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Importance of Brands.
Financial Value of Brands
Brand as Business Assets
Brands on Balance Sheet
Approaches to Brand Valuation
Social Value of Brands
Brands & Wealth Creation
Brand in M&A

Brands - Importance
Economic importance
Social importance
Political importance
Economic importance
1. Brands benefit all stakeholders.
2. Strong brands drive share performance.
3. Strong brands protect customers.
4. Brands ensure business are accountable for their actions.
5. Brands help business to cross geographic and cultural boundaries.
6. Brands ensure competitive economy.
7. Brands help economy to adapt and grow (innovation).
Social importance
1. Wealth creation
2. Improving living standards.
3. Minimal unethical behavior.
4. Provides more security & stability of employment.
5. Increase investment in R&D.
Political importance
1. Political symbol (Brand America)
2. Bind people and culture together.
He who owns the brand owns the wealth.

Brands as Business Assets

Business assets creates business value.
Business Assets - Tangible & Intangible assets.
Tangible assets - Land, buildings, machinery, cash etc.
Intangible assets - Brands, technology, patents, employees.

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Historically tangible assets were regarded as the main sources of business values. Intangible assets are
always at the heart of corporate success, but rarely explicitly valued.
Increasing recognition of intangible assets came with the continuous increase in gap between companies
book value and their stock market valuations.
Recent studies indicated that, over a period from 1975 t0 2005, the contribution of intangibles to the
overall corporate value increased from 17% t0 80%.
This is specifically evident from the premium price paying for M&A.
Due to economic value of brands, they are the most important intangible asset. Brands can influence the
choice of
Customers.
Employees.
Investors.
Government authorities.
Brands are also durable compared to other intangible assets. For example, Coca-Cola is a 120 years old
brand.
Various studies concluded that an average brand accounts for more than of shareholder value.

Brands on Balance Sheet

With new accounting guidelines, acquired goodwill needs to be capitalized on the balance sheet and
amortized according to its useful life. However, intangible assets such as brands that claim infinite life do
not have to be subjected to amortization. Instead, companies need to perform annual impairment tests.
If the value is same or higher than the initial valuation, the asset value on the balance sheet remains same.
If the impairment value is lower, the asset needs to be written down to the lower value.
Key limitations are
Only acquired goodwill is recognized.
Problems with the quality of brand valuations for balance sheet recognition.

Approaches to Brand Valuation

For some companies, the brand is the most important asset they have. Having a brand like Google, CocaCola or Mercedes Benz almost guarantees business success.
The purchasing of brand is no longer merely an acquisition of a product, it also includes an intrinsic
experience of a consumer and even reflects a certain lifestyle.
A successful brand has loyal consumers, which ultimately reflects on sales value and brand owners
market value.

The total brand value includes two aspects.

1. Economic value
2. Social value
Economic value - The economic value of brand in a companys shareholder value is most visible when
companies are being bought and sold. In 1989, Philip Morris paid 12.8 billion USD for Kraft, six times its
net asset value.
Several studies have tried to estimate the contribution that brands make to shareholder value. The 2003
study by Interbrand, concluded that on average brands account for more than of shareholder value.
Social value - A brand that has social value ensures success on the market. For individuals, the social
value of a brand lies in the
Consumer surplus
Freedom of choice
Possibility to express preference & personality by buying a certain brand.
Branded companies invest more in R&D, which in turn leads to a continuous process of product
improvement and development.
Brand value means the financial value of the brand. The concept of brand valuation emerged in 1970. The
ability to value and put a price tag on a brand may be useful for a number of reasons.
Basic brand evaluation approaches falls into 3 categories.
1. Research based
2. Financially driven
3. Economic
Research Based Approaches
This approach uses consumer research to assess the performance of brands. Research approach do not put
a financial value on brands, they just measure the customer behavior and attitudes that have an impact on
the economic performance of brands. They include a wide range of perspective measures.
Brand awareness
Brand knowledge
Brand familiarity
Brand satisfaction etc.
The disadvantage of the research based techniques is that they do not differentiate between the effects of
the brand on consumers and effects of other factors such as research, development & design.
A brand can perform strongly according to these indicators, but still fail to create financial & shareholder
value.
Financially Driven Approaches

