9/23/2014

Brand Management
MK542E
Brand Equity and Brand Valuation

Dr. Dildar Hussain

Assistant Professor
ESC Rennes School of Business
Office No. 327
dildar.hussain@esc-rennes.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 it is important to put a value on brands?
Evaluate different approaches and methods to valuing brands
Understand strategic implications of brand valuation

9/23/2014

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 brands 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)

9/23/2014

What is Brand Equity - 2

This partly explains why brands have been added to companys balance sheet
In 1988, Nestl paid six times of the book value for acquisition of brands; for example,
Kit Kat
Quality Street
Smarties, etc.

Implications of Leuthessers 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

9/23/2014

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 companys
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

MCDonalds - no
Burger King , LV, Prada, LOral, Gucci - yes
Issues with valuation methods
8

9/23/2014

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
9

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 companys 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)

10

9/23/2014

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

11

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
Firms total brand equity can be measured by subtracting the estimates economic value (not
just book value) of tangible and intangible assets from its stock market value
Another approach applies momentum accounting
Brands 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

12

9/23/2014

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 brands names, symbols, associations, and reputation to all target audience
who interact with it

13

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
14

9/23/2014

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

15

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

9/23/2014

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 brands 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

17

18

9/23/2014

Summary Brand valuation models

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

Categories

Business finance
models

Brand valuation
models

Psychographic/
behaviorally
orientated models

Characteristics
- Quantitative procedures to compute a monetary value
for brand equity.
- Consumers perspective not taken into account.
- Used to value brand equity in the context of
acquisitions, licensing and analyusts options.
- Referring to cost-based approach; market-based
method; income-based or earning capacity method;
market value orientated or comparables; and premium
pricing.

- 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
explaining brand strength.
- Endeavour to explain what goes on in the hearts and
minds of customers to determine a brands value.
- Refer to Aakers brand equity approach; Kellers
customer based brand equity; and Young & Rubicam
BAV.

Brand Valuation Methods -

Brandz Top 15 brands of 2014

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

20

10

9/23/2014

21

Best Global Brands - 2

2013

China Telecom

2012

VISA
Marlboro
Microsoft

Brandz - MillwardBrown

AT&T
Coca cola
Mc Donalds
IBM
Google
Apple
0

50000

100000

150000

200000

Toyota
Intel
Samsung
Mc Donalds
GE
Microsoft
IBM
Coca cola
Google
Apple

22
0

50000

100000

150000

11

9/23/2014

Brand Valuation Methodology

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

Brandz
https://www.youtube.com/watch?v=u7oIjjq3z80&list=PLvYWJhl4wAxPXTGxjkO1EnAyiHTgArPZu

23

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

24

12

9/23/2014

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

25

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, less marketing, customer service in KPIs,
customer retention, numbers, retention rate, and customer complaints

26

13

9/23/2014

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

27

Case Study

Nike Incorporated

28

14

9/23/2014

dildar.hussain@esc-rennes.fr

29

15