Contents. Brand Valuation & Return on Brand Investment. Why is Branding Important?

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1 Brand Valuation & Return on Brand Investment Charles Pahud de Mortanges Professeur Ordinaire - Marketing Contents Importance of Branding Valuation Methods The Model Approach Determination of Brand Power Determination of Brand Value Example Brand Strategy Matrix Discussion Why is Branding Important? Importance to Company: Signal of Quality Level to Customers Source of Competitive Advantage Means of Endowing Product with Unique Associations Means of Legally Protecting Unique Features Source of Financial Returns 1

2 Why is Branding Important? Importance to Current Customers AND Potential Customers: Easy Identification of Source of Product Promise, Bond, or Pact with Company Signal of Quality Risk Reducer Search Cost Reducer Why Do Brand Valuation? Important Reasons to Do Regular Brand Valuations Are: Brand Performance Tracking Brand Portfolio Reviews Resource Allocation Marketing Budget Determination But, also in situations such as: Mergers & Acquisitions Selling a Business Why Do Brand Valuation? Brand Valuation is Becoming More Important The value of companies has been shifting from tangible assets the bricks and mortar to intangible assets, such as patents, licenses, customer lists and brands. These are the keys to shareholder value.. Business Week, The Value Challenge for Marketers: They need to forge a deep understanding of how marketing activities affect the bottom line and the ability to communicate it. Business Week,

3 Why Do Brand Valuation? Brand Valuation is Becoming More Important. Surveys among financial analysts and investor relations directors of several companies. Should companies in your sector publish more information on the following? Marketing Expenditure Ratings % Advertising Expenditure Discounts Given Marketing Performance Measures Brand Values Financial Analysts Investor Relations Dir. Why Do Brand Valuation? But, this would imply a closer Marketing-Finance Interface! Marketing Finance Interface Purpose of Marketing Relationship between marketing and finance Input to marketing analysis Traditional Assumptions Create value for customers, win in the product marketplace Positive product-market results translate into positive financial results Understanding of the marketplace and organization Emerging Assumptions Create and manage market-based assets to deliver shareholder value Marketing/Finance interface must be systematically managed Financial consequences of marketing decisions What is measured Product-market results; Assessments of customers, channels and competitors Financial results; configuration of marketbased assets Adapted from: Market-Based Assets and Shareholder Value: A Framework for Analysis, by R.K. Srivastava, T.A. Shervani, and L. Fahey in Journal of Marketing, January 1998, Vol. 62, Nr.1, pp

4 Marketing Finance Interface Marketing Finance Interface The World's 10 Most Valuable Brands RANK BRAND 2001 BRAND VALUE ($BILLIONS) 1 COCA-COLA MICROSOFT IBM GE NOKIA INTEL DISNEY FORD McDONALD'S AT&T 22.8 Source: Business Week 4

5 The Value of Brands In 1998, BMW paid 60 Million just for this logo Alternative Valuation Methods A Brand Valuation Method Has to:* Have Quantitative Aspects Have Qualitative Aspects Show Influence of Qualitative Aspects Be Transparent Be Objective Be Reliable Be Consistent Not Be Too Complex * Based on Kriegbaum, C. Valuation of Brands: A Critical Comparison of Different Methods Paper presented at the EAA Congress, Belgium. April, Alternative Valuation Methods Cost-Based Valuations It is possible to value a brand on the basis of what it actually costs to create or what it might theoretically cost to recreate. However, such costs may bear little similarity to the current value of a brand. This method is internally focused and also excludes factors like perceived quality, brand loyalty, brand associations,. 5

6 Alternative Valuation Methods Market-Based Valuations This approach is more externally focused. It is based on an estimation of the amount for which the brand can be sold. When information of market transactions involving comparable brands is available it is possible to estimate one brand s value by comparison to another brand. However, the fact that such data is scarce and that brands are unique makes this an unsatisfactory primary method of valuing a brand. =? Alternative Valuation Methods Royalty Relief Method This is based on the assumption that if a brand has to be licensed from a third party brand owner, a royalty rate on turnover will be charged for the privilege of using the brand. By owning the brand such royalties are avoided. The royalty relief method involves estimating likely future sales and then applying an appropriate royalty rate to arrive at the income attributable to brand royalties in future years. The stream of notional brand royalty is discounted back to a net present value the brand value. Alternative Valuation Methods Price Premium Compare the Price Premium of the Branded Product with a Generic (No Brand Name) Product. Danger: Overvalue smaller brands that are highlypriced; Undervalue higher-volume lower-priced brands. 6

