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APPROACHES
Brand Valuation Approaches:
Overview
Description Comment
Price premium Values a brand on the basis of Practical approach
valuation
the premium consumers are Neglects margin perspective
willing to pay for it
Royalty-based
Establishes brand value as Royalty rates difficult to
valuation net-present value of (likely) obtain
annual royalties
Brand margin Derives brand value from Reflects a brand's net earnings
valuation brand profitability (brand value to its owner
revenue minus brand Relatively complex
investment)
Brand discounted
Values a brand by discounting Establishes net present value of
cash flow valuation total net cash flows brand
attributable to the brand over Dependent on identification of
lifetime of brand discount rate and of future
Discounted cash flow revenue
Detailed and informative
Interbrand approach
valuation approach High degree of subjectivity
Includes market, brand
strength and legal aspects in
analysis
PRICE PREMIUM VALUATION
The brand premium approach establishes brand The brand premium approach provides a financial
value based on the premium consumers are willing value for tracking purposes
to pay for a brand relative to a non-branded product
Easy to calculate at frequent intervals
Information readily available (also for
Brand value = Price premium x volume competitors)
Summed over categories Outcome similar to more complex methods
with regard to ranking
Volume-premium change analyses help
understand market dynamics and possible
A non-branded benchmark does not always
growth strategies
exist
- Proxy benchmark price = average of
three lowest price competitors but must be used with some caution
(joint market share > 1.5%)
Absolute values change depending on
benchmark and base year
Neglects level of brand investment, i.e., a
margin perspective
ROYALTY-BASED VALUATION
The royalty approach establishes brand value as the The royalty method has been used extensively in
net present value of the annual royalties the the valuation of intellectual property but is less
company could hope to receive if it licensed the suitable for brand valuation due to several reasons
right to use the brand
Royalty rates uncommon in most markets
(owners will want to exploit successful
brands themselves)
Brand value =
(Royalty rate x sales)n Often only covers small fraction of total
(1+r)n brand sales
Royalty rate (expressed as % of annual sales)
n=I
dependent on several conditions Generally reflect market conditions markedly
different from brand's main markets
- type of market (often underdeveloped)
- agreed level of advertising and
marketing expenditure
- minimum sales level
- margin included
BRAND MARGIN VALUATION
Brand margin approachdescription Brand margin approachassessment
The brand margin approach values a brand's Brand margin approach is a more "correct"
earnings reflection of the value of a brand to the company
Brand value = Brand revenue - incremental Values a brand's net earnings
brand investment
Related Earnings
RM - R = QM(PM - CM) - Q(P - C) - MKTG - R&D - IMP - INV
Brand DCF approach applies same Apparently "exact" financial measure of brand
methodology as company DCF values
Provides a strong link to company cash flow
and total shareholder return
Brand (Free cash flow)n
Value
n=1 (1 + r)n But too many assumptions required with too little
= added value
Assumptions concerning the lifetime of the
brand, all future cash flows and the right
Brand related earnings discount rate
+ Depreciation of brand assets Severe data separability issues
+ Interest payments - How to separate brand-related earnings
+ Reserves (due to brand) from
Investment in brand assets non-brand related?
- Are brand assets at all accounted for?
- How have brand investments been
= Free cash flow of brand financed?
- Brand related part of reserves?
Calculation of competitive brand values
almost impossible
INTERBRAND'S VALUATION
METHOD
Interbrand approachdescription Interbrand approachassessment
Interbrand uses an "economic use" valuation The Interbrand method is detailed and informative
but has some limitations
A brand can be valued by assessing its net
contribution to the current owner in its current Can hardly be integrated into a tool to be
use now and in the future used on a more frequent basis
Valuation consists of 4 elements Difficult to calculate the brand value of
competitors due to requirement for detailed
Intangible earnings are isolated through a
company information
detailed Financial Analysis
High degree of subjectivity when calculating
A Market Analysis establishes the Role of
brand value
Branding Index (RBI) indicating the
importance of branding in the market being Consumers' view of a brand not considered
examined
Cost of offering a brand is not included
- brand earnings equals intangible
earnings times RBI
The Brand Strength Analysis shows to what
extent brand earnings can be realized over a
longer period of time
The legal situation of the brand is assessed in
the concluding Legal Analysis
$
Operating earnings
x % Role of Branding Index
/ %
Discount factor
- Charge for tangible
capital
Weighting the relative importance of the business driver for the business assessed through customer research
Brand Dependence the importance of branding in that driver
RBI The importance of branding to the business
Net Sales 440,0 480,0 500,0 520,0 550,0 580,0 620,0 650,0
Operating earnings 66,0 72,0 75,0 78,0 82,5 87,0 93,0 97,5
Tangible capital employed 220,0 240,0 250,0 260,0 275,0 290,0 310,0 325,0
Charge for capital (5%) 11,0 12,0 12,5 13,0 13,8 14,5 15,5 16,3
Intangible earnings 55,0 60,0 62,5 65,0 68,8 72,5 77,5 81,3
Brand earnings (75%) 41,3 45,0 46,9 48,8 51,6 54,4 58,1 61,0
Tax rate 33% 33% 33% 33% 33% 33% 33% 33%
Tax paid 13,8 15,0 15,6 16,3 17,2 18,1 19,4 20,3
Post-tax brand earnings 27,6 30,0 31,3 32,5 34,4 36,3 38,7 40,7
Discount rate 15%
Discount factor 1,0 1,15 1,32 1,52 1,75 2,01
Discounted cash-flow 31,4 28,3 26,1 23,9 22,1 20,2