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,