7 Alternative Valuation Methods Economic Use Method This method considers the economic value of a brand to the current owner in its current use. This is the most widely used method of brand valuation. Brand s Earnings Deduct a Fair Charge for Tangible Assets to Produce, Maintain, Service and Finance the Brand Excess Net Earnings Attributable to Owning the Brand Discounted Value of Estimated Future Earnings Attributable to the Brand Discount Rate Discounted Cash Flow (DCF) of Estimated Future Brand Earnings (5-10 Years) Net Present Value (NPV) = Brand Value The Brand Valuation Model Financial, Market, Customer & Marketing Data Brand Forecasts Brand Score Card Brand Contribution Brand Power Discount Rate Brand Beta (Risk Factor) Operational Brand Value Brand Mission & Objectives Strategic The Brand Score Card Research by Keller (2000) Has Shown That the World s Strongest Brands Score on these 10 Attributes: 1. Equity (Brand Loyalty; Brand Awareness; Perceived Quality, Brand Associations) 2. Value (How does the Product/Brand add value to the customer?) 3. Benefits (Does the Product/Brand deliver the expected benefits?) 4. Relevance (In terms of Product, Price, Promotion & Place) 5. Positioning (Premium, or Regular Product/Brand?) 6. Portfolio (How does Product/Brand fit within the Portfolio?) 7. Monitoring (Is Brand Equity regularly monitored?) 8. Consistency (Is Internal AND External Product/Brand Communication Consistent?) 9. Support (Does the Product/Brand receive the necessary support?) 10. Meaning (Do Customers and Employees know what the brand stands for?) 7

8 5-Phase Approach 1. Management Interviews 2. Questionnaire Development 3. Data Collection 3.1 Company Financial & Other Internal Data 3.2 Customer Surveys 3.3 Other Relevant External Data 4. Data Analysis 5. Brand Power & Brand Value Calculation Data analysis Brand Power Brand Power Brand Employee Market Customer Brand Power Sontara Brand Power = 71% Individual weights 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 100% 45% 10% 25% 20% 0,0 Brand Power Brand Employee Market Customer 8

9 Brand Value Sontara Beta Discount Rate Discount Rate Strong Brand Sontara Weak Brand Brand Risk Risk Free A Brand Power of 71% corresponds with a Beta of Combined with a sector Beta of 0.69 this results in a Discount Rate of 5.88%. Determining Brand Risk (β): Converting Brand Power into a Beta Risk (βeta) 71 Brand Power Score Calculating the Discount Rate Discount Rate = Risk Free Rate + (Expected Rate of Return* Risk Free Rate) x Brand Beta x Sector Beta** For example: 4% + (8% - 4%) x.68 x.69 = 5.88 % *e.g. WACC **e.g. Specialty Chemicals 9

10 Brand Value Calculation Brand Value Value Profit before tax (million ) *) Sales Growth rate (for next period) 16% Capital employed (million ) Charge for capital 8% Economic Value Added Brand Contribution 100% Tax 35% Inflation 3% Post Tax/Inflation contribution Brand Power 71 InterMark Beta (IMß) 0,58 Sector Beta 0,69 Risk Free Rate 4% Discount rate 5,6% 5,6% 5,6% 5,6% 5,6% 5,6% 5,6% Discount factor 1,0 1,1 1,1 1,2 1,2 1,3 Discounted Cash Flow NPValue for next 5 years 95 Value from Brand Value (in million ) 547 Brand Strategy Matrix 5.00 Equivocal Can Be a Profitable Brand Build Selectively Specialize on Limited Strengths. Withdraw if no sustainable growth is probable Invest to Build Challenge for Leadership Build Selectively on Strengths Value-Creating Potential Brand Protect Position Invest to grow at maximum rate Market Attractiveness 3.67 Limited Expansion, or Selectivity / Manage for Build Selectively Harvest Earnings Invest heavily in most Medium Look for ways to expand Concentrate investment in attractive segments. without high risk; otherwise segments where profitability Build up ability to counter minimize investment and is good and risks are competition. rationalize operations. relatively low. Increase profitability by increasing productivity 2.33 Value-Destroying Brand Low-Value Growth Withdraw Manage for Earnings Potential Sell the brand at maximum Protect position in most Protect & Re-Focus Low cash value profitable segments Manage for current earnings Upgrade product line Concentrate on attractive Minimize investment Segments 1.00 Defend Strengths 0% 33.33% 66.67% 100% Low Medium Brand Measures (Brand Score Card) Sontara in the Brand Strategy Matrix Area: Value-Creating Potential Brand. This means that DuPont should protect Sontara s position and invest to grow at maximum rate Market Attractiveness Medium Sontara Low % Low 33.33% 66.67% 100% Medium Brand Measures (Brand Score Card) 10

11 Multiple Brand Strategy Matrix 5.00 Market Attractiveness Medium Sontara SilverStone Dartek Low % Low 33.33% 66.67% 100% Medium Brand Measures (Brand Score Card) Questions & Discussion 11