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Brand Value

A brand is the idea or image of a specific product or service that consumers connect with, by identifying the name, logo, slogan, or design of the company who owns the idea or image. Brand is a name or trademark connected with a product or producer. Brands have become increasingly important components of culture and the economy, now being described as "cultural accessories and personal philosophies”. The amount that a brand is worth in terms of reputation, prestige, income, potential income, and market value would constitute its brand value. Brands with a high value are regarded as considerable assets to a company, so that when a company is sold a brand with a high value may be worth more than any other consideration. On the other hand, Brand value can be defined as the net present value of future cash flows from a branded product minus the net present value of future cash flows from a similar unbranded product—or, in simpler terms, what the brand is worth to management and shareholders. Brand value is a precious yet intangible asset, which will make a consumer pay premium price for a product. The value of every asset, whether tangible or intangible, can be estimated. Some assets are easier to value than others, and some evaluations are more precise than others. Intangible assets, such as brands, often fall in the more difficult, less precise valuation category. While the valuation of brands requires techniques that are quite different from those used to value stocks or fixed assets, the basic principles are the same. First, from a shareholder’s perspective, the value of a brand is equal to the financial returns that the brand will generate over its useful life. Second, any financial returns attributed to a brand must be discounted to account for market uncertainty and asset-specific risks. These two principles apply to the valuation of all assets, not just brands. Successful brands create value through strong business basics, a clear and relevant value proposition that is communicated powerfully and consistently (avoid positioning the brand exclusively around price or specific product features), delivery of a great experience that matches the brand’s promise and effective leadership of trends or aspirations. The subsequent section details the various methods of brand valuation. Why are brands valued? Although public perceptions of brand valuation are often focused on balance sheet valuations, the reality is that the majority of valuations are now actually carried out to assist with brand management and strategy. Companies are increasingly recognizing the importance of brand guardianship and management as key to the successful running of any business. The values associated with product or services communicated through the brand to the consumer. Consumers no longer want just product or service but a relationship based on trust and familiarity. In return businesses will enjoy an earnings stream secured by loyalty off customers who have ‘bought into’ the brand. The methods of brand valuation undertaken by our group:  Price Premia Model: This model helps to assess how much premium a particular brand can charge from the consumers. This is more applicable to products, which are more like commodities.

Nike etc. This model works best for products being converted to brands from commodities. i. The ability . The methodology is to look at the difference in sale prices between the margin after costs. So to arrive at an authoritative and valid approach. It is possible to determine the market share for a given product at a given price level. The ultimate purpose of the brand is to secure future demand.e. The relationship between brand equity and price is easily explained. the model gives the percentage of premium it can charge its customers over the generic substitutes. Most have fallen into two categories: • Research-based evaluations. to arrive at the value of the in tangible asset. It is often used to value brands. Gross Profit Differential Method: The gross-profit differential method compares the profits of a branded product with that of an unbranded one. The value generation of these brands lies in securing future volumes rather than securing a premium price. but it was only in the late 1980s that valuation approaches were established that could fairly claim to understand and assess the specific value of brands. Rationale for choosing Price Premia Model: The premise of the price premia approach is that a branded product should sell for a premium over a generic product. Approaches to brand valuation Financial values have to some extent always been attached to brands and to other intangible assets.  Discounted Cash Flow Method: In this method. The brands can even compare their value of the brand vis-à-vis competition. a number of brand evaluation models have been developed. For a brand. the brand.  Book to Market Method: This method is ideal for single brand companies like Adidas. between the branded product and an unbranded or generic product. The value of the brand is therefore the discounted future sales premium. the value of a brand to charge a premium over an unbranded or generic equivalent can be tracked. The major advantage of this approach is that it is transparent and easy to understand. and • Purely financially driven approaches  Research-based approach Method 1: Price Premia Model Introduction: In the price premia method. the cash flows are estimated and discounted to come at the Present Value of the firm. In this method the book value of the company is deducted from its market capitalization.

