trend | 10 |
| Support | 10 |
| Protection | 5 |
| Total Score | 100 |
Leadership – There is well-documented evidence showing a strong link between market share and profitability, thus leading brands are more valuable than followers. A brand leader can strongly influence the market, set prices, and command distribution, thus these criteria must be met to score well on leadership.
Stability – Well-established brands, which have a notable historical presence, are strong assets.
Market – Marketers with brands in non-volatile markets, for example foods, are better able to anticipate future trends and therefore confidently devise brand strategies than marketers operating in markets subject to technological or fashion changes. Thus part of the brand’s strength comes from the market it operates in.
Internationality – Brands which have been developed to appeal to consumers internationally are more valuable than national or regional brands because of their greater volumes of sales and the investment to make them less susceptible to competitive attacks.
Trend – The overall long-term trend of the brand shows its ability to remain contemporary and relevant to consumers, and therefore is an indication of its value.
Support the amount, as well as the quality, of consistent investments and support is indicators of strong brands.
Protection – A registered trademark protects the brand from competition and any activities to protect the brand against imitator’s augers well for the future of the brand.
The brand is audited against these seven factors, with the maximum scores for each factor shown in the table. By aggregating these seven scores, the brand strength can be calculated.
The higher the brand strength scores the greater its multiple score.
Interbred argues that a new brand grows slowly in the early stages, then it increases exponentially as it moves from national to international recognition and then slows down as it progresses to global brand status. However, experimental analysis shows that the development of a brand is susceptible to threshold effects. It gradually acquires strength with consumers and retailers in different stages, but beyond a certain point its rate of growth is much greater. Research has found that brands achieve respectable spontaneous awareness scores only after a high level of prompted awareness has been achieved. Therefore, the relationship between brand strength and brand multiple may be better represented by a less regular pattern.
Despite these limitations, the Inter brand method is a popular method amongst firms valuing their brands and is being adopted by more companies as a practical way to determine the value of their brands. Furthermore, firms have growing historical brand valuation databases enabling managers to assess which strategies are particularly effective at growing their brands.
