Brand valuation is the process of estimating the total financial value of a brand. A conflict of interest exists if those who value a brand were also involved in its creation. The ISO 10668 standard specifies six key requirements for the process of valuing brands, including transparency, validity, :wikt:reliability|reliability, sufficiency, objectivity, financial, behavioral, and legal parameters. Brand valuation is distinct from brand equity.
Brand value
Traditional marketing methods examine the price/value relationship in terms of dollars paid. Some marketers believe customers perceive value to mean the lowest price. While this may be true for commodities, some branding techniques are moving beyond this evaluation. Brand valuation emerged in the 1980s. Early firms involved in providing brand valuations included the British branding agency, Interbrand, led by John Murphy and Michael Birkin, who are credited with leading the development of the concept. In 1989, Murphy edited a seminal work on the subject: Brand Valuation – Establishing a true and fair view; and in 1991, Birkin laid out a brand earnings multiple model of brand valuation in the book, Understanding Brands.
Valuation methodologies
There are three main types of brand valuation methods:
In real estate appraisal, the cost approach is one of three basic valuation methods. The other valuation methods are market, or sale comparison, and income. The fundamental premise of the cost approach is that a potential user of real estate won't, or shouldn't, pay more for a property than it would cost him or her to build an equivalent. The cost of construction minus depreciation, plus land, therefore, is a limit, or at least a metric, of market value.
In this approach, the market price is compared. For example, if one wishes to buy a property in place A, it is quite likely that the price of other nearby properties would be considered before deciding place A's price, rendering the approach based on the market. This valuation method relies on the estimation of value based on similar market transactions of comparable brand rights. Given that often the asset undervaluation is unique, the comparison is performed in terms of utility, technological specificity and property, also considering the perception of the asset by the market. Because the market approach relies on comparisons to similar assets, it is most useful when there is substantial data available regarding recent sales of comparable assets. Data on comparable or similar transactions may be accessed through the following sources:
This approach measures the value by reference to the present value of the economic benefits received over the rest of the useful life of the brand. There are six recognized methods of the income approach.
Price premium method – estimates the value of a brand by the price premium it generates when compared to a similar but unbranded product or service. This must take into account the volume premium method.
Volume premium method – estimates the value of a brand by the volume premium it generates when compared to a similar but unbranded product or service. This must take into account the price premium method.
Income split method – this values the brand as the present value portion of the economic profit attributable to the brand over the rest of its useful life. This has problems in that profits can sometimes be negative, leading to unrealistic brand value, and also that profits can be manipulated so may misrepresent brand value. This method uses qualitative measures to decide the portion of economic profits to be accredited to the brand.
Multi-period excess earnings method – this method requires a valuation of each group of intangible assets to calculate the cost of capital of each. The returns for each of these are deducted from the present value of future cash flows and when all other assets have been accounted for, the remaining is used as the value of the brand.
Incremental cash flow method – Identifies the extra cash flow in a branded business when compared to an unbranded, and comparable, business. However, it is rare to find conditions for this method to be used since finding similar unbranded companies can be difficult.
Royalty relief method – Assume theoretically a company does not own the brand it operates under, but instead licenses the use from another. The royalty relief method uses available data of similar arrangements in the industry and assigns the value of the brand as the present value of future royalty payments.
The recent rise of brand valuation practice led to the multiplication of valuation companies. These companies not only rank brands but also sell them some recommendations for them to improve their portfolio and brand value. The most reputed companies are Interbrand, Millward Brown and Brand Finance.
