Interbrand’s valuation methodology enables you to articulate the contribution of your brand to business results. It brings together market, brand, competitor, and financial data into a single framework within which a brand’s performance can be assessed, a roadmap for improvement identified, and the financial impact of investing in your brand quantified.
One component of the methodology is our Brand Strength framework. This is a diagnostic tool that delivers actionable insights, letting you know what to do next, rather than providing a rear-view mirror of past performance. Additionally, by addressing the strength of your brand inside your organization as well as externally, we provide a more holistic assessment of your brand performance.
Finally, we combine these powerful tools with diverse skills and experience. By bringing Interbrand’s unique combination of strategic, creative, analytical, and financial skills to our valuations, together with our experience of working with world-leading brands, we generate rich and varied insight from the valuation process, truly delivering on our mission to create and manage brand value.
Since Best Global Brands launched in 2000, this annual look at the world’s most valuable brands has been one of Interbrand’s most important commitments to the promotion of brands as key value creators for business and society. In 2010, our brand valuation methodology was the first to be certified as compliant with the requirements of the ISO 10668 international standard for monetary requirements for brand valuation.
There are several criteria for inclusion in Interbrand’s annual Best Global Brands report. The brand must be truly global and needs to have successfully transcended geographic and cultural boundaries. It must have expanded across the established economic centers of the world, and be establishing a presence in the major markets of the future. In measurable terms, this requires that:
These requirements—that a brand be global, visible, and relatively transparent in financial results—lead to the exclusion of some well-known brands that might otherwise be expected to appear in the ranking. The Mars and BBC brands, for example, are privately held and do not have publicly available financial data. Walmart, although it does business in international markets, often does so under a variety of brands and, therefore, does not meet Interbrand’s global requirements.
For similar reasons, brands in several sectors have been excluded. Telecommunications, for example, tends to be strongly oriented to national
markets and faces awareness challenges outside of home markets. The airline industry is highly capital intensive and, typically, operates on narrow margins. This means that airline brands struggle to achieve positive economic profits over the long term. Major pharmaceutical companies, while valuable businesses, are also omitted. This is because consumers tend to build a relationship with the product brands rather than with the corporate brand owner, and there is insufficient publicly disclosed financial data on pharmaceutical product brands to meet Interbrand’s criteria.
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 competitive strength of the brand, the role the brand plays in the purchase decision, and the financial performance of the branded products or services.
A Versatile Strategic Tool: Applications for Brand Valuation
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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.
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.
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.
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:
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:
The core benefits of Brand Strength analysis are that it:
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.
Our experience and knowledge show that brands in the ideal position to keep generating demand for
the future are those performing strongly (i.e., “showing strength” versus the competition across a
set of 10 factors that are outlined below). Four of these factors are more 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. The higher the Brand Strength Score,
the stronger the brand’s advantage.
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, scale, or geographical spread.
The ability to respond to market changes, challenges, and opportunities. The brand should have a sense of leadership internally, 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.)
• Read more about Interbrand’s Brand Valuation, including case studies, here.