Brand valuation: from marketing department to boardroom

This idea of brands functioning as corporate assets, rather than expenses, might seem obvious now, but was the basis for some revolutionary thinking. The breakthrough was to express the value of brands in financial and accounting language – the language of the board-room – and to integrate marketing frameworks within that.

The challenge now and into the future is ensuring that brand valuation is done properly in the first place so that it can be used as a fundamental and consistent piece of management and measurement information throughout an organisation. Through constant development of brand value metrics, we can now understand the precise economic benefits that brand has on every aspect of a business.

It is now possible to not only quantify a brand's contribution in the decision making process and measure its competitive strength in acquiring and retaining customers, but to predict the value of an innovation and understand which elements of the brand experience and customer touchpoints should receive the most investment to generate the best return. (Increasingly important now that the vast majority of brands have a service element and multiple touchpoints).

Also, bearing in mind that brands are demonstrably the most important and sustainable assets any organisation has, the future must be about generating that value more sustainably – economically, socially and environmentally. If there is any benefit to the current world crisis on so many fronts, it may be that there will be the motivation to re-boot political and business structures on sustainable models. That is, measuring and rewarding people on sustainable value creation, and doing this in a way that builds social cohesion and environmental protection.

TURNING SOFT PROPERTIES INTO HARD ASSETS

The need to have more robust measurements for brand value came to a head for me at Saatchi & Saatchi, working as a planner on the British Airways account.

We had produced some extraordinary advertising campaigns with them, building an image for the airline that set it apart from competitors. At that time, the senior leadership of the airline had an instinctive belief in the power of the brand, and recruited some of the best marketing talent to innovate across the brand experience.

However, by the early 1990s, financial pressures meant that any activities that could not be measured and quantified were vulnerable. Knowing that Interbrand had pioneered brand valuation in the 1980s (to a great deal of scepticism at the time, it has to be said), we brought the firm in to do a brand valuation.

This demonstrated, amongst other things, that the British Airways brand was the most valuable airline brand in the world (despite being dwarfed in revenue terms by the American carriers), and that the British Airways brand was a hard, quantifiable economic asset to the company. And that being an asset, it needed to be invested in for the long term and maintained in proportion to its value, just as any physical asset (like a plane) needed maintaining.

INTANGIBLES ARE A SIGNIFICANT COMPONENT

The intangible element of the combined market capitalisation of Standard & Poor's 500 companies has increased to around 80%, compared with some 30% 20 years ago; and it is likely to grow even further as tangible distinctions between businesses become less sustainable. The brand element of that combined market value amounts to around one-third of the total, which confirms the brand as the most important single corporate asset. Globally, brands are estimated to account for approximately one-third of all wealth.

Looking at the economic importance of brands on an international stage, the 100 most valuable brands in 2008 were worth over $1.2 trillion, which would make them the 11th biggest 'country' in the world by GDP, ahead of India and just behind Brazil.

From an investment perspective, inspection of brand value, equity measures and audience relationships will give a more complete and realistic basis for underlying value than short-term financial results, which often reflect short-term priorities.

A recent study by Harvard and South Carolina Universities compared the financial performance of the world's most valuable 100 brands with the average of the Morgan Stanley Capital Index and the Standard & Poor's 500. The dramatic difference in performance gives further quantified substance to what is qualitatively obvious. Strong brands mean more return, for less risk, and that's as relevant for the next 50 years as it has been in the past.

THE APPLICATIONS OF BRAND VALUATION

Brand valuation creates added value for many stakeholders: public & social affairs, risk management, investor relations, rating agencies, controlling, taxes, marketing, strategic corporate development, mergers & acquisitions, and business development. Some of the more specific applications of brand valuation used by the world's best brands are as follows:

Extending the Business Based on the Brand's Equity

Brand valuation identifies the value contribution of the brand asset to shareholder value and makes it comparable to other intangible and tangible company assets. The brand is usually the most valuable asset of the business and offers the biggest opportunity to grow by extending business activities under the brand. It's obviously useful to understand the value drivers of current equity to do this.

Assessing the Economic Impact on Branding Decisions.

Any decision to change a brand's fundamentals – perhaps its strategic focus, its brand architecture or even its colour – will have implications on the brand's economic contribution to the business. The upside potential and downside risks of these decisions can be analysed and quantified with the help of prognostic models and their impact expressed in financial terms.

Setting Performance Metrics for Management Purposes

Management attention needs to be focused on value creation. The value of a brand provides a central platform for financial performance measures and should serve as a performance indicator for various management purposes. These key performance indicators need to be integrated into an all-round performance measurement system within the company. The purpose of performance measurement is to link brand management performance with the strategic goals and the financial success of the company.

Defining Transfer Prices in Tax Related Issues

Brand valuation is key to defining royalty rates when establishing an internal licensing program between parent and subsidiary companies. Licensing can bring a range of financial, legal and operative benefits. Tax relief can be maximized as the incoming royalty stream is taxed at lower rates if the brand is domiciled in a low-tax country. The benefits of an internal licensing scheme are not only financial; it can increase the legal protection of the asset, enhance the rationale for managing the asset across countries and divisions, establish brand management as a profit centre and create a stronger 'brand minded' organisation.

