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Brand valuation is the job of estimating the total financial value of the brand. Like the valuation of any product, of self review, or conflicts of interest if those that value the brand also were involved in its creation. The ISO 10668 standard sets out the appropriate process of valuing brands, and sets out six key requirements:
- objectivity, and
- financial, behavioural, and legal parameters.
Brand valuation is distinguished from brand equity.
Traditional marketing methods have examined the price/value relationship in terms of dollars paid. Many marketer believe that customers perceive value to mean the lowest price. While this may be true for commodities, many branding techniques are moving beyond this evaluation.
There are three main types of brand valuation methods:
The cost approach
In real estate appraisal, the cost approach is one of three basic valuation methods. The others are market, or sale comparison, and income. The fundamental premise of the cost approach is that a potential user of real estate won't, or shouldn't, pay more for a property than it would cost to build an equivalent. The cost of construction minus depreciation, plus land, therefore is a limit, or at least a metric, of market value.
The market approach
In this approach a comparison with the market is done. For example if a person wish to buy a property in place A, it is quite likely that the price of neighborhood would be checked before arriving at conclusion on the existing property, leading to an approach based on the market. This valuation method relies on the estimation of value based on similar market transactions (e.g. similar license agreements) of comparable brand rights. Given that often the asset under valuation is unique, the comparison is performed in terms of utility, technological specificity and property, having also in consideration the perception of the asset by the market. Data on comparable or similar transactions may be accessed in the following sources:
1. Company annual reports.
2. Specialized royalty rate databases and publications.
3. In court decisions concerning damages.
The income approach
This approach measures the value by reference to the present value of the economic benefits received over the rest of the useful life of the brand. There are six recognised methods of the income approach.
- Price premium method – estimates the value of a brand by the price premium it generates when compared to a similar but unbranded product or service. This must take into account the volume premium method.
- Volume premium method – estimates the value of a brand by the volume premium it generates when compared to a similar but unbranded product or service. This must take into account the price premium method.
- Income split method – this values the brand as the present value portion of the economic profit attributable to the brand over the rest of its useful life. This has problems in that profits can sometimes be negative, leading to unrealistic brand value, and also that profits can be manipulated so may misrepresent brand value. This method uses qualitative measures to decide the portion of economic profits to be accredited to the brand.
- Multi-period excess earnings method – this method requires a valuation of each group of intangible assets to calculate the cost of capital of each. The returns for each of these are deducted from the present value of future cash flows and when all other assets have been accounted for, the remaining is used as the value of the brand.
- Incremental cash flow method – Identifies the extra cash flow in a branded business when compared to an unbranded, and comparable, business. However it is rare to find conditions for this method to be used since finding similar unbranded companies can be difficult.
- Royalty relief method – Assume theoretically a company does not own the brand it operates under, but instead licenses the use from another. The royalty relief method uses available data of similar arrangements in the industry and assigns the value of the brand as the present value of future royalty payments.
Uses of brand valuation
Common purposes are:
- value reporting
- dispute resolution
- legal transaction
- strategic planning
- management information
- taxation planning and compliance
- litigation support
- Investor's presentation/ Shareholder's report
- Raising funds
- Campaign for Independent Brand Valuation
- Knapp, Duane E. (2000). The Brand Mindset. New York: McGraw Hill. pp. 24–35. ISBN 0-07-134795-X.
- ISO 10668 and brand valuations: a summary | BVR's IP Management & Valuation Wire
- RoyaltyRange - Intellectual Property Royalty Rates Database: http://www.royaltyrange.com/