In Mergers and Acquisitions. The price difference between a brand and competing products can be an indicator of its strength. the brand could act as the most saleable asset. Hence. the managers can actually track the performance over time and in case of insolvency. the benefit arises on the cost and market share dimensions. This method is flawed because there are generic equivalents to which the premium price of a branded product can be compared. Price Premia: Valuation Objective: To measure the brand value of Adidas using Price Premia Model. we usually see a premium being paid over and above the market price. Limitations of Price Premia Model: The disadvantages are where a branded product does not command a price premium. The model may bear little evidence to economic reality or serve other useful purpose.of a brand which is an intangible asset is tested. Reebok. he pays a premium. Then they were asked to quote an amount which they were willing to spend for the shoes if a brand name is attached to it. These days’ people are also pledging the brand value in order to raise debt. Methodology: A sample of 20 people was taken for the purpose of evaluation. The brands were Nike. but it does not represent the only and most important value contribution a brand makes to the underlying business. The reason for testing this model is Adidas is serving in a category which is undifferentiated. There is a certain amount of value which the buyer attaches to the company which he is acquiring and that value is not captured in the balance sheet. By taking out the brand value. Puma. The respondents were asked to state the price which they are willing to pay for unbranded sports shoes. Q) What is the price you are willing to pay for the below mentioned brands? Name Devdeep Daruka Spandan Bandhopadhay Gurcharan Singh Ranabir Pal Amit Sura Zeeshan Mohammad Ghanshyam Burnwal Ganesh Agarwal Adnan Kitabi Rohit Khattar Arunachalam Ramanatham Abinas Mishra Gender M M M M M M M M M M M M Unbranded 700 600 500 700 450 400 600 450 400 500 720 600 Adidas Reebok Puma 3000 2500 2800 3000 2500 2600 2400 2500 3500 4000 2500 2300 3000 3000 2500 3000 3000 2500 3000 3000 4000 3500 2500 2500 2500 2000 2000 2000 2000 1500 2000 2000 1500 2000 1500 1500 Nike 2500 2500 2500 2500 2500 2500 2500 2500 3500 5000 3500 2000 . the value of a brand will actually signify Adidas’s presence in the category of shoes. Adidas. The difference between the amounts which a consumer is willing to pay for a branded product and an unbranded product is the price premium which a brand commands.

399375 Brand Value= Brand Revenue*Brand Co-efficient The Brand Value of Adidas through this method was found to be $4. The premium over an unbranded sports shoe for Adidas is Rs 2237.3/2800 = 0.5 38500 59000 1925 2950 Tabulation & Findings: Unbranded Adidas Premium No.Shubhankar Sengupta Varun Tiwari Anjali Shrikant Kunal Samanta Rewati Rane Binayak Das Aditi Nabeela Khaled M M F M F M F F 600 700 700 450 400 400 700 700 2800 3000 3500 2000 2500 3500 2600 2500 56000 2800 2700 2500 3000 2500 3000 3200 2700 3000 58100 2905 2000 2000 2000 1500 2000 2500 2000 2000 3000 3500 3000 3500 3500 2000 3000 3500 Total 11270 Average 563.52 Brand Co-efficient= Brand value per customer/ Average Adidas shoe price Therefore Brand Co-efficient= 1118. 0.3 Brand Revenue (In Million$) = 12014.52 4798.7bn.299 The average price of a Adidas sports shoe that a customer is willing to pay is Rs 2800 and that for an unbranded sports shoe is Rs 564.3 0.5. Method 2: Gross-Profit Differential . of purchase Brand Value per customer Brand Co-efficient Brand Revenue(In Million$) Brand Value( In Million$) 564 2800 2237 0.e. Brand Value per customer= Premium*No of purchase Therefore the Brand Value of Adidas per customer= Rs 1118.399375 12014.5 1118. The number of purchases that we have taken for Adidas is once every six months i.

bv = (p – n) x Were bv is the Brand Value. Findings:p = Rs 2800 n = Rs 564 x = 4000000 bv = (2800-564)*4000000 bv = 8. It is often used to value brands.944 billion  Purely financially driven approaches Method 3: Book to Market .Introduction: The gross-profit differential method compares the profits of a branded product with that of an unbranded one. the value of a branded product will be equal to the price of that product minus the average price of similar non-branded products. This model is very simple but effective and takes into account the parameters like price premium and the unit sales. n is the average price of similar. P is the price of an unbranded unit.944 billion Brand Value of Adidas is 8.2800. From the data provided by the company. we have taken the average price that the customer is willing to pay for Adidas sports shoes which is Rs. Rationale and Methodology: In this approach. between the branded product and an unbranded or generic product. we have taken the number of units of Adidas sports shoe sold during the year 2009-2010 to be 4mn. The methodology is to look at the difference in sale prices between the margin after costs. The average price of nonbranded sport shoes was determined by asking 20 respondents about the amount they are willing to pay and the value obtained was Rs 564. non-branded products and x is the number of branded units sold For finding the brand value of Adidas sports shoes.

