There are many finance-oriented-brand valuation approaches such as capital market oriented valuation approach, market-oriented valuation cost-oriented valuation, brand valuation based on the concept of enterprise value, earning capacity-oriented brand valuation, license-based brand valuation and customer-oriented brand valuation to name a few.
“The market value-oriented brand valuation” approach is the method in which, the value of a brand is established by referring to the fair market prices of comparable brands. The other approach “capital market-oriented brand valuation model” was pioneered by Simon and Sullivan. They defined brand equity as the present value of all future earnings attributable solely to branding. Thus, from a financial markets perspective, brand value can be calculated from a company’s stock market capitalization or market value. But, this valuation method can be useful only for stock exchange-listed companies as the model is based on the idea that the stock price of a company will perform to reflect the future potential, its brands provide.
In the case of a single-brand company, brand value will therefore consist the company’s capitalized or realized market value. Brand value of a company can be calculated by using simple formula:
Brand Value = (stock price x number of shares) – (tangible assets + all remaining intangible assets)
If a company has more than one brand, the calculation is done pro rata for each brand’s share of total revenues or profits.
Brand valuation can also be based on the idea of the net asset value approach that is frequently drawn upon in the field of corporate valuation, which is called “cost-oriented brand valuation”. In net asset value approach, depending on the time perspective chosen, the assets may be valued either at their historic cost or at replacement cost. Brand valuation with the replacement cost method is done on the principle—what it would cost today to build up an equivalent brand from scratch. Whereas historic cost assumes that brand is an asset-based on resources that have been invested in it. Not only net asset value but enterprise value is also seen as a base to value brand equity. It also involves the aggregation of marketing and R&D expenditure relating to a brand. This method is used by Cadbury Schweppers for brand valuation. Historic Cost method, involves the aggregation of marketing and R&D expenditure relating to a brand. The problem is the isolation of costs specific to the brand alone, which may require the capitalization of costs incurred decades ago. Sander, Crimmins and Herp have proposed models based on price premium. In price premium-oriented approaches, the brand is seen as generating an additional benefit for the customer, for which they are willing to pay a little more. Sander proposed “Hedonic brand valuation method”, which is based on hedonic price theory. It explains product prices in terms of various product characteristics, or rather the extent to which they are present. On the other hand, Crimmins points out three dimensions of brand value: Actual amount, band breadth, and content of brand value. Herp builds upon the brand valuation model on conjoint measurement. In this model, brand value is defined as the sum of all incremental revenues earned as a result of branding a company.
It is seen that advertising support varies hugely from industry to industry. BBDO’s brand valuation model also considers the advertising in brand valuation, which most of the other models do not considers and present a distorted picture. The Brand Equity Evaluation System is a multi-phase factor model of brand valuation, which takes into account the differences between industries and solves the basic problem of the advertising support. This model also takes forward-looking variables to establish brand’s development potential. The model identifies eight determinants of brand equity.
The constituents of brand environment—sales performance, net operating margin and development prospects are aggregated into a joint factor of brand quality. The new brand quality factor is channeled together with the remaining four weighting factors (international orientation, advertising support, brand’s strength within its industry, image) to form an overall factor value. It is subsequently used as a multiplier of earnings before taxes. The monetary value of brand equity is the product of the average pre-tax earnings in the last three years and this combined the weighting factor. The detailed processes involved in implementing the BEES model are summarized in Figure.
There are few other methods to calculate brand value like “customer-oriented brand valuation model”, which is based on customer contribution margins. “Kern’s x-times-model” which is based on earning capacity, establishes the monetary value of a brand by capitalizing the value of potential earnings. License-based brand valuation proposed by Consor is yet another model which values a brand on the basis of the license rates typical of the industry and earned by comparable brands. It focuses on brand licensing, and the value calculated is the sum of money, another company would be willing to pay either to purchase the brand outright or to obtain a license for it.
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