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Financially driven approaches do not research consumer behavior, but are based on financial performance
of a certain brand. Financially driven approaches include
1. Cost based approaches
2. Comparables
3. Premium price
Cost based approaches define the value of a brand as the aggregation of all historic costs incurred while
bringing the brand to its current state. These costs can include
Development costs
Marketing costs
Advertising costs
Communication costs etc.
Cost based approaches fail because there is no direct correlation between the financial investment made
and the value added by a brand.
Comparables approach is used to arrive at a value for a brand by observing and valuing comparables of
different brands. Defining a comparable is difficult as by definition a brand should be differentiated and
thus not comparable. Comparables can provide an interesting cross check. However, they should never be
relied on solely for valuing brands.
Premium price is the price paid by a buyer for improved quality of the product. In this method, the price
(premium price) is calculated as the net present value of future price premiums that a branded product
would command over an unbranded or generic equivalent. This method is flawed because there are rarely
generic equivalents to which the premium price of a branded product can be compared. In today's world,
almost everything can be branded.
Both research based and financially driven approaches are essentially one dimensional. Research based
approaches lack financial component, while financially driven approaches lack marketing component to
provide a complete and robust assessment of the economic value of brands.
Economic Use Approach
The economic use approach provides the multidimensionality to brand valuation as it combines brand
equity with financial measures. This brand valuation includes both a marketing measure that reflects the
security and growth prospects of the brand and a financial measure that reflects the earnings potential of
the brand.
The total brand value comprises several tiers which when put together resemble a pyramid.

Brand value is often identified with its most visibly attractive elements, but that is just the first tier
(the top of the pyramid) of the overall brand value. Tier two contains financial measures such as brands
profitability, income, and tax, while tier three contains measures of brand strength and market conditions.
Given this concept of economic worth, the value of a brand reflects not only what earnings it is
capable of generating in the future, but also the likelihood of those earnings actually being realized.
Interbrands brand valuation model is shown below.

Segmentation - Brands influence customer choices that varies depending on the market in which the
brand operates. This is why, market is split into segments, may be based on consumption patterns,
geography etc. The brand need to value in each market separately.
Financial analysis - Includes identification and forecast of revenues and earnings from intangibles.

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Demand / Market analysis - Assess the role that brand plays in driving the demand for products and
services in the markets and determines what proportion of intangible earnings is attributable to the brand.
Brand earning - Is calculated by multiplying the role of branding index by intangible earnings.
Competitive benchmarking - Looks at the competitive strengths and weakness of the brand as well as the
likelihood of the expected future earnings. Brand strength typically comprises seven components.
1. Geographic footprint (Spread)
2. Leadership
3. Stability
4. Support
5. Profit trend
6. Consumer preference
7. Legal protection
Brand strength score can be transformed into a discount rate using an S curve.
Brand value is the NPV of the forecasted brand earnings discounted by the brand discount rate.
Brand valuation systems are mainly used for
Strategic brand management
Financial transactions
Strategic brand management includes
Making decisions on business investments.
Measuring the return on brand investments.
Making decisions on licensing the brand.
Award & promote employees.
Organize & optimize the use of different brands.
Assessing co branding initiatives
The financial use of brand valuation include the following.
1. Assessing the fair transfer prices for the use of brands in subsidiaries.
2. Determining the brand royalty rates.
3. Capitalizing brand assets on balance sheet.
4. Determining the price in M&A or sales of company.
5. Using brands for securitization of debt facilities.
Social Value of Brands
Brands & Wealth Creation

Brand Audit
Brand audit is a comprehensive examination to assess the health of the brand, uncover its sources of
equity, and suggest ways to improve and leverage that equity.

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The scope of a typical brand audit includes
Brand vision & mission
Brand promise & values
Brand position
Brand personality
Brand performance
Brand audit dimensions are
Brand Inventory (Supplier side)
Brand elements
Supporting marketing programs
Profile of competitive brands
POPs and PODs
Brand mantra

Brand Exploratory (Demand side)

Awareness & favorability
Uniqueness of associations
Customer based equity model

Typical steps include

1. Establish brand audit objectives, scope & approach
2. Background about the brand.
3. Background about the industries.
4. Consumer analysis - motivation, perception, needs etc.
5. Brand inventory
6. Brand exploratory
7. Summary of competitor analysis
8. SWOT analysis
9. Brand equity evaluation
10. Strategic brand management recommendations