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Brand valuation is the job of estimating the total financial value of the brand. Like the valuation of any product, or self review, a conflict of interest exists 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. Some marketers believe customers perceive value to mean the lowest price. While this may be true for commodities, some branding techniques are moving beyond this evaluation.
Brand valuation emerged in the 1980s. Early firms involved in providing brand valuations included British branding agency, Interbrand led by John Murphy and Michael Birkin, who are credited with leading development of the concept. In 1989, Murphy edited a seminal work on the subject: Brand Valuation – Establishing a true and fair view and in 1991, Birkin laid out a brand earnings multiple model of brand valuation in the book Understanding Brands. Charles Hoskinson and Kartik Hegadekatti, who have worked extensively on Brand Tokenisation and Blockchains have stated that it will be possible to monetize brand values through cryptocurrencies. Tokenization can allow brands to control the vital information. It also creates a safe baseline around Brand's products for their community to build. It can empower dedicated users to build out the communities around those brands. All of this can generate more information for the brands about their product’s lifecycle. It has also been shown that companies can monetize their brands using cryptocurrencies without the need to give away equity.
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
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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:
- Company annual reports.
- Specialized royalty rate databases and publications.
- 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
- business buying and selling decisions
- tracking Shareholders' value
- dispute resolution
- legal transaction
- strategic planning
- management information
- taxation planning and compliance
- litigation support
- Investor's presentation/ Shareholder's report
- Raising funds
Interbrand classifies these uses of brand valuation in three categories:
- Financial applications (e.g. M&A, balance sheet valuation, investor relations)
- Brand management applications (e.g. brand portfolio management, resource allocation)
- Strategic / Business case applications (e.g. brand architecture, brand repositioning)
Brand valuation companies
The recent rise of brand valuation practice led to the multiplication of valuation companies. These companies not only rank brands but also sell them some recommendations for them to improve their portfolio and brand value. The most reputed companies are Interbrand, Millward Brown and Brand Finance.
- Campaign for Independent Brand Valuation
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- Premier, Energy (2018-04-02). "What we learned from Charles Hoskinson about tokenization of brands and blockchain in banks". Medium. Retrieved 2019-01-24.
- Hegadekatti, Kartik (2017-10-18). "Brand Tokenization and Monetization Through Cryptocurrencies". Rochester, NY.
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- "How Blockchain Tokenization Provides a New Opportunity to Track a Product's Lifecycle". www.adweek.com. Retrieved 2019-01-24.
- ISO 10668 and brand valuations: a summary | BVR's IP Management & Valuation Wire
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- http://brandfinance.com, Brand Finance -. "Brand Finance - Brand Valuation Consultancy | Brand Value | Intangible Asset Valuation". Brand Finance. Retrieved 2017-10-26.