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BRAND VALUATION
August 6, 2011
Brand Valuation Methods Table of Contents BRAND VALUATION I. II. A. B. C. D. E. F. i. ii. iii. G. III. Introduction Approaches to Valuation Valuation Based on Aggregate Cost The Replacement Cost Method Gross Margin Approach Valuation at market price Valuation based on customer relations factors Valuation based on Income Approach Discounted cash flow method Capitalization of Earnings Multiple or discretionary earnings Royalty Relief Method References 1 3 3 3 4 4 6 6 8 8 9 9 10 11
I.
Introduction
Brand equity needs to be distinguished from brand valuation, which is the job of estimating the total financial value of the brand. This report contains an overview of the following different approaches for Brand valuation: 1. Valuation based on the aggregate cost of all marketing, advertising and research and development expenditure devoted to the brand over a stipulated period. 2. The replacement cost method 3. Gross Margin Approach: Valuation based on premium pricing of a branded product over a non branded product. 4. Valuation at market price 5. Valuation based on customer related factors such as esteem, recognition or awareness. 6. Valuation based on income approach 7. Royalty relief method: We assume what royalty the firm would have to pay if the brand was not owned by them as a percentage of sales
II.
Approaches to Valuation
A. Valuation Based on Aggregate Cost
Typically, Cost-based brand valuation approaches take into consideration the costs that have been incurred by the company to create the brand. These approaches are not forward looking. Rather, they look backwards into history. The cost-based method is conceptually the least defensible. It is perhaps the weakest. In order to arrive at the value figure, all costadvertising, promotions, research and development-which have gone into brand creation are added and converted into current prices. For instance, for an imaginary brand like FROOTSA , Rs. 80 crores have been spent in brand building. According to the cost based method, the brand s value would be Rs. 80 crores. For cost accounting purposes, the cost-based valuation makes good sense. But the fundamental plan of this method is whether the brand really is worth as much as it has cost to be created. The brand buyer would not be interested in how much has really gone into its creation; rather, his or her concern would be on its earning capacity or market value. This is true of various brands especially Japanese ones, which command greater market value in spite of lower incurred costs compared with their western counterparts.
Brand Valuation Methods do. If you ve been marketing your products or services as low-cost options, it s difficult to move up the price ladder without devoting significant dollars to aggressive marketing outreach and realistic differentiation between product offerings. The best approach is to launch products as premium offerings from the beginning--if that s what your business model calls for--because it s easier to mark products down (and nearly impossible to mark them up) once they ve been identified with a specific price point. Few factors that will influence your ability to establish and maintain your premium price position and reap the rewards: y
Don't Sacrifice Price, Even When Times are Tough. Just explain why your product or service is worth the investment, but be a little flexible for long-time customers. Do yourself a favor, though, and make a list of the customers you are willing to be flexible with; then make sure your sales team is aware of which customers are on the list so they won t be pressured to make snap decisions. Give employees freedom in dealing with customers, but make sure they know which customers are worthy of special treatment. Don't Play the Lowest Price Game. Weaker competitors are quick to cut prices to earn business. Don't play their game. Many competitors will fail because they can't generate cash flow to sustain this discounting strategy. Another disadvantage to playing the discount game is that this strategy is the fastest way to push your product or service into the commodity category. Select businesses have carved out a distinctive market by not discounting their products. The challenge is to create and sustain a brand that supports your premium pricing strategy.
The brand value is calculated multiplying the unit price differential of the brand in comparison with a generic product by the volume of sales. There are, at least, two options to calculate price premium statistically: y y Conjoint Analysis: It identifies the utility relative to independent product attributes Hedonic Analysis: The hedonic approach considers the price as a function of different product traits, being the brand one of them.
Brand value by gross margin approach is the product of the branded sales revenues and the premium branded gross margin that is the excess above the average gross margin of comparable competitors. This kind of approach is attractive as it is universally understood. The statistical methods to calculate price differentials are perceived as methods that remove the subjectivity inherent to the valuation process. It allows the valuation of brands that do not have price advantage, since it also considers the cost advantage.
