4 Brand Valuation Methods

Value has different meanings to different people. The objective of the valuation is determined by its use. Some of the more common valuation approaches are market based/direct measurement method; brand communication investments based method; awareness and franchise valuation method; finance based/indirect measu- rement method; excess-earnings method and relief-from-royalty method.

The simplest direct measurement is to add all the brand’s communication investments, adjusted for inflation. An additional adjust- ment is sometimes made to account for and reward the risk taken by past managers. This adjustment is called the discount rate and it is used to compute the net present value of the successive investments, that is, what they are worth today. The method is simplistic and overvalues the brands; but brand buyers use it for that very reason. It also penalises brands that do not advertise heavily.

Another direct measurement is the awareness and franchise valuation method. Marketing/product managers, when projecting the volume for a new product, routinely use equations that convert a given advertising budget into its resulting awareness, awareness into trial, and trial into its resulting consumer franchise and consumption volume. Valuation just takes the same path but reverses its direction. This method is easy to use and requires less research than the one previously mentioned.

One of the indirect valuation method is excess-earnings method that tries to assess the increase in profit (or cash flow) attributable to the brand. Then it projects these cash flows over the useful life of the brand (usually limited to 10 years) and does a discounted cash flow analysis, where each year’s projected cash flow is discounted according to the assumed risk of the investment and how far away it will materialise. The sum of these cash flows plus the residual value of the brand at the end of the analysis gives the brand value. The major difficulty with this analysis resides in estimating the incremental effect of the brand on sales or profits.

Relief-from-royalty is another method used by financial analysts. It is based on the concept that, if the company did not have the use of its brand name, it would need to license that right in exchange for a royalty fee. These royalty fees are usually based on a percentage of sales (not profits). The valuation consists of first estimating the fee as a percentage of sales and then projecting that fee over the useful life of the brand.

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