Brand
Valuation
Brand value and the process of brand valuation
is an important concept within marketing, which
you have probably encountered before. In many
ways brand value is extremely similar to the
concept of brand equity, and indeed some people
use these two terms interchangeably. However,
there is an important difference. The distinction
between the two is not just academic; it has
important ramifications for professionals on the
front line too. Here we will take the time to explore
these nuances and then delve into the process of
brand valuation in greater depth.
So what is brand value, and how is it distinct
from brand equity? The difference is subtle, but
important. As an intangible asset, brand equity
refers to the value of a brand from a qualitative
point of view. For example, a brand that is
well known around the world and also held in
particularly high regard by its customers would
have extremely high levels of brand equity. Brand
value, on the other hand, refers to the actual
tangible financial value of a brand name that
can be included on the balance sheet, and brand
valuation is the process by which this quantitative
evaluation is carried out. Of course, brand equity
and brand value are intimately linked, in the sense
that the greater the brand equity the higher the
brand value will be. But, they are not in fact the
same thing.
As depicted in the graphic, there are three main
approaches to brand valuation. The first of these
approaches is income-based brand valuation,
which comprises a variety of methods. The Relief
from royalty method is based on how much the
brand owner would have to pay to use its brand
if it licensed the brand from a third party. It uses
discounted cash flow analysis (DCF) to capitalise
future branded cash flows. Another income-based
brand valuation technique is called the excess-
earnings method which calculates the earnings
above the profit margin required to attract an
investor, using the estimated rate of return based
on the current value of the assets employed. These
excess earnings are assumed to be attributable to
the intellectual property, or brand.
Secondly, the market based brand valuation
approach includes the P/E (price to earnings)
ratios method. This multiples the brand’s profits
by a multiple derived from similar transactions
of profits to price paid based on the value of
reported brand values. A similar technique is
the turnover multiples method which multiplies
the brand’s turnover by a multiple derived from 5 KEY POINTS
similar transactions. Lastly, there are a number of
cost based brand valuation methods, such as the
creation costs method. This involves estimating 1. Brand Value is closely related to, but
the amount that has been invested in creating the distinct from, brand equity.
brand. Similarly, the replacement value method
estimates the investment required to build a brand 2. Brand valuation is the process of
with a similar market position and share. assigning quantitative financial value
to a particular brand.
Although brand equity is an important 3. Income-based valuations are one
contributing factor to brand value, they are of the main methodologies use to
in fact different things. This is because brand calculate brand value.
equity relates to intangible value, whereas
brand valuation attempts to put a quantifiable 4. Market based brand valuation
value to a particular brand. There are three main techniques are also commonly used.
methodologies for calculating brand value: 5. Cost-based valuation methods
income-based brand valuation, market based may also be employed in some
brand valuation, and cost based brand valuation, circumstances.
each of which comprises several specific technical
approaches.
Brand valuation methods
Income-based valuations
- Relief from royalty method uses discounted cash flow analysis (DCF)
to capitalise future branded cash flows
- Excess-earnings method calculates the earnings above the profit margin required
to attract an investor, using the estimated rate of return based on the current
value of the assets employed
Market-based valuations
- P/E (price to earnings) ratios method which multiples the brand’s profits by
a multiple derived from similar transactions of profits to price paid based
on the value of reported brand values
- A similar technique is the turnover multiples method which multiplies
the brand’s turnover by a multiple derived from similar transactions
Cost-based valuations
- The creation costs method involves estimating the amount that has been
invested in creating the brand
- The replacement value method estimates the investment required to build
a brand with a similar market position