Brand Valuation

A versatile strategic tool for business

Creating and managing brand valueTM Interbrand | Pg. 2 Brand Valuation A versatile strategic tool for business

by Mike Rocha

Compared to when Interbrand first pioneered BRAND brand valuation in the 1980s, global business PROPOSITION leaders now widely accept the importance and value of strong brands -- and the significant role they can play in enhancing business performance.

Strong brands enhance business performance primarily through their influence on three key stakeholder groups: (current and prospective) customers, TOUCHPOINTS employees, and investors. They influence customer choice and create loyalty; attract, retain, and motivate talent; and lower the cost of financing.

The influence of brands on current and PERCEPTIONS prospective customers is a particularly significant driver of economic value. By expressing their proposition consistently across all touchpoints, brands help shape perceptions and, therefore, purchase behavior, making products and services less substitutable. In this way, brands create GENERATION CONTINUITY demand, allowing their owners to enjoy OF DEMAND OF DEMAND higher returns. Strong brands also create continuity of demand into the future, thus making expected returns more likely – or less risky. Brands, therefore, create economic value by generating higher returns and growth, and by mitigating risk. HIGHER EXPECTED LOWER RISK Interbrand’s brand valuation methodology RETURNS has been specifically designed to take all of these stakeholders and value-creation levers into account. Role of Brand analysis is about understanding purchase behavior: the brand’s influence on the generation of demand through choice. Brand Strength measures the ability of the brand to create continuity of demand into the future through BRAND loyalty and, therefore, to reduce risk. In doing VALUE this it considers ‘internal’ (management and employee) and ‘external’ (customer) factors. Finally, these inputs are combined with a Figure 1. Brand Value Chain Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 3

financial model of the business to measure The business applications for brand valuation Financial Applications the brand’s ability to create economic value can broadly be categorized into three areas: Increasingly, CEOs are placing more for its owner. emphasis on their companies’ brands in • Financial investor communications. Many more It is quite possible that you believe that your annual report column inches are now brand could be (or is) a significant source of • Brand management dedicated to discussing an organization’s competitive advantage for your business, commitment to its brand, from the CEO but you are unsure of how a brand valuation • Strategy/ business case development down. Numerous companies take their exercise could help you. brands seriously enough to report on their value over time to investors.

Financial Brand Management Strategy/Business Case Development Applications ◆ Investor relations ◆ Brand performance ◆ Brand positioning ◆ Mergers & acquisitions management ◆ Brand architecture ◆ Licensing/royalty ◆ Brand portfolio ◆ Brand extension rate setting management ◆ Brand launch ◆ Financing/securization ◆ Resource allocation ◆ Business case for ◆ Tax valuations ◆ Brand tracking/ brand investment ◆ Balance sheet valuations dashboards ◆ Co-branding/JV analysis ◆ Return on investment analysis ◆ Organizational brand engagement ◆ Management KPIs Typical Frequency One-off Recurring One-off

Primary Objective A robust value with Ongoing brand Business case connecting supporting analysis management leading to brand change/investment insight and to expected financial results recommendations to grow brand value

Figure 2. Brand valuation applications

“Brand valuation provides a common language for brand performance around which a company can be galvanized and organized. Responsibility for Brand Strength factors can be allocated to functions, building engagement and a sense of responsibility for the brand across the organization.” Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 4

