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Brand valuation

Brand value is a simple concept, but one of fundamental importance to any brand-owning business.

Every interaction a customer has with a company influences their perception of the brand. In turn,
these customer perceptions influence customer behaviour, and ultimately the company's financial
performance:

We define brand value as the net present value of the future earnings attributable to the brand, taking
account of the impact of the brand on the business and the strength of the brand in its market.

For further detail on our methodology and associated techniques, please follow the links below:

 Brand valuation methodology


 Brand valuation techniques
Brand value and valuation are themes that run across many aspects of our services. The thinking and
techniques that underpin brand value are applicable to brand management, brand transactions and
many aspects of marketing decision support. See the How we can help section of this web-site for
discussion of many of the areas where we apply this.
Copyright © Morar Consulting Ltd. 2008
 
Brand valuation

Brand valuation methodology


Our brand valuation framework combines structured financial and marketing assessments to quantify
the influence of brands on both demand creation and risk reduction - as illustrated below:

Each component of the process provides insights into opportunities for further value creation. 

Our approach provides a number of benefits:

 Aligned with the financial purpose of the business (value creation)


 Tailored to give a company-specific perspective on brand value
 Sensitive to changes in marketing and financial performance
 Provides a foundation of understanding for all the applications described in the How we can
help section of this web- site

In addition to our proprietary methodology, we also have significant experience in the application of
alternative approaches to brand valuation including royalty-relief, replacement cost and premium
pricing. These methods can provide different perspectives on brand value that can enrich the valuation
analysis.

   
Brand valuation techniques
The concept of Brand Value, as the economic security that a brand-owner derives from its brands, is
now well established. A wide variety of brand-owning companies around the world, in consumer
goods, business markets and service provision, have realised that understanding the value of their
brands and communicating this internally and externally is a critically important task. Brand valuation
techniques can help them ensure that they safeguard the value already built up in their brands and
exploit their potential value. Maximising Brand Value is, after all, a key part of the wider challenge of
maximising shareholder value.

Although a wide range of brand valuation approaches and reference points can be used to get different
perspectives on the value of a brand (e.g. premium pricing, replacement cost, ‘market’ pricing,
historic cost), two approaches dominate brand valuations conducted world-wide:

1. Economic use approach to brand valuation (calculating the net present value of future earnings
attributable to the brand in a specified use, typically its existing use by its existing owner)

2. Royalty-relief approach to brand valuation (calculating the net present value of the ‘relief’ that a
brand owner enjoys because they do not have to pay a royalty for their brand)

There is much debate as to the relative merits of these brand valuation approaches, but our view is
that ‘Economic use’ should be the primary approach, supported by alternative brand valuation
approaches where necessary or useful.

Economic use approach to brand valuation

Our approach to brand valuation is based upon on the ‘economic use method’, which is the most
widely accepted and recommended approach to value a brand, and the only method that complies
with the principles of current corporate finance theory. This brand valuation approach integrates
marketing and financial analyses into a financial valuation model that is accepted by both financial and
marketing professionals.

The underlying principle is that brands create economic value for businesses by generating and
securing consumer demand.

The brand valuation model values this economic impact according to the principles of net present
value (NPV) of future earnings streams. It assesses the value of the brand by identifying the brand’s
future earnings and discounting these to a net present value using a discount rate that reflects the
risk of those earnings being realised.

This approach to brand valuation is directly comparable to other asset valuations and brings the
economic value of the brand on the same footing as other company assets, allowing cross-asset
investment decisions and fund allocations.

The challenge of the ‘royalty-relief’ approach to brand valuation

Although royalty-based brand valuation approaches have the appeal of ‘market’ reference points,
comparing royalty situations is a highly subjective process. A number of factors drive this:

 Only a small proportion of brand royalty agreements ever enter the public domain, so the concept
of ‘industry average’ rates or ranges, to be used as the basis for a brand valuation, can end up
being based on skewed samples of brand situations that are very different to those being valued.
 The headline percentage rate of a royalty is typically only one component of agreements that often
include shared marketing investment, the provision of other intellectual property and/or a range of
other negotiated considerations. This weakens its validity for brand valuation purposes.
 Brand situations are intrinsically hard to compare and market-specific rather than brand-specific
issues often play an important role in determining the level of a fair royalty.

The ultimate weakness of the ‘royalty-relief’ approach to brand valuation is that it inherently does not
provide the same level of the situation-specific strategic insights as an economic use approach.

Other supporting brand valuation approaches

Where appropriate and useful we also apply alternative brand valuation approaches to provide further
back-up and context to the valuation of the brand. Most often, we will conduct a royalty based brand
valuation for comparative purposes where data and resources allow (costs are usually incurred
obtaining published royalty rates).

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