recipes. licenses such as landing slots. specific knowhow. what is the current market price if the company were to be sold today. estimating the total financial value of the brand. a single brand company has shown good brand strength and people regard the brand.  Adidas. design rights. This model takes into account the Book Value of the company. logotypes. retail listings and contracts. Since the brand is so famous we want to check out the book value and the difference between its Book value vis-à-vis Market value. including manufacturing and operating guides and manuals. software.e. third generation telecom licenses government permits and authorizations and raw materials sourcing contracts. Methodology: The book value of the company has been calculated by adding the Reserves and Surplus for the year 2009-10 and the Equity of the company. associated Goodwill general predisposition of individuals to do business with brand are included. this difference is the value of the Brand. land and buildings or financial assets such as receivables and investments. The difference between the Market Capitalization of a company and its Book Value is assigned to Intangible Assets. domain name.Introduction: Book to market model embraces the intangible asset that the company as Brand Value is calculated by deducting Market Value of company with the Book Value. It also considers the Market Capitalization of the company. Book to market method is very important these days because of more and more deals of mergers & acquisitions. Rationale for choosing Book to Market Model For most of the century. In case of a single branded company like Adidas. Categories of intangible asset that support the superior market performance of business are:   Knowledge intangibles: for example patents. Book to Market: Valuation Objective: To measure the brand value of Adidas using Book to Market Model. They would be valued at cost or outstanding value as shown in the balance sheet. production or import quotas. i. distribution rights. product research etc. tangible assets were regarded as the main source of business value. trademarks and trade symbols. . The formula for calculating the Book Value is given below: Book Value = Equity + Reserves and Surplus The market capitalization of Adidas has also been calculated by multiplying the total number of Issued Shares into the average Share Price of Adidas over the last one year. Business process intangibles: these includes trade names. Market position intangibles: for example. These included manufacturing assets.

both now and in the future.89375 5206.92429 7730. therefore the brand value of Adidas has decreased from the previous year using the book to market method. segmented into relevant components of value.16 209.813 5199.266 6.1589 292. This is because the market capitalization has remained the same for the past two years but the total equity has increased in the year 2010. Of outstanding Shares(in million) Market Capitilization(in million $) Brand Value(in million $) 288. DCF valuation is the most widely accepted approach to brand valuation and provides a greater depth of understanding of the dynamics of the brand.915 6364. of issued shares * market price of each share The brand value of the brand through this method can be found out by the following formula Brand value= Market Capitalization – Total Equity Tabulation & Findings Average Share Price Of Adidas (in $) Particulars(Figures in Million $) Equity Share capital Reserves Retained earnings Total share holders Equity(million$) Non-controlling interest Total Equity (million $) Total No.216 14104.96125 209. While brand valuations can be based on a multiple of .216 14104.765 67.295 4618.92 8898. Method 4: Discounted Cash Flow Introduction: The model focuses on the return earned as a result of owning the brand – the brand’s contribution to the business. The DCF approach is consistent with the approach to valuation used by financial analysts to value equities and by accountants to test for impairment of fixed assets (both tangible and intangible) as required by new international accounting standards.89 billion which has reduced to $7.2363 5299.The formula for calculating the market capitalization is given below: Market Capitalization = No.73 billion in the year 2010. The framework is based on a discounted cash-flow (DCF) analysis of forecast financial performance.963038 288.31 9.65125 6373.418 2010 2009 The brand value of Adidas in the year 2009 was calculated at $8.15888 776.

historical earnings it is clear that past performance is no guarantee of future performance and that investors base value judgements on expected future returns rather than actual historical returns. historical results are crucial for accurate valuation mainly because they provide information and data relationships which help to more accurately forecast the future. From the DCF method we have tried to arrive at the present value of Adidas and from the present value of the company we will attribute a share to brand value. Rationale: Discounted cash flow method helps us at arriving at the present value of the future cash flows. The rationale behind using this method is that it helps in arriving at comparatively a precise value of brand Adidas. Market data Financial Data Demand Drivers Brand Forecasts Risk Factors Economic Value Added Brand Value Added (BVA) Index Brand Beta Analysis Brand Value Added Discount Rate Brand Value Valuations based on projected earnings are therefore our preferred approach with the caveat that forecasts must be credible. which will be earnings from the brand value and derive the brand value of brand Adidas. However. . Where forecasts are credible the valuation results are both robust and actionable.