Brand also continues to be a key driver of reasons behind a brand’s strengths and Strategy/Business Case Applications acquisition premiums in M&A. Often, it weaknesses, both internally and externally. From time to time, businesses need to is the latent potential of the brand that is It supports strategic brand management evaluate significant changes in brand driving this premium through its ability to by prioritizing areas of highest impact strategy, whether it be repositioning, enter new markets and extend into adjacent for managers. brand architecture, brand extension, or categories. A broad skill set, combining even a complete rebrand. These kinds of Typical deliverables from a Brand Strength market research, brand, and business changes typically involve significant financial analysis are: strategy, together with business case outlay upfront, along with a high degree modeling, is required to quantify the latent • A ‘heat map,’ indicating areas of strong of uncertainty over when, or whether, a financial potential of the target brand. and weak performance for the brand positive return will be made on (this can be across geographies, that investment. Interbrand’s brand valuation methodology products, or customer groups, can also be used to complement other more Some CEOs are willing to make these for example). traditional techniques for setting royalty critical brand strategy decisions based on rates for brands. By identifying the value • Drill-down analysis into specific qualitative strategic analysis and intuition. created by a brand for its business, combined segments in the portfolio to identify The majority, however, are looking for a with an evaluation of the relative bargaining reasons for over- and business case that goes further. They want power of the parties involved, we are able to under-performance. to understand the likely overall financial advise on the proportion of brand value that impact on the business over time, covering a • Recommendations for improvement on should be paid out as a royalty rate in return range of alternative scenarios. In addition to Brand Strength factors, together with a for the right to exploit the brand. a detailed breakdown of the expected costs cost benefit analysis to to deliver, a rounded business case will also inform prioritization. Brand Management Applications quantify the expected impact on the top line Ultimately, everything we do as brand The core benefits of Brand Strength analysis through the modeling of key revenue drivers managers should be considered through are that it: (these will vary based on the business, but a value creation lens. Considerable could include customer acquisition, churn, • Enables constructive dialogue about investments are made in brands and, price premiums, share of wallet, frequency the brand between different parts of ultimately, it is important to determine if of purchase/visit, average basket size, the business by creating a common these actions are creating value for your and so on) and on profit margins from any language for discussion of customers and, in turn, your shareholders. operational changes required to deliver brand performance. Interbrand’s brand valuation methodology the new strategy. Finally, sophisticated seeks to determine, in both customer and • Provides global and local managers with techniques such as Monte Carlo simulation financial terms, the contribution of the an actionable tool to make informed may be employed, running thousands of brand to business results. marketing decisions–empowering possible permutations in order to estimate A strategic tool for ongoing brand management with insights to the most likely outcome. implement brand strategy. management, it brings together market, By bringing together market, brand, brand, competitor, and financial data into • Allows responsibility for performance competitor, and financial data, the brand a single, value-based framework within on the ten Brand Strength factors (see valuation model is the ideal framework which the performance of the brand can be below for further details) to be allocated within which such business case modeling assessed, areas for improvement identified, to functions across the business, can be conducted. and the financial impact of investing in the building engagement and a sense of brand quantified. It also provides a common responsibility for the brand across language around which a company can be the organization. galvanized and organized. Finally, when the Role of Brand and Brand Role of Brand analysis lets us know where Strength analyses are connected to the investment in (and focus on) brand financial model, they provide a framework improvements will have the biggest impact. for resource allocation and prioritization It can be thought of as a measure of based on the opportunities to enhance brand ‘brand leverage’. performance that are expected to have the Brand Strength is the key diagnostic greatest impact on brand and business value. tool with which we can measure brand performance and better understand the Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 5

As global competition becomes tougher a separate analysis of the individual parts a platform on which to do so. Depending and many competitive advantages, such as (or segments) of a business to ensure that on the brand, this platform may include, technology, become more short-lived, the differences between those segments in for example, manufacturing facilities, brand’s contribution to shareholder value terms of the three key components of the distribution channels, and working capital. will only increase. Brands are one of the few brand valuation (financial performance, Interbrand, therefore, allows for a fair return business assets that can provide long-term Role of Brand and Brand Strength) can be on this capital before determining that the competitive advantage. taken into consideration. From a brand brand itself is creating value for its owner. management perspective, the insights and Companies as diverse as Samsung, Philips, recommendations that result from the brand We build a set of financial forecasts over Hyundai, and AXA, among many others, valuation exercise will be at the segment five years for the business, starting with have used brand valuation to help them level, so it is also important that they are at revenues and ending with economic profit, refocus their businesses on their brands, an actionable level for the client’s which then forms the foundation of the motivate management, create an economic brand teams. brand valuation model. A terminal value is rationale for branding decisions and also created, based on the brand’s expected investments, and make the business financial performance beyond the explicit case for change. The number and choice of segments forecast period. The capital charge rate is therefore depends on: determined by reference to the company’s Although many brand metrics are available, weighted average cost of capital. few can link the brand to long-term financial • The strategic priorities of the business value creation and this, along with its many and of the brand valuation exercise. Role of Brand other applications, makes brand valuation a Role of Brand measures the portion of the versatile strategic tool for your business. • The level at which brand management purchase decision that is attributable to the decisions are taken. brand, relative to other factors (for example, Interbrand’s Brand Valuation purchase drivers like price, convenience, • The number of parts of the business Methodology or product features). The Role of Brand that can be identified where financial There are three key components in all of Index (‘RBI’) quantifies this as a percentage. performance, Role of Brand and Brand our valuations: an analysis of the financial Customers rely more on brands to guide Strength are considered to be sufficiently performance of the branded products or their choice when competing products different to warrant separate analysis. services, of the role the brand plays in the or services cannot be easily compared or purchase decision, and of the competitive contrasted, and trust is deferred to the • The availability of data. strength of the brand. These are preceded brand (e.g. computer chips), or where by a decision on segmentation and at the their needs are emotional, such as making

