9/24/2018

“ Brand Management”
MK542E

Brand Equity and Brand Valuation

Dr. Dildar Hussain

Associate Professor
Rennes School of Business

Office No. 327

dildar.hussain@rennes-sb.com

Chapter Overview

 Overview

 Why and how brands are valued?

 Methods of brand valuation

 Advantages and applications of brand valuation

 Learning Objectives

 Understand meaning of brand equity

 Why is it important to put a value on brands?

 Evaluate different approaches and methods to valuing brands

 Understand strategic implications of brand valuation

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Introduction

 Brand is more than a product

 It provides emotional and symbolic value above the

functional value to consumers

 Brands have become part of consumers’ life and they are ready to pay higher prices

 Brand managers realized

 Significant contribution of brands

 Ability to charge premium pricing

 Increase customer confidence

 Create customer loyalty

 As a result, the concepts of brand equity and brand valuation emerged

What is Brand Equity - 1

 Brands are seen as valuable assets to the company

 A brand is a

 A trademark (in technical terms)

 Includes value attached to it that can make profits, increase market share and enhance
organizational performance

 The sum of value is called “brand equity”

 Brand equity is defined as

“the set of associations and behavior on the part of a brand’s customers, channel
members, and parent corporation that permits the brand to earn greater volume or
greater margins than it could without the brand name” (Leuthesser, 1988)

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What is Brand Equity - 2

 This partly explains why brands have been added to company’s balance sheet

 In 1988, Nestlé paid six times of the book value for acquisition of brands; for example,

 Kit Kat

 Quality Street

 Smarties, etc.

 Implications of Leuthesser’s definition

 Unless, a brand earns a high volume of sales and high margins the brand has no value

 The definition only takes into account financial value of the brand

What is Brand Equity - 3

 Brand equity should be examined at three levels (Kapferer, 2004)

 Brand Assets

 Awareness

 Saliency

 Image

 Relationship

 Patents

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What is Brand Equity - 4

 Brand Strength

 Market share

 Market leadership

 Loyalty rate

 Price premium

 Growth rate

 Brand Value

 Net discounted cash flow attributable to brand

 After paying the cost of capital

The Financial Brand Valuation Methods -1

 The very first brand valuation done by Interbrand in mid 80s for Rank Hovis Mcdougall

 The approach was a ranking one

 It reflected the developments in the previous year and how it effected the company’s
brand value

 Brands on the balance sheet

 In London Stock Exchange, it was allowed in 1989 to have intangible assets on the balance
sheet

 Not all companies take brand on their balance sheet

 MCDonald’s - no

 Burger King , LV, Prada, L’Oréal, Gucci - yes

 Issues with valuation methods

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The Financial Brand Valuation Methods -2

 The cost-based method

 One of the simplest methods

 Value of brand is equal to cost of product development, test marketing, and marketing
communication

 It includes historical costs – the resources that have already been invested in brand

 Also considers the amount of money that will be required to replace a brand

 It seeks to measure future benefits by assessing the amount to create a similar brand from a
scratch

 Based on expert opinion and guesswork

 It might be subjective

 It may put excessive value on unsuccessful brands with huge expenditure

 Other issues may be related to the time period over which accounting needs to be done
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The Financial Brand Valuation Methods -3

 The market approach

 Based on the amount customer or the market is willing to pay for the brand

 For marketer, it looks at the future benefits

 The evaluations tend to be hypothetical

 Can be calculated from a company’s stock market capitalization or market value

 This method ignores the customers’ reasons behind purchase which may be personal

 It assumes that the stock price of a company will reflect the brand value and is calculated as

Brand Value =

(stock price x number of shares) – (tangible assets + all remaining intangible assets)

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The Financial Brand Valuation Methods - 4

 Comparable

 Based on something comparable

 It could be difficult to compare brands as every brand is unique

 In similar target group, channels of distribution, advertising and promotion it may provide a
reasonable evaluation

 Premium price

 Calculated on the basis of NPV of future price premiums

 Premium over unbranded or generic equivalent

 However, the primary objective is not to charge premium but to create higher future demand

 There are rarely generic equivalents

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The Financial Brand Valuation Methods - 5

 Financial brand equity research

 Very little research on brand financial value

 Simon & Sullivan (1993 ) developed methods of separating brand value from other assets

 Firm’s total brand equity can be measured by subtracting the estimated economic value (not
just book value) of tangible and intangible assets from its stock market value

 Another approach applies “momentum accounting”

 Brand’s momentum is that rate at which it creates sales

 Shortcoming of financial methods

 Focus too much on earning capacity, future revenues, and market capitalization

 Do not take into account all influencing factors

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The Behavioral Approach -1

 Offers a market or customer orientation rather than company one

 Takes into account attitudes of the consumer and defines (Leuthesser, 1988)

 The set of associations

 The behavior on the part of the consumer

 Early definition included customers only; later included other stake holders as well

 Behavior of channels members

 Parent corporation

 Therefore, includes brand’s names, symbols, associations, and reputation to all target audience
who interact with it

