By Mike Rocha
Interbrand’s Brand Valuation methodology provides a common language around which a company can be galvanized and organized.
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 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. We believe that a strong brand, regardless of the market in which it operates, drives improved business performance. It does this through its ability to influence customer choice and engender loyalty; to attract, retain, and motivate talent; and to lower the cost of financing. Our approach explicitly takes these factors into consideration. There are three key components in all of our valuations: analyses of the financial performance of the branded products or services, of the role the brand plays in the purchase decision, and of the competitive strength of the brand.
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.
Role of Brand
This measures the portion of the purchase decision 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 choices 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 can be derived in three ways (and are described in order of preference below):
1. Primary research.Specifically designed research, such as choice modeling (although other techniques are available), where RBI is statistically derived.
2. Existing research plus Interbrand assessment. Existing research addressing the relative importance of purchase drivers is combined with Interbrand’s analysis of the extent to which the brand influences perception of how the product or service will perform against each driver.
3. Qualitative assessment. Based on management discussions and past experience. This is used where no market research is available.
RBI findings are cross-checked against historical roles of brand for companies in the same industry. Finally, 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.
This measures the ability of the brand to create loyalty and, therefore, to keep generating demand and profit into the future. Brand strength is scored on a 0–100 scale, based on an evaluation across ten 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.
The brand-specific discount 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 deliver the expected earnings into the future. This is equal to brand value.
Focus on: Brand Strength
Our experience shows that brands that are best placed to keep generating demand and profit into the future are those performing strongly (relative to competition) across a set of ten factors, shown below.
Four of these factors are internally driven, and reflect the fact that great brands start from within. The remaining six factors are more visible externally, acknowledging the fact that great brands change their world.
Clarity internally about what the brand stands for and its values, positioning, and proposition; clarity, too about target audiences, customer insights, and drivers. Because so much hinges on this, it is vital that these are articulated and shared across the organization.
Internal commitment to brand, and a belief internally in the importance of brand. The extent to which the brand receives support in terms of time, influence, and investment.
How secure the brand is across a number of dimensions: legal protection, proprietary ingredients or design, and scale or geographical spread.
The ability to respond to market changes, challenges, and opportunities. Internally, the brand should have a sense of leadership and a desire and ability to constantly evolve and renew itself.
The brand is soundly based on an internal truth and capability. It has a defined heritage and a well-grounded value set. It can deliver against the (high) expectations that customers have of it.
The fit with customer/consumer needs, desires, and decision criteria across all relevant demographics and geographies.
The degree to which customers/consumers perceive the brand to have a differentiated positioning distinctive from the competition.
The degree to which a brand is experienced without fail across all touchpoints or formats.
The degree to which a brand feels omnipresent and is talked about positively by consumers, customers, and opinion formers in both traditional and social media.
The brand is not only recognized by customers, but there is also an in-depth knowledge and understanding of its distinctive qualities and characteristics. (Where relevant, this will extend to consumer understanding of the company that owns the brand.)