end of the process are brought together to a statement about their personality (e.g. enable the financial value of the brand Financial Analysis luxury brands). RBI tends to fall within a to be calculated. This measures the overall financial return to category-driven range, but there remain an organization’s investors, or its ‘economic significant opportunities for brands to Segmentation profit.’ Economic profit is the after-tax increase their influence on choice within Segments are typically defined by operating profit of the brand minus a charge those boundaries, or even extend the geography, business unit, product, service for the capital used to generate the brand’s category range where the brand can change or customer group. Why is segmentation revenues and margins. A brand can only consumer behavior. important? A robust valuation requires exist and, therefore, create value, if it has

“CEOs are placing more emphasis on their companies’ brands in investor communications…and the significant role they can play in enhancing business performance.” Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 6

factors that Interbrand believes make a 1. Segmentation strong brand. Performance on these factors is judged relative to other brands in the industry and relative to other world-class brands. The strength of the brand is inversely related to the level of risk associated with the brand’s financial forecasts (a strong 2. Financial 3. Demand 4. Competitive brand creates loyal customers and lowers Analysis Analysis Analysis risk, and vice versa). A proprietary formula is used to connect the Brand Strength Score to a brand-specific discount rate. (See below Economic Role of Brand Brand Strength for more information on Interbrand’s ten Profit Index (RBI) Score (BSS) factors of Brand Strength).

Brand Value The brand-specific discount rate is used to discount brand earnings back to a present value, reflecting the likelihood that the Brand Brand Risk brand will be able to withstand challenges Earnings (Discount Rate) and deliver the expected earnings into the future. This is equal to brand value.

Focus on: Brand Strength 5. Brand Value Our experience shows that brands that are Net present value of brand earnings best placed to keep generating demand and profit into the future are those performing strongly (relative to competition) across a Figure 3. Interbrand’s brand valuation methodology set of ten factors, shown below.

Note: Interbrand was the first company to have its methodology certified as compliant with the requirements of ISO 10668 – requirements for monetary brand valuation, as well as playing a key Four of these factors are internally driven, role in the development of the standard itself. and reflect the fact that great brands start from within. The remaining six factors are more visible externally, acknowledging the fact that great brands change their world. ■ RBI determinations can be derived in 3. Qualitative assessment. Based on three ways (and are described in order of management discussions and past preference below): experience. This is used where no market research is available. 1. Primary research. Specifically designed research, such as choice modeling RBI findings are cross-checked against (although other techniques are historical roles of brand for companies in the available), where RBI is same industry. Finally, RBI is multiplied by statistically derived. the economic profit of the branded products or services to determine the earnings 2. Existing research plus Interbrand attributable to the brand (‘brand earnings’) opinion. Existing research addressing that contribute to the valuation total. the relative importance of purchase drivers is combined with Interbrand’s Brand Strength opinion on the extent to which the Brand Strength measures the ability of the brand influences perception of how the brand to create loyalty and, therefore, to product or service will perform against keep generating demand and profit into the each driver. future. Brand Strength is scored on a 0-100 scale, based on an evaluation across ten key Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 7

Internal Factors External Factors

Clarity Authenticity

Clarity internally about what the brand stands The brand is soundly based on an internal truth for and its values, positioning, and proposition. and capability. It has a defined heritage and a Clarity too about target audiences, customer well-grounded value set. It can deliver against insights, and drivers.Because so much hinges the (high) expectations that customers have on this, it is vital that these are articulated and of it. shared across the organization. Relevance

Commitment The fit with customer/consumer needs, Internal commitment to brand, and a belief desires, and decision criteria across all internally in the importance of brand. The relevant demographics and geographies. extent to which the brand receives support in terms of time, influence, and investment. Differentiation

The degree to which customers/consumers Protection perceive the brand to have a differentiated How secure the brand is across a number of positioning distinctive from the competition. dimensions: legal protection, proprietary ingredients or design, scale or geographical Consistency spread. The degree to which a brand is experienced without fail across all touchpoints or formats. Responsiveness

The ability to respond to market changes, Presence challenges, and opportunities. The brand The degree to which a brand feels should have a sense of leadership internally, omnipresent and is talked about positively by and a desire and ability to constantly evolve consumers, customers, and opinion formers and renew itself. in both traditional and social media.

Understanding

The brand is not only recognized by customers, but there is also an in-depth knowledge and understanding of its distinctive qualities and characteristics. (Where relevant, this will extend to consumer understanding of the company that owns the brand.)

Figure 4. Brand Strength factors Mike Rocha Global Director, Brand Valuation