Methods for Assessing Brand Value

MA-Thesis / Master von Tatiana Soto J.

Abstract:

In today’s highly competitive business environment, companies have recognised the increasing importance of brands as one of their most important assets. However, now the discussion is how to measure the value of such an important asset and what makes this valuation important.

The purpose of this thesis is the critical comparison between two well-known brand valuation methods in order to choose the one that reflects the monetary value of a brand best possible. For this purpose, the methods are first analysed in relation to their compliance with the requirements for brand valuation methods. Secondly, the extent to which the methods can be applied for the different valuation purposes is also analysed. The two selected methods are the Interbrand model (from Interbrand Zintzmeyer & Lux) and the Brand Equity Evaluator model (from BBDO Consulting).

Table of Contents:

	List of Abbreviations	IV
	List of Figures	V
	List of Tables	VI
1.	Introduction	1
1.1	Background	1
1.2	Purpose and Structure of the Thesis	3
2.	Foundation of Brand Valuation	6
2.1	Importance and Definition of Brand	6
2.1.1	Importance of Brand	6
2.1.2	Brand Definition	8
2.1.3	Brands as Intangible Assets and Generators of Value	11
2.2	Definition of Brand Value	14
2.2.1	Financial Approach	15
2.2.2	Behavioural Approach	17
2.2.3	Combined financial/behavioural Approach	19
3.	Selection of the Comparison Criteria for Brand Valuation Methods	21
3.1	Requirements for Brand Valuation Methods	22
3.1.1	Methodical Requirements	22
3.1.2	Covering Content Requirements	23
3.1.3	Relevance of Result Requirements	24
3.2	Scopes of Application of Brand Valuation	26
3.2.1	Internal Scope of Application	27
3.2.2	External Scope of Application	30
4.	Methods for Assessing the Brand Value	37
4.1	Classification of the Methods	38
4.1.1	Financial-oriented Methods	39
4.1.2	Behavioural-oriented Methods	41
4.1.3	Combined financial/behavioural Methods	42
4.2	Theoretical and Methodological Description of the Methods	43
4.2.1	Interbrand Brand Value Approach (from Interbrand Zintzmeyer & Lux)	43
4.2.1.1	Theoretical Foundation	44
4.2.1.2	Methodological Description	46
4.2.2	Brand Equity Evaluator Approach (from BBDO)	51
4.2.2.1	Theoretical Foundation	52
4.2.2.2	Methodological Description	54
5.	Critical Comparison of the Interbrand Model and the Brand Equity Evaluator Model	59
5.1	Contrast of the Theory and Methodology of the Valuation Models	59
5.2	Compliance with the Requirements for Brand Valuation Methods	62
5.2.1	Interbrand Model	62
5.2.2	Brand Equity Evaluator Model	68
5.3	Practical Application of the Valuation Methods	73
5.4	Evaluation and Conclusion of the Methods' Comparison	77
6.	Resume and Recommendations	83
	Bibliography	88
	Appendix	94

Text Sample:

Kapitel 3.1, Requirements for Brand Valuation Methods:

It is essential that brand value is consistent and that it continuously reacts to changes caused by the influencing factors (indicators). Furthermore, these factors should complement brand value and should not overlap; otherwise it could lead to biases in the results. Therefore, the independence of factors is pursued.

The next methodical criterion is the necessity of cause-and-effect relationships between the brand strength and the absolute monetary brand value. Through this relationship it is aimed, that the impacts of market-oriented activities, which influence the brand strength and the origination of value are reflected on the value of the brand; and that the monetary consequences for brand’s owners are shown and quantified.

Other methodical requirements constitute the objectivity, validity and reliability of the methods. A method is objective when it is exempt from subjective influences from the evaluator. Nevertheless, total objectivity is also not desired, because it would generate non-credible values. Thus, some subjective judgments are required at every stage of brand valuation.

A method is valid if it measures what it claims to measure, i.e. the brand’s potential for success (brand value). The validity represents the degree of accuracy with which a method actually measures the data. Furthermore, validity can be measured through inspection, that is considering experts’ opinion, or through the utilisation of different indicators. Validity, however, is difficult to prove, but at least the methods should clearly describe what concept they are based on, and the evaluation process should be documented in detail.

Further on, a valuation method is reliable when the measured results remain the same even if they were measured at different points of time or by different people; that represents the formal accuracy. The valuation methods should be exempt from random errors and should provide stable, exact and consistent results. Both theoretical and practical reliability are required in order to achieve transparency of the method.

Covering Content Requirements:

A covering content requirement represents the universal applicability of the method. This means that the valuation method should be able to evaluate brands of different industries, companies, product categories and regions with equal success; otherwise the brand value of different companies could not be compared. In this context, the methods for assessing brand value should also comprehend a general acceptance.

Further on, another requirement constitutes the possibility of brand isolation. This means that it should be possible to differentiate the contribution of a single brand to the firm’s value from the contribution of all brands to the firm’s total value. Hence, the method could also be used by companies which own more than one brand.

Furthermore, it should also be possible to separate the revenues and costs of the brand from the revenues and costs of the product, as not all revenues and costs of a product are directly linked to its brand. Normally, there are product-related factors (e.g. product satisfaction, product quality) sold under the brand name which affects the brand strength and the brand value. These factors should be incorporated in the brand valuation. Nevertheless, the methods should be able to filter brand influencing factors from product specific elements to avoid showing a brand value that is too high. In short, all indicators that directly or indirectly affect brand strength and brand value should be taken into account in the valuation.

Furthermore, for a valid financial brand valuation the psychological factors that influence consumers should be considered and should be adequately incorporated in the process of brand valuation. These factors represent the brand’s psychological potential and its validation constitutes the brand strength index. The brand strength index must operate as a forecast instrument that supports the assessment of future revenues.

Finally, the brand valuation methods should be cost-effective and feasible. Cost-effective denotes that the time needed and the cost originated from it must be justifiable. Additionally, the data needed must be easily available and accessible; hence, extensive effort and investments to obtain them must not be required. Moreover, the valuation method must be easy to use and to interpret by managers and they should provide a transparent value. Further on, the brand valuation methods should be able to recognise and measure small changes in brand value, thus they need a certain degree of sensitivity.

Relevance of Result Requirements:

For the relevance of results, it is important that the valuation methods provide results which are future-oriented; in other words, the methods should include forecasts of future brand earnings. Furthermore, the activities of brand building are conducted over many years, thus a long-term forecast period of five to ten years or even longer should be considered. The problem is that most of the currently used methods do not incorporate the brand revenues forecast; they only update the current revenues while the costs remain constant without taking into consideration market or brand trends. Another important aspect to consider is that future brand earnings have to be discounted by an appropriate discount rate. For the determination of this discount rate, specific earnings expectations and risk factors for the brand must be considered and any rough or approximate solution must be avoided. Therefore, for a valid brand valuation the discount rate for each brand should be individually determined.

Furthermore, it is essential that at the end, the brand strength index is transformed in monetary terms, so that this monetary brand value can be compared with the competitors’ brands. Moreover, a brand that posses a monetary brand value will be regarded as an investment which creates future cash flows. It must also be possible to depict a complete picture of the brand’s potential for success, in which past, present and future data must be considered.

Finally, strategies for brand steering should originate from the brand valuation methods. This means that the valuation model can be used as a brand-steering tool which provides brand managers the necessary help in order to plan, deploy and control their brand management tools. Brand value should be connected to different planning levels and should be integrated in the target system of the company. The complete list of requirements is comprised in Table 2.