Brand Valuation and Brand Equity:

Introduction:

Brands today are not restricted to marketing or profits made by a company, but are a part of our everyday life. In the light of emergence of concepts of consumer awareness and the new world economy, brands have a quintessential role to play. The term brand, infers to names, terms, signs, symbols and logos that identify goods, services and companies; Brand Value is not just a financial number. As put forth by Ajimon Francis, Indian head and CEO for global brand consultancy Brand Finance, "It (Brand Value) is a measure of several factors like loyalty of customers, the ability of a brand to keep offering newer products and technology, and the connect with consumers, who give it a premium."

Brands have three primary functions – navigation, reassurance and engagement. To explain this further – Navigation is when the brands help customers to select from the bewildering array of alternatives while Reassurance ensures that they communicate the intrinsic quality of the product or service and assure consumers at the point of purchase while Engagement communicates a distinctive imagery and associations that encourage identification of the brand by customers.It is an obvious assumption that the value that brands carry and the process of their valuation is important.

Brand Valuation and Brand Equity:

Brand Valuation can be defined as the process used to calculate the value of a brand or the amount of money another party is willing to pay for it or the financial value of the brand.

The concept of Brand Value, although similarly constructed to that of Brand Equity, is distinct. To put it simply, while brand equity deals with a consumer-based perspective, brand value is more of a company-based perspective. As early as 1991, Srivastava and Shocker identified brand equity as a multidimensional construct composed of brand strength and brand value. This indicates that brand equity is a concept a lot broader than brand value.

In order to further this discussion of the distinction between the two, let us consider an example. This specific case concerns the $1.7 billion purchase of Snapple by Quaker Oats in 1994. Quaker Oats' primary distribution strength was confined to supermarkets and drugstores whereas smaller convenience stores and gas stations constituted more than half of Snapple's sales. But despite the purchase, Quaker Oats was unable to increase supermarket and drugstore sales enough to compensate for lost convenience and gas station sales and was forced to sell Snapple for $ 300 million just three years later. As seen in this case, Snapple's Brand Value decreased enormously over the three years that Quaker Oats owned it, but this had nothing to do with it brand equity, which could have been constant or increased owing to the additional exposure in supermarkets and drug stores. What can be concluded from this example is that neither a brand's purchase price nor a dramatic change in its selling price provides information about the magnitude or movement of a brand's equity. This also means that while a company may have the highest brand value, it is not necessary that it also has high brand equity. For example, Apple's Brand Value ID ranked #1 is worth $185 billion whereas its equity is #11 and Coca Cola has the highest Brand Equity.

Evaluating Brands:

Before evaluating brands, two essential questions need to be answered i.e. what is being valued, the trademarks, the brand or the branded business and secondly, the purpose for such valuation. This brings us to the answering what the utility of undertaking brand valuation is. The process of brand valuation is of primal importance not only for the brand and the respective owning company to improve upon the same but also for the purposes to increase the market value and ascertain accuracy in instances of mergers and acquisitions. In other words, brand valuation would comprise of technical valuation which can be utilized for balance sheet reporting, tax planning, litigation, securitization, licensing, mergers and acquisitions and investor relations purposes and commercial valuation which is operational for the purpose of brand architecture, portfolio management, market strategy, budget allocation and brand scorecards. Thus, the application of brand valuation would be for strategic brand management and financial transactions.

Prior Approach:

Earlier research with respect to Brand Valuation was limited to two areas: Marketing measurement of brand equity and financial treatment of brands. The former was used by Keller and included subsequent studies by Lassar et al on the measure of brand strength, by Park and Srinivasan on the evaluation of the equity of brand extension, Kamakura and Russell on single source scanner panel data to estimate brand equity and Aaker and Montameni and Shahrokhi on the issue of valuing brand equity across local and global markets. The financial treatment of brands has traditionally stemmed from the recognition of brands on the balance sheet (Barwise et.al., 1989, Oldroyd, 1994, 1998), which presents problems to the accounting profession due to the uncertainty of dealing with the future nature of the benefits associated with brands, and hence the reliability of the information presented. Tollington (1989) has debated the distinction between goodwill and intangible brand assets. Further studies investigated the impact on the stock price of customer perceptions of perceived quality, a component of brand equity (Aaker and Jacobson, 1994), and on the linkage between shareholder value and the financial value of a company's brands (Kerin and Sethuraman, 1998).

Current Trend/Practices in Brand Evaluation:

However, Brand Valuation is no longer limited to these two areas anymore. International Organization for Standardization (ISO) came up with ISO 10668 – Monetary Brand Valuation in 2010, which laid down principles which should be adopted when valuing any brand and is popularly followed by most firms indulging in valuation of brands like Interbrand, Finance World and Brand Equity Ten. ISO 10668 is a 'meta standard' which succinctly specifies the principles to be followed and the types of work to be conducted in any brand valuation. It is a summary of existing best practice and intentionally avoids detailed methodological work steps and requirements. As per ISO 10668, each brand is subjected to an analysis on three levels – Legal analysis, Behavioural analysis and Financial Analysis. Keeping in mind that the nature and concept of value is difficult to grasp on account of being subjective in nature, these three methods of analysis objectify the valuing of brands.

LEGAL ANALYSIS is the method that draws a distinction between the trademarks, the brands and the intangible assets involved and defines them as separate entities. After the brand valuer has clearly determined the intangible assets and Intellectual Property rights included in the definition of the 'brand' in concern, (s)he is required to assess the legal protection afforded to the brand by identifying each of the legal rights that protect it, the legal owner of each relevant legal right and the legal parameters influencing negatively or positively the value of the brand. Extensive Risk analysis and due diligence is required in the legal analysis and the analysis must be segmented by type of IPR, territory and business category. In other words, the valuer needs to observe and assess the legal protection afforded to the brand by identifying each of the legal rights that protect the brand, the legal owner of each of those legal rights and the legal parameters positively or negatively influencing the value of the brand.

BEHAVIOURAL ANALYSIS involves understanding and forming an opinion on likely stakeholder behaviour specific to geography, product and customer segments where the brand is operational. For perusal using this method, it is necessary to understand the market size and trends, contribution of the brand to the purchase decision, attitude of all stakeholder groups to the brand and all economic benefits conferred on the branded business by the brand. Here, the brand valuer must also look into why a possible stakeholder would prefer the brand in comparison to that of the competitors' and the concept of brand strength which is comprised of future sales volumes, revenues and risks.

FINANCIAL ANALYSIS is the most frequently used brand valuation method and uses four approaches – Cost, Market, Economic and Formulary approach. Often, a fifth approach is also considered. Special situation approach recognizes that in some instances brand valuation can be related to particular circumstances that are not necessarily consistent with external or internal valuations. Each case has to be evaluated on individual merit, based on how much value the strategic buyer can extract from the market as a result of this purchase, and how much of this value the seller will be able to obtain from this strategic buyer.