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UNIVERSITY OF

PASSAU
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Marc Fischer
MASB Winter Board Meeting, Chicago,
March 11-12, 2010

Methods of Brand
Valuation:
What is Known
Featured Project: Measuring Brand Value

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• What‘s in a brand name?
• Measuring brand value – Metric
characteristics and methods

• Discussion

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• What‘s in a brand name?
• Measuring brand value – Metric
characteristics and methods

• Discussion

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A shortcut for tangible and intangible values

The ultimate driving machine

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A guarantee for quality

Always better

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A delivery on a promise

I’m lovin’ it

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Brands are more than the product
in percent
Gustation test for soft drinks
Blind Not blind

65

51
44

23

12
5

... ... Indifferent ... ... Indifferent


tastes tastes tastes tastes
better better better better

Source: Chernatony & McDonald (1992)


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Personalities have a face

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... which makes them distinctive

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Brands also have a face

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... and stand out from the croud

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Brands create value for the company!
Price index

1 Liter = 1,137

1 Liter = 282

1 Liter = 100*

* Average
Source: Kaufhof, Mai 2007

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Are there limits of price stretching?

100 ml = EUR 1.17 100 ml = EUR 79.93

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„We gave up selling motor bikes. We sell a way of life. The bike is an
add-on for free!“
(Jeffrey Bluestein, CEO)

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Brand value arises in the head of the customer

Brand value

"... is the discounted incremental


future cash flows accruing from
products and services bearing the
brand name compared with a
(fictitious) situation in which the firm
offerings had no brand name..."

Sources: according to Ailawadi, Lehmann, and Neslin (2003); Fischer (2007); Shocker and Weitz (1988);
Simon and Sullivan (1993)
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• What‘s in a brand name?
• Measuring brand value – Metric
characteristics and methods

• Discussion

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There is a jungle of brand valuation models ...

Interbrand-
Model BBDO-Model Incremental
EPG

Semion-Model

Historical
costs GfK-Model

Life duration Price


approach premium
Theory of option
valuation

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… which do not converge at all
BRAND VALUE
EUR millions

AC Nielsen 958

Brand Rating 953

Seven brand PwC/GfK 833


valuation experts
determined the brand
value for a fictitious Interbrand 463
company based on
the same data
KPMG 425 516

BBDO 386

Semion 173
+450%
Source: Special issue absatzwirtschaft 2004
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Brand valuation models need to fulfill their purposes

• Mergers and
acquisitions
• Financial reporting
Key questions • Decision support for
brand management
• Litigation support
Valuation • ...
• What is the purpose
of valuation? purpose

• Which is the target


group?

• What is the object Target


Object
of valuation? group

• Analysts/ • Corporate
Investors brand
• Management • Umbrella brand
• Customers • Brand portfolio
• Employees • Monobrand
• Retailers • ...
• ...
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We need standards for brand valuation

Where are accounting qualities important?

MMAP
characteristics of an • Purchase price allocation in acquisitions,
mergers, and sales of businesses
ideal metric
• Annual impairment tests for recognized
brands
• Reporting to tax authorities
• Litigation and insolvency proceedings
Characteristics of an
ideal accounting • Communication to investors
metric • Securitized borrowing

Many external stakeholders only


accept metrics that meet generally
accepted accounting standards

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The vast majority of characteristics of MMAP and FASB ideal metrics
are congruent
General accounting Interpretation/co MMAP characteristics
qualities mponents of an ideal metric
(SFAC No. 2/1980) (FASB 1980) (MASB 2006)
- Predictive value 1. Relevant
• Relevance
- Feedback value 2. Predictive
- Timeliness 6. Sensitive

- Verifiability 3. Objective
• Reliability
- Representational 9. Transparent
faithfulness
- Neutrality

- Consistency across 4. Calibrated


• Comparability
analysis units and 5. Reliable
time
7. Simple
• Understandability

8. Causal
• Benefits > Costs
Specific to each 10. Quality assured
catalogue

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Derived critical criteria for brand valuation

Accounting + MMAP Critical brand valuation criteria


qualities of metric

• Relevance • Future orientation (DCF-analysis)

• Reliability • Objectivity (valid and reliable


measurement)
• Completeness
• Comparability • Comparability (across brands and
time)

• Understandability
• Simplicity (can be applied by non-
experts)
• Benefits > Costs • Cost-effectiveness
• Reflects the brand value chain
• Causal
(includes intermediate marketing
outcomes)

