Monday, January 30, 2006

Brand Value vs. Brand Valuation

There’s a difference between “brand value” and “brand valuation.” Brand value is the strategic and financial value of the brand to your company today. Brand valuation is a financial exercise intended to put a price on the brand over and above the discounted future cash flows. The difference can be subtle. Tim Ambler of the London Business School uses this metaphor to describe the two: “Since I live in my house and plan to do so for some time, its value to me is the shelter and comfort I derive from it. When I’m prepared to consider selling it, I’ll be interested in the valuation.” Brands work much the same way.

So when should you be looking at brand value and when should you consider brand valuation?Let’s compare the two by first looking at brand value.

Brands create value for companies in several ways:
  • They create customer loyalty, resulting in a lower cost of customer reacquisition and greater likelihood of future sales from existing customers.
  • They lower the perception of risk the company presents to the financial marketplace, resulting in lower borrowing or financing costs.
  • They establish negotiating leverage with suppliers and vendors who seek to be associated with them.
  • They establish the perception of continuity of cash flows into the future amongst investors, thereby increasing the multiple over the company book value that investors are willing to pay for stock.

If these dimensions of brand value are relevant ways for you to gauge the potential return you will create by investing in brand development activities, then you’d benefit by reporting them on a brand scorecard. You may choose to reflect it in competitive comparisons of expected customer lifetime value, perceptions of company “quality” amongst investors and analysts (either through syndicated methods like CoreBrand® or through proprietary research among targeted analysts), an index of company borrowing costs that isolates brand contributions from other marketplace and company variables, or a survey of brand influence within the vendor community.

The most common measure of brand value is one of the difference between market capitalization and either “book value” — the value of the company’s total balance sheet assets — or the net present value of expected future cash flows. Unfortunately, it’s not often reasonable to assume that the difference is mostly attributable to brand value. Channel dominance, patents and technical advantages, sales force effectiveness, and other non-brand elements can be responsible for a big portion of the “intangible” value of the company.

Nevertheless, if your category is one in which investments in brand development are less directly justifiable in terms of customer financial behavior in the near term, you may need to incorporate some element of brand value in your analysis. The best advice we can offer is to sit down with your CFO and discuss the ways you might agree on measuring the brand asset. Typically those fall into two classes. The first is made up of top-down models that seek to explain valuation in terms of the lift in share price that the brand gives you over and above what the company would trade at without a brand. The second approach comes at it from the bottom up. Often called the “economic use” approach, this is an attempt to measure how much incremental cash flow the brand provides over and above what you would get with a “generic” product. The two are philosophically very well aligned. One comes from the macro and hopes to explain the micro, and the other hopes to aggregate the micro to explain superior valuation for the company.

“Brand valuation,” on the other hand, may be relevant to you if your portfolio of brands includes some acquired from other companies, or if you anticipate selling one or more brands at some point in the not-too-distant future.

Accounting regulations in the United States and many other countries require companies to keep close tabs on the “goodwill” assets they carry on their balance sheets from past acquisitions. If the CFO has reason to believe that any acquired brand is no longer worth its carrying value on the balance sheet, she must take a write-down against earnings on the P&L to revise the estimate of value in a process called “asset impairment.”

As a result, companies with acquired brands often need to continually monitor the value of those brands on their brand scorecard to prevent any sudden surprises in earnings.

Similarly, if your company anticipates selling itself in the whole or just selling one or more brands in its portfolio, you may want to begin tracking brand valuation over the period leading up to the sale to understand which potential investments help increase the valuation and which might actually detract from it.

Bottom line: if your primary interest is in measuring the strategic development of brand equity, don't waste time with brand valuation.

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