How to do Brand Valuation?

The business valuation process is a challenging task. While the valuation of a brand may seem simple and appealing, they offer proper financial techniques, the truth is the bigger a brand is, the more complex and challenging the task of brand valuation is. A lot of factors should be taken into account and the valuation of trademarks, patents, goodwill, etc. also play a major role in the process.

Brand Valuation refers to the process that is used to calculate the value of a brand or the amount of money a third party is willing to pay for it or the financial value of the brand.

COST-BASED APPROACH OF BRAND VALUATION

The techniques under this method are concerned with the costs that are used in creating or replacing the brand. It is further subdivided into the following methods:

• Historical Cost Method - The approach includes the historical cost of making the brand as the actual brand value. It is regularly used on the preliminary levels of brand creation when specific market applications and advantages cannot yet be identified. However, the shortfalls of this approach are that there exist difficulties as to what could classify as marketing costs and the next amortization of marketing cost as a percent of sales over the brand's expected life.
• Replacement Cost Method - This method states that the brand valuation should be done by taking into account all the expenditures and investments that are required to replace the brand with a new one that has equivalent value to the company. The drawback for this method is that though it makes the calculation convenient and easy, however, it looks over the success of an established brand.
• Conversion Model - Using the approach here, one estimates the quantity of awareness that needs to be generated to attain the modern-day level of sales. This technique could be based on conversion models, i.e., taking the level of awareness that induces trial that in addition induces ordinary repurchase. The output so generated may be used for 2 purposes: to decide the cost of obtaining new clients and would be the replacement fee of brand equity. The major flaw in this system is that the differential in the purchase patterns of a generic and a branded product is required and the conversion ratio among awareness and purchase is better for an unbranded generic than the branded product and this indicates that awareness isn't always a key driving force of sales.
• Customer Preference Model - This method proposes that the value of the brand may be calculated through observing the growth in recognition and evaluating it to the corresponding growth in the market proportion. But he had diagnosed the trouble with this being how much of the elevated market share is attributable to the brand's recognition growth and how much to other factors. A further issue is that one might not anticipate a linear function among awareness and marketplace share.

MARKET-BASED APPROACH OF BRAND VALUATION

The market-based method essentially offers the amount at which a brand is bought and is associated with the maximum value that a "willing consumer & seller" are prepared to pay for an asset. This method is most typically used when one needs to sell the brand and consists of methods herein stated:

• Comparable Approach or the Brand Sale Comparison Method - This approach entails the valuation of the brand by observing current transactions concerning similar brands in a similar industry and referring to similar multiples. In other words, this approach takes the premium (or some other measure) that has been paid for similar brands and applies this to brands that the company owns. The benefit of this method is that it appears at a 3rd party angle that is, what the third party is willing to pay and is easy to calculate however the flaw in this approach is that the information for similar brands is rare and the price paid for the same brand consists of the synergies and the specific goals of the buyer and it may not be relevant to the value of the brand at issue.
• Brand Equity based on Equity Evaluation method - Brand equity may be divided into components: The ‘demand enhancing component, which incorporates advertising and results in rate premium profits, The cost-benefit component, which is acquired due to the brand during new product introductions and through economies of scale in distribution. Hence, they essentially anticipated the price of brand equity using the financial market value and the benefit of this method is that it is based on empirical proof however shortfalls of this method are that it assumes a very sturdy state of efficient marketplace hypothesis and that all information is covered in the share price.
• Residual Method - Keller has proposed the valuation of the brand by residual value which might be when the marketplace capitalization is subtracted from the net asset value. It will be the value of the ‘intangibles’ one of which is the brand. Another alternative method that is advised is that of the utilization of real options. The variables that need to be calculated are the risk-free interest rate, implied volatility (variance) of the underlying asset, the modern-day exercise rate, the value of the underlying asset, and the time of expiration of the option. This approach is beneficial in calculating the potential value of line extensions however the inherent assumptions in this method make any practical application hard.