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Process of brand value creation
Costs/investment
Marketing program
Marketing Capital
Cost of
& other expendi-
Perceived Brand capital
expenditures tures
Price price knowledge
performance
Brand
aware-
ness
Perceived
Product product Brand Discounted
image Customer Brand
performance future cash
response revenues
flows
Utility Including brand
maxi- equity-related
Perceived mization revenues:
Distribution transaction
performance - Price premium
Brand - Volume premium
choice Financial
brand equity

Perceived
Communi-
information
cation
performance • Retention of customers
• Acquisition of new customers
• Re-acquisition of lost customers

Source: Fischer (2007), 31


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Financial brand valuation methods can be classified into three broad
classes
Main limitation for
Value equals… brand valuation

Historical or replacing Costs are not predictive


Cost costs for asset of future income
approach streams

Methods Market transaction Appropriate market data


for valuing Market price, bid, or offer for are usually not available
intangible approach identical or reasonably for brands
assets similar asset

Present value of No general main


Income income, cash flows, or limitation as it is
approach cost savings actually or consistent with the
hypothetically due to the definition of financial
asset brand value

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Alternative brand valuation methods of the income approach (1/3)

Method Basic idea


++ −−
Price- Estimation of price Intuitive logic & sensitive Not complete
premium difference between
method branded and
unbranded offering

Volume- Estimation of volume Intuitive logic & sensitive Not complete


premium (market share)
method difference between
branded and
unbranded offering

Revenue- Estimation of revenue Simple & transparent if • Consistency across time


premium difference between appropriate private label and analysis units not
method branded and available ensured
unbranded offering
• Assumes competitive
equilibrium strategies that
need to be forecasted

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Alternative brand valuation methods of the income approach (2/3)

Method Basic idea


+ −
Relief-from- • Estimation of Intuitive logic & relevant Comparable brands licensed
royalty discounted at arm’s length on a regular
method hypothetical royalty basis often do not exist
(Royalty payments that are
savings saved by brand owner
method)
• Hypothetical royalty
rates are based on
observed rates of
comparable brands

(Multi-period) Estimation of present Intuitive logic & relevant • Not easy to implement as it
Excess value of cash flows requires to be complete in
earnings attributable to the identifying all relevant
method brand after deducting tangible and intangible
cash flows arising assets
from all other tangible
• Subject to error and high
and intangible assets
costs when valuing all other
required to operate the
intangible assets that are
business
difficult to measure

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Alternative brand valuation methods of the income approach (3/3)

Method Basic idea


+ −
Bottom-up Estimation of the • Consistent with the • Credibility depends on the
premium difference between definition of brand value approach to determine
profits discounted cash flows incremental cash flows due
• Relevant, predictive, and
method from the branded to the brand
sensititve
(Incremental business and the
• Not cost-effective because it
income unbranded business
requires to estimate a
method)
second cash-flow stream of
the unbranded business

Top-down Same idea as above, • As above Credibility depends on


premium but two-step procedure transparent and convincing
• Simple, robust, and
profits approach for isolating the
potentially cost-effective
method (1) Forecast of DCF of brand equity share
(Income split branded business
method) (2) Determination of fair
brand share in DCF
of branded business

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A top-down premium profits method that includes intermediate
marketing outcomes and is cost effective Main contribution of
marketing experts

Brand revenues (in EUR)

Discounted cash
flow (DCF) : Tax payments (in EUR)
of brand (in EUR)
Operating expenditures (in EUR)

Capital expenditures (in EUR)


Financial
brand value X Discount factor (cost of capital)
(in EUR)

Brand relevance weight (in %)


Brand equity share
X
(in %)
Brand image* (index multiplier)

* Brand image measures the brand perceptions relative to relevant competitors. A value of one
represents an image that is not different from the market average.

Source: Fischer (2007)


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• What‘s in a brand name?
• Measuring brand value – Metric
characteristics and methods

• Discussion

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Issues to be discussed

• In which detail should the brand value chain be


reflected in the valuation approach?

• Should a brand-specific risk factor be


incorporated into the discount rate?

• Should cross-validation to isolate brand-specific


cash flows always be required?

• MECE*-ness of cash flow decomposition

• Should the method allow for negative brand


values?

• Other issues/questions?

* MECE = Mutually Exclusive and Completely Exhaustive


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UNIVERSITY OF
PASSAU

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