Brand Valuation - A versatile strategic tool for business
By Mike Rocha
“CEOs are placing more emphasis on their companies’ brands in investor communications… and the significant role they can play in enhancing business performance.”
Compared to when Interbrand first pioneered brand valuation in the 1980s, global business leaders now widely accept the importance and value of strong brands—and the significant role they can play in enhancing business performance.
Strong brands enhance business performance primarily through their influence on three key stakeholder groups: (current and prospective) customers, employees, and investors. They influence customer choice and create loyalty; attract, retain, and motivate talent; and lower the cost of financing.
The influence of brands on current and prospective customers is a particularly significant driver of economic value. By expressing their proposition consistently across all touchpoints, brands help shape perceptions and, therefore, purchase behavior, making products and services less substitutable. In this way, brands create demand, allowing their owners to enjoy higher returns. Strong brands also create continuity of demand into the future, thus making expected returns more likely—or less risky. Brands, therefore, create economic value by generating higher returns and growth, and by mitigating risk.
Interbrand’s Brand Valuation methodology has been specifically designed to take all of these stakeholders and value-creation levers into account. Role of Brand analysis is about understanding purchase behavior: the brand’s influence on the generation of demand through choice. Our Brand Strength analysis measures the ability of the brand to create continuity of demand into the future through loyalty and, therefore, to reduce risk. In doing this, we consider ‘internal’ (management and employee) and ‘external’ (customer) factors. Finally, these inputs are combined with a financial model of the business to measure the brand’s
ability to create economic value for its owner.
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 of how a brand valuation exercise could help you. The business applications for brand valuation can broadly be categorized into three areas:
- Brand management
- Strategy/ business case development
Increasingly, CEOs are placing more emphasis on their companies’ brands in investor communications. Many more annual report column inches are now dedicated to discussing an organization’s commitment to its brand, from the CEO on down. Numerous companies take their brands seriously enough to report on their value over time to investors.
Brand also continues to be a key driver of acquisition premiums in M&A. 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.
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, it 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. It also provides a common language around which a company can be galvanized and organized. 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 are:
- A ‘heat map,’ indicating areas of strong and weak performance for the brand (this can be across geographies, products, or customer groups, for example).
- Drill-down analysis into specific segments in the portfolio to identify reasons for over- and under-performance.
- Recommendations 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 brand strategy.
- Allows responsibility for performance on the ten brand strength factors (see below for further details) 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.
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.
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.