Brand Valuation Methods Nearly all businesses have customers. However, not every one has identifiable customer relationships, whose value can be properly estimated. A reasonably identifiable relationship includes, but is not limited to: the ability to identify specific buyers and the income stream they generated; and the expectation of the business continuing or being renewed along with its expected duration. Generally, if these characteristics are present, an intangible asset exists, and a customer relationship asset value can be estimated. In addition, it is important to segment the relationships based on various criteria, including the types and level of goods and services purchased, geographies, and so on. This segmentation is critical as it enables a deeper understanding of the basis for the value creation. Once a customer relationship has been identified and segmented, one should understand the two key value drivers: the amount of inertia in the relationship, and the amount of information available about the buyer.
Customer Inertia Companies that typically have valuable relationship assets experience high-inertia with their customers. These arise from various factors (including barriers to entry, high switching costs, differentiated products and services, etc.) thereby creating a stickiness factor enabling ongoing, and reasonably predictable, purchasing patterns. Customer Information A strong and valuable relationship can be based on collecting, managing, and protecting key information. This may include: historical data on contact information, products ordered, quantity ordered, order date, ship date, payment history, marketing and satisfaction surveys; as well as past and projected financial results including revenue growth, profitability, and investments. The key value drivers are estimated from this information, since it often serves as an indicator of the profits that will be generated over the life of the customer relationship. Understanding these drivers and their impact on customer value should facilitate the value creation process. Possibly the most important drivers are the customer attrition and cash flow profiles. The customer attrition profile suggests the likelihood of an existing buyer continuing to purchase products and services with reasonable certainty and predictability. It also establishes the time period for estimating the value of existing customers. The cash flow profile reflects revenue components including price and volume, cost structure to serve the customers, and the impact of other assets (both tangible and intangible) in this value creation process. The customer attrition and cash flow profiles combine to form the basis for developing a customer relationship valuation analysis.
Discounted cash flow method Capitalization of earnings method Multiple of discretionary earnings method
i.
Discounted cash flow method A key income-based small business valuation method that establishes the business value as a stream of future economic benefits discounted to their present value. Discounted Cash Flow method determines the business value by considering these inputs: y y y A stream of expected economic benefits, such as the net cash flows. A discount rate which establishes the required rate of return on investment. An expected gain from the disposition of the business at the conclusion of the ownership period, or the long-term (terminal) value.
The objective of the method is to determine what the expected economic benefits stream is worth in present day dollars, given the risks associated with owning and operating the small business. Because of the method's solid financial theory foundation, it is favored by seasoned investors and business valuation professionals. Business appraisers and economists sometimes use the formal name Discounted Future Economic Income when referring to the Discounted Cash Flow business valuation method. The reason is that this method is quite flexible with the choice of the income measures that can be used as its input. Key to the method's accuracy, though, is a careful match between the income measure, known as the earnings basis, and the discount rate.
Brand Valuation Methods ii. Capitalization of Earnings A common income-based small business valuation method that establishes the business value by dividing the expected business economic benefit, such as the seller's discretionary cash flow, by the capitalization rate. Capitalization of Earnings Method determines the business value using a single measure of the expected business economic benefit as the numerator. This is divided by the capitalization rate that represents the risk associated with receiving this benefit in the future. We discuss the capitalization and discounting business valuation methods in the Guide and show that the two are equivalent if the business earnings grow at a constant rate. In using this valuation method, care must be given to the proper selection of the economic benefit being capitalized and the appropriate capitalization rate. Accurate matching of the income being capitalized and selection of the capitalization rate are the key advantages of the Multiple of Discretionary Earnings business valuation method.
iii.
Multiple or discretionary earnings A key income-based small business valuation method that establishes the business value as a multiple of an economic benefit adjusted for net working capital, non-operating assets and long-term business liabilities. Multiple of Discretionary Earnings method establishes the business value by multiplying the seller's discretionary cash flow by a composite valuation multiple which is derived from a number of business, industry, market, and owner preferences factors. The method is especially well suited for valuing owner/operator managed businesses whose purchase is driven by both economic and lifestyle considerations.
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III.
References
http://en.wikipedia.org/wiki/Category:Brand_valuation http://knol.google.com/k/management-accounting-brand-valuation#Methods_of_Brand_Valuation
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