what is brand?
A brand is a name or a symbol - and its associated tangible and emotional attributes - that is intended to identify the goods or services of one seller in order to differentiate them from those of competitors. At the heart of a brand are trademark rights.
why we need a brand? or why to evaluate brand?
A brand designates a product or service as being different from competitors' products and services by signaling certain key values specific to a particular brand. It is the associations which consumers make with the brand that establish an emotional and a rational 'pact' between the supplier and the consumer. This pact is an ongoing relationship between the supplier and consumer, and because of this, brands provide a security of demand that the supplier would not enjoy if they did not own the brand. This security of demand means a security of future brand earnings, and this is what defined as brand evaluation.
NEED FOR BRAND EVALUATION
Although public perceptions of brand valuation are often focused on balance sheet valuations, the reality is that the majority of valuations are now actually carried out to assist with brand management and strategy. Companies are increasingly recognizing the importance of brand guardianship and management as key to the successful running of any business.
The values associated with the product or service is communicated through the brand to the consumer. Consumers no longer want just a service or product but a relationship based on trust and familiarity. In return businesses will enjoy an earnings stream secured by loyalty of customers who have 'bought into' the brand.
METHODS OF BRAND EVALUATION
Today, a widely accepted method of valuing a company or business is to discount the profit or cash flows it produces to a net present value. A similar approach can be used for brands. The profit streams produced by the brand are discounted to their net present value using a discount rate which reflects the riskiness of those income streams being realized i.e. which reflects the strength of the brand - the drivers of those profit streams.
Interbrand, the original pioneers of Brand Valuation employ an economic use method, which is the most widely accepted and has made Interbrand a worldwide authority in this field. It is based on the premise that brands, when well managed, affect the way that consumers behave in the market and the brand owner derives an economic benefit as a result.
Interbrand bases its valuation method on this concept of economic use and the fundamental question: how much more valuable is the business because it owns certain brands? It is thus a marketing measure that reflects the security and growth prospects of the brand and a financial measure that reflects the earnings potential of the brand.
Given this concept of economic worth, the value of a brand reflects not only what earnings it is capable of generating in the future, but also the likelihood of those earnings actually being realized. Broadly speaking Interbrand's brand valuation methodology comprises four elements:
1. Financial Analysis - To identify business earnings and 'Earnings from Intangibles' for each of the distinct segments being assessed.
2. Market Analysis - To measure the role that a brand plays in driving demand for services in the markets in which it operates and hence to determine what proportion of Earnings from Intangibles are attributable to the brand (this is measured by an indicator referred to as the 'Role of Branding Index').
3. Brand Analysis - To assess competitive strengths and weaknesses of the brand and hence the security of future earnings expected from that brand (this is measured by an indicator referred to as the 'Brand Strength Score').
4. Legal Analysis - To establish that the brand is a true piece of 'property' Brand valuation techniques originally developed in response to mergers and acquisitions activity: valuing the brands owned by a company to help calculate the true value of the business.
APPLICATIONS OF BRAND EVALUATION
External investor relations
Mergers and acquisitions were the original driving force for brand valuation. Now many successful companies use brand valuation as an ongoing business performance indicator: to help ensure that brand strength is reflected in share value. (And in many markets the relevant accounting standards allow brands to be shown as assets on the balance sheet).
Internal marketing management
Brand valuation is increasingly being used as a management tool in leading organizations. For example: brand valuation figures can be used to evaluate new product and market development opportunities, to set business objectives, allocate budgets and to help measure performance and reward staff.
Internal royalty rates
Across a large organization there may be many affiliates, subsidiaries or divisions that make use of any particular brand. As the profit potential of brands becomes more clearly understood more companies are charging royalties, across their business operations, for the use of these brand assets.
Licensing and franchising
Where companies allow outside organizations to use their brand, on a licensing or franchising basis, a brand valuation can lay the foundation for appropriate charges.
As the management of brands as financial assets becomes more sophisticated, so tax authorities around the world have started to take an interest in how these assets are managed. The result is that more and more international organizations are planning the most cost-effective domicile for their brand portfolios and are organizing their tax affairs with their brands in mind.
Even in the conservative world of banking, the asset value of brands has been recognized. As a result brands have been used to secure loans, especially in the US, where companies such as Disney have borrowed significant amounts of money against their brand name.
Brand valuations have been used to support litigation against the illegal use of a brand name (as a basis for calculating damages, for example) and also in cases of receivership, to prevent the assets of the business being undervalued.
BENEFITS OF BRAND EVALUATION
Valuation has various intangible and tangible benefits.
Intangible benefits of brand valuation
1. Enhances Confidence: Brand credibility shows the faith & confidence of public at large in the product, Valuation if reflected in the books of accounts further enhances the public loyalty to the product and hence becomes a force multiplier.
2. Indicator of effective utilization: The value in the brand building is generated in the reverse direction when compared to the capital expenditure. We invest in capital expense today and utilize the proportionate investment every year, which we write off in the form of depreciation or amortization, whereas the expenditure in brand building is incurred in installments and is converted into valuable asset over a period of time. The expenditure is considered as revenue expense due to accounting and taxation provision which really is not so, hence valuation gives us the real effective worth, which we have created over the years through brand building and hence becomes an indicator as to how effectively we have utilized the expenditure.
3. Credibility to the real worth: If you valuate your brand only at the time of disposal it has a lesser influence and will always leave a doubt of its real worth, in the mind of both the buyer as well as the seller where as if the brand is continuously valued has a different impact and gives much more creditability to the real worth.
4. Strategy development: Companies are applying brand valuation
techniques in order to understand and manage their brands better. Brand valuation involves a detailed examination of a brand from marketing point, a financial and legal prospective. It also examines the brand performance, prospective, market opportunity, and competition. It thus provides an excellent tool for strategy development.
Tangible benefits of brand valuation
1. Merger & Acquisition: It is of critical importance for an acquirer, as well as for the vender to understand and evaluate their real worth for negotiating the correct price.
2. Disposal: The current focus on brands has led many companies to
recognize that they cannot support properly all their brands or certain brands could be worth more to a third party than to their current owner. Brand evaluation technique can be used to judge which brand to dispose of and their possible economic worth to a third party.
3. Licensing: Brand licensing, either to third parties or internally to its
own subsidiary, is am increasingly common practice. Brand valuation assists in formulating this strategy.
4. Fund Raising: Brand valuation are playing an increasing prominent role in the area of fund raising, particularly from the public as brand represent robust asset against which to seek funds is much easier.
5. Discount Rate: Robust strength also assists in arranging the large funds at lower cost.