Reporting on the Value of the Brand

Conversations with investors and financial analysts can be facilitated through the analysis and quantifying of brand value. The intellectual capital statement is a management tool and an information source where employees, customers, co-operative partners and investors can see how a company generates value for them. The statements usually include: the (quantified) relevance of the brand to the business; the link between branding and corporate strategy; the measures to track the performance of the asset; and the actions to sustain and grow the brand's value.

Financing Projects and Businesses

Increasingly companies use intellectual property rights such as brands as collateral to obtain debt financing. One option is securitisation of the brand asset. Securitisation is a process that allows companies to raise loans in anticipation of future cash. The debt capital is mostly secured by brand related royalties or in some cases by the sheer value of the brand. The key benefit is the reduction of capital cost and that this transaction is off balance sheet. In a similar fashion, the company's finance can be secured through sales and lease-back of brands. Both schemes can be pursued by companies, which use self-created or acquired brands or plan to expand success through acquiring other brands. Brand valuation provides insight into the value as well as the risk of the transaction and provides a check on the liquidity of the asset.

Defining the Royalty Rates in Third Party Licensing Agreements

Brand valuation provides fair and robust brand royalty rates for optimal exploitation of the brand asset through licensing the brand to third parties. It can determine the fair split of economic benefit from the brand as well as the share of risk and cost between licensee and licensor. The analysis also reveals the most appropriate royalty rates for the use of the brand. These rates apply to all relevant commercial situations including co-branding and licensing into new categories as well as geographical markets.

Providing a Fair Opinion

Brand valuation can serve as a basis for negotiation if the ownership of a brand changes through merger or acquisition and joint ventures. You can evaluate not only the current value but also the potential value of the brand in the context of the new owner. You can also demonstrate the contribution that a brand offers to joint ventures. It allows the share of profits, investment requests, and shareholding in the joint business to be determined.

Building the Fundament in Brand Related Litigation

Brand valuation can be used to measure damage caused by brand infringement and is recognised as a support in claims for damages. As the damage is often incurred in a partial aspect of a brand's total value, in a specific geographic region or during a certain time period, it becomes crucial to assess the damage of the brand's equity and translate it into a monetary value. In a legal case, these kind of fact based arguments and logical interlinking of facts become particularly important for success.

Providing Investment Advisory

Stocks of companies with strong brands tend to perform better on the stock market. These days, it is important for analysts and investors to understand the brand as the key value driver of the business. Brand valuation helps to identify the potential market outperformers by ranking the stocks of a defined universe by Brand Value, Brand Strength and other brand related criteria. Proprietary quantitative financial modeling helps to weight these factors. The interaction of these criteria are needed to select the stocks that lead to a portfolio with the strongest financial performance. Brand valuation provides a tool which can be implemented by investors, fund managers and asset managers.

Legitimising Brand Investments and Internal Business Case

Even now, in many industry sectors, branding is still a much undervalued issue and often perceived as a marketing 'gimmick' belonging to the world of fmcg. Convincing the company's management and other stakeholders about the value and contribution of a brand to the business is often the first step to more professional and systematic brand management.

Supporting Risk Management

Risk management these days has become a much broader issue including legal, reputational, environmental and social liabilities. As these risks are mostly non-transferable, companies have to establish sophisticated risk monitoring systems and action plans to mitigate such risks. Brand related risk is still not sufficiently understood and hard for most companies to grasp. With the emergence of new and supposedly 'soft' forms of liabilities such as reputation or brand, brand valuation and particularly brand risk evaluation become critical to company risk managers.

WHAT TO DO NOW?

It is still true to say that many businesses are in a state of transition to understanding that the brand is not just a 'marketing thing', but a whole 'organisation thing'. As the brand should be the most important and sustainable asset in any organisation, it should logically be used as the central organising principle across all areas of operation.

One of the most heartening conversations I have had recently with a marketing director was when he said his ambition was to 'get the brand out of the marketing department'. He realised that the way to future power was, ironically, to do something that looked like giving the power of the brand away rather than trying to ring fence and be over-protective. But, making sure that the CEO feels and acts like the Chief Brand Officer, and that the HR, operations and all teams feel involved and accountable for delivering the brand is the best way to ensure future maximum brand value all round.

And if some might feel that the current climate is the wrong time to be investing in measuring and managing brand value in more detail, they're wrong. There will never be a more important time to optimise budgets and make sure that every pound is driving demand and creating value. Every boardroom is under greater scrutiny over how shareholder funds are being used and it's essential to be able to demonstrate the specific value of what you are doing.

Looking further ahead, it seems very likely that there will continue to be more curiosity by the widest range of stakeholders of how businesses are being managed, and what is being measured in a way that is going to generate real, substantial and sustainable value. It's always nice to be prepared.

Figure 1: Death of the secondary high street