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The Behavioral Approach -2

 Aaker also presented a similar approach

 Brand as a formal sign

 Brand equity can be negative

 It comprises a collection of advantages and disadvantages

 Brand equity is made of five elements (brand awareness, brand association, perceived quality;
proprietary brand assets, and brand loyalty)

 Steps in building brands

 Select a name and symbol

 Create awareness

 Position the brand to begin differentiation

 Create a brand image

 Create trust in the minds of consumers

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The Behavioral Approach -3

 Brand awareness

 Is always in customers’ minds

 Has significant influence on purchase decision

 Is created through repeated exposure of the brand and appropriate association with the
related product category

 High awareness can considered as a solid base for good financials and for brand loyalty

 Brand awareness programs

 Brand loyalty

 Without loyalty, brand name is merely a trademark

 To realize long term benefits, bilateral benefits need to be taken into consideration

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Customer Based Brand Equity

 Value of brand and its equity is derived from the actions of the customers

 Consumer based brand equity means

“the differential effect that consumer brand knowledge has on their response to brand
marketing activity” (Keller, 2003)

 An indirect approach to evaluate brand equity by assessing potential sources for brand
equity by measuring consumer mindset or brand knowledge

 Brand knowledge includes

 Thoughts

 Feelings

 Perceptions

 Images

 Experiences, etc. 16

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The New Approach: Brand Asset Valuator (BAV)

 BAV

 A database of consumer perceptions of brands

 Created and managed by Brand Asset Consulting

 Result of the world’ s most extensive research project on branding

 Covering 30,000 brands , 400,000 consumers in 48 countries through 240 studies

 BAV measures value of a brand on four dimensions

 Differentiation – measuring brand’s point of difference

 Relevance – measuring how appropriate the brand is to you

 Esteem – means how well regarded the brand is

 Knowledge – means an intimate understanding of the brand

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Summary – Brand valuation models

Summary of Brand Valuation Models (Laforêt, Managing Brands, 2010)

Categories Characteristics
- Quantitative procedures to compute a monetary value
for brand equity.
- Consumer’s perspective not taken into account.
- Used to value brand equity in the context of
Business finance acquisitions, licensing and analyusts’ options.
models - Referring to cost-based approach; market-based
method; income-based or earning capacity method;
market value orientated or comparables; and premium
pricing.
Brand valuation
models
- Brand equity seen as a qualitative construct that can be
made manifest using scorecards.
- Not empirically verifiable.
- High degree of subjectivity in the choice of factors
Psychographic/ explaining brand strength.
behaviorally - Endeavour to explain what goes on in the “hearts and
orientated models minds” of customers to determine a brand’s value.
- Refer to Aaker’s brand equity approach; Keller’s
customer based brand equity; and Young & Rubicam
BAV.

Brand Valuation Methods -

 Brandz
 Brandz Top
Top 100
100 brands
brands of
of 2018
2018

https://www.youtube.com/watch?v=CUHkJr-rixA
https://www.youtube.com/watch?v=CUHkJr-rixA

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Top 25 Brands – BrandZ 2017

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Brandz Overview 2016

https://www.youtube.com/watch?v=jECdQQEYgYw

2_2_Overview.mp4

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Best Global Brands - 2

25

Best Global Brands - 2015

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Brand Valuation Methodology

 Brandz

https://www.youtube.com/watch?v=u7oIjjq3z80

2_3_BrandZMethod.mp4

 Interbrands

https://www.youtube.com/watch?v=tK2ozWQ0HA4

2_4_InterbrandMethod.mp4

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Advantages and Applications of Brand Valuation - 1

 It helps in

 Making decisions on business investments

 Measuring the return on brand investments

 Making decisions on brand investments – prioritizing by brand, customer segment, product or

service, geographic market

 Making decisions on licensing the brand to subsidiary companies

 Turning the marketing department from a cost center into a profit center

 Allocating marketing expenditure according to benefit each business unit derives from the
brand asset

 Organizing and optimizing the use of different brands in the business mix

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Advantages and Applications of Brand Valuation - 2

 It helps in

 Assessing co-branding initiatives

 Deciding appropriate branding after merger

 Managing portfolio of brands across different markets

 Communicating where appropriate the economic value of the brand to the capital markets in
order to support share prices and obtain funding

 Licensing and franchising

 Tax planning

 Securitizing borrowing

 Litigation support

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Emerging Trends

 Intangible assets represent significant proportion of firms’ assets

 Mostly are not reported in financial statements

 Institute of Practitioners in Advertising (IPA) has come up with new ways of reporting
brand intangibles

 Using non financial performance indicators

 Concise, comprehensive, material, cohesive, strategic, forward looking, comparative, and

comparable over time.

 Should include human capital, customer service, marketing, customer service in KPIs, customer
retention, numbers, retention rate, and customer complaints

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Take Home Message

 Meaning of brand equity

 Importance of putting a value on brands

 Different approaches and method to value brands

 Strategic implications of brand valuation

https://www.youtube.com/watch?v=sQLlPC_alT8

2_5_Brand.mp4

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Case Study

Nike Incorporated

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dildar.hussain@rennes-sb.com

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