1. Financial Analysis
This measures the overall financial return to an organization’s investors, or its “economic profit.” Economic profit is the after-tax operating profit of the brand, minus a charge for the capital used to generate the brand’s revenues and margins. A brand can only exist and, therefore, create value, if it has a platform on which to do so. Depending on the brand, this platform may include, for example, manufacturing facilities, distribution channels, and working capital. Interbrand, therefore, allows for a fair return on this capital before determining that the brand itself is creating value for its owner.
We build a set of financial forecasts over five years for the business, starting with revenues and ending with economic profit, which then forms the foundation of the brand valuation model. A terminal value is also created, based on the brand’s expected financial performance beyond the explicit forecast period. The capital charge rate is determined by reference to the industry weighted average cost of capital.
2. Role of Brand
Role of Brand analysis is about understanding purchase behavior—the brand’s influence on the generation of demand through choice. It measures the portion of the decision to purchase that is attributable to the brand, relative to other factors (for example, purchase drivers like price, convenience, or product features). The Role of Brand Index (RBI) quantifies this as a percentage.
Customers rely more on brands to guide their choice when competing products or services cannot be easily compared or contrasted, and trust is deferred to the brand (e.g., computer chips), or where their needs are emotional, such as making a statement about their personality (e.g., luxury brands). RBI tends to fall within a category-driven range, but there remain significant opportunities for brands to increase their influence on choice within those boundaries, or even extend the category range where the brand can change consumer behavior.
RBI determinations for this study derive, depending on the brand, from one of three methods: primary research, a review of historical roles of brand for companies in that industry, or expert panel assessment. RBI is multiplied by the economic profit of the branded products or services to determine the earnings attributable to the brand (brand earnings) that contribute to the valuation total.
3. Brand Strength
Brand Strength measures the ability of the brand to create loyalty and, therefore, to keep generating demand and profit into the future. In doing this, it considers internal (management and employee) and external (customer) factors.
Brand Strength is scored on a 0–100 scale, based on an evaluation across 10 key factors that Interbrand believes make a strong brand. Performance on these factors is judged relative to other brands in the industry and relative to other world-class brands. The strength of the brand is inversely related to the level of risk associated with the brand’s financial forecasts.
A proprietary formula is used to connect the Brand Strength Score to a brand-specific discount rate. In turn, that rate is used to discount brand earnings back to a present value, reflecting the likelihood that the brand will be able to withstand challenges and generate sustainable returns into the future.
A Versatile Strategic Tool: Applications for Brand Valuation
It is quite possible that you believe that your brand could be (or is) a significant source of competitive advantage for your business, but you are unsure how a brand valuation exercise could help you.
The business applications for brand valuation can be broadly categorized into three areas:
- Brand Management
- Strategy/Business Case Development
1. Brand management applications
Ultimately, everything we do as brand managers should be considered through a value creation lens. Considerable investments are made in brands and, ultimately, it is important to determine if these actions are creating value for your customers and, in turn, your shareholders. Interbrand’s brand valuation methodology seeks to determine, in both customer and financial terms, the contribution of the brand to business results.
A strategic tool for ongoing brand management, brand valuation brings together market, brand, competitor, and financial data into a single, value-based framework within which the performance of the brand can be assessed, areas for improvement identified, and the financial impact of investing in the brand quantified.
Role of Brand analysis lets us know where investment in (and focus on) brand improvements will have the biggest impact. It can be thought of as a measure of “brand leverage.”
Brand Strength is the key diagnostic tool with which we can measure brand performance and better understand the reasons behind a brand’s strengths and weaknesses, both internally and externally. It supports strategic brand management by prioritizing areas of highest impact for managers.
Typical deliverables from a Brand Strength analysis include:
- A heat map indicating areas of strong and weak performance for the brand (this
can be across geographies, products, or customer groups)
- Drill-down analysis into specific segments of the portfolio to identify reasons for
over- and under-performance
- ecommendations for improvement on Brand Strength factors, together with a cost/benefit analysis to inform prioritization.
The core benefits of Brand Strength analysis are that it:
- Enables constructive dialogue about the brand between different parts of the business by creating a common language for discussion of brand performance
- Provides global and local managers with an actionable tool to make informed
marketing decisions—empowering management with insights to implement
- Allows responsibility for performance on the ten Brand Strength factors (see below) to be allocated to functions across the business, building engagement and a sense of responsibility for the brand across the organization.
Finally, when the Role of Brand and Brand Strength analyses are connected to the financial model, they provide a framework for resource allocation and prioritization based on the opportunities to enhance brand performance that are expected to have the greatest impact on brand and business value.
2. Strategy/Business case applications
From time to time, businesses need to evaluate significant changes in brand strategy, whether it be repositioning, brand architecture, brand extension, or even a complete rebrand. These kinds of changes typically involve significant financial outlay upfront, along with a high degree of uncertainty over when, or whether, a positive return will be made on that investment.
Some CEOs are willing to make these critical brand strategy decisions based on qualitative strategic analysis and intuition. The majority, however, are looking for a business case that goes further. They want to understand the likely overall financial impact on the business over time, covering a range of alternative scenarios.
In addition to a detailed breakdown of the expected costs to deliver, a rounded business case will also quantify the expected impact on the top line through the modeling of key revenue drivers (these will vary based on the business, but could include customer acquisition, churn, price premiums, share of wallet, frequency of purchase/visit, average basket size, and so on), and on profit margins from any operational changes required to deliver the new strategy. Finally, sophisticated
techniques such as Monte Carlo simulation may be employed, running thousands of
possible permutations in order to estimate the most likely outcome.
By bringing together market, brand, competitor, and financial data, the brand valuation model is the ideal framework within which such business case modeling can be conducted.
3. Financial applications
Increasingly, CEOs are placing greater emphasis on their companies’ brands in investor communications. Many more annual reports these days dedicate space to discussing an organization’s commitment to its brand, from the CEO down. Numerous companies take their brands seriously enough to report on their value over time to investors.
Brands also continue to be a key driver of acquisition premiums in mergers & acquisitions. Often, it is the latent potential of the brand that is driving this premium through its ability to enter new markets and extend into adjacent categories. A broad skill set, combining market research, brand, and business strategy, together with business case modeling, is required to quantify the latent financial potential of the target brand.
Interbrand’s brand valuation methodology can also be used to complement other more traditional techniques for setting royalty rates for brands. By identifying the value created by a brand for its business, combined with an evaluation of the relative bargaining power of the parties involved, we are able to advise on the proportion of brand value that should be paid out as a royalty rate in return for the right to exploit the brand.
As global competition becomes tougher and many competitive advantages, such as technology, become more short-lived, the brand’s contribution to shareholder value will only increase. Brands are one of the few business assets that can provide long-term competitive advantage.
Companies as diverse as Samsung, Philips, Hyundai, and AXA, among many others, have used brand valuation to help them refocus their businesses on their brands, motivate management, create an economic rationale for branding decisions and investments, and make the business case for change.
Although many brand metrics are available, few can link the brand to long-term financial value creation and this, along with its many other applications, makes brand valuation a versatile strategic tool for your business.