IB Brand Valuation PDF

Brand Valuation A versatile strategic tool for business  Interbrand | Pg. 2 Brand Valuation A versatile strategic tool for business by Mike Rocha Compared to when Interbrand first pi...

Brand Valuation A versatile strategic tool for business  Interbrand | Pg. 2 Brand Valuation A versatile strategic tool for business by Mike Rocha Compared to when Interbrand first pioneered Figure 1. Brand Value Chain brand valuation in the 1980s, global business leaders now widely accept the importance Brand and value of strong brands – and the proposition significant role they can play in enhancing business performance. Strong brands enhance business performance primarily through their influence on three key stakeholder groups: (current and prospective) customers, employees, and investors. They influence customer Touchpoints choice and create loyalty; attract, retain, and motivate talent; and lower the cost of financing. The influence of brands on current and prospective customers is a particularly Perceptions significant driver of economic value. By expressing their proposition consistently across all touchpoints, brands help shape perceptions and, therefore, purchase behavior, making products and services less substitutable. In this way, brands create demand, allowing their owners to enjoy Generation Contunity higher returns. Strong brands also create of demand of demand continuity of demand into the future, thus making expected returns more likely – or less risky. Brands, therefore, create economic value by generating higher returns and growth, and by mitigating risk. Interbrand’s brand valuation methodology Higher expected Lower risk has been specifically designed to take all returns of these stakeholders and value-creation levers into account. Role of Brand analysis is about understanding purchase behavior: the brand’s influence on the generation of demand through choice. Brand Strength measures the ability of the brand to create continuity of demand into the future through loyalty and, therefore, to reduce risk. In doing Brand value this it considers ‘internal’ (management and employee) and ‘external’ (customer) factors. Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 3 Finally, these inputs are combined with a exercise could help you. Financial Applications financial model of the business to measure The business applications for brand valuation Increasingly, CEOs are placing more the brand’s ability to create economic value can broadly be categorized into three areas: emphasis on their companies’ brands in for its owner. investor communications. Many more annual Financial report column inches are now dedicated to It is quite possible that you believe that your discussing an organization’s commitment to brand could be (or is) a significant source of Brand management its brand, from the CEO down. Numerous competitive advantage for your business, companies take their brands seriously but you are unsure of how a brand valuation Strategy / business case development enough to report on their value over time to investors. Figure 2. Brand valuation applications Brand Management Strategy / Business Financial Case Development Applications Brand performance Brand positioning Investor relations management Brand architecture Mergers & acquisitions Brand portfolio management Brand extension Licensing / royalty rate setting Brand roadmap development Brand launch Tax valuations / transfer pricing Resource allocation Business case for brand Balance sheet valuations Brand tracking / dashboards investment Asset-backed financing Return on investment analysis Sponsorship evaluations Senior management KPIs Typical Frequency Recurring One-off One-off Primary Objective Ongoing brand management Business case connecting A robust value with supporting leading to insight and brand change / investment to analysis recommendations to grow expected nancial results brand value “Brand valuation provides a common language for brand performance around which a company can be galvanized and organized. Responsibility for Brand Strength factors can be allocated to functions, building engagement and a sense of responsibility for the brand across the organization.” Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 4 Brand also continues to be a key driver of Brand Strength is the key diagnostic tool Finally, when the Role of Brand and Brand acquisition premiums in M&A. Often, it is the with which we can measure brand Strength analyses are connected to the latent potential of the brand that is driving performance and better understand the financial model, they provide a framework this premium through its ability to enter new reasons behind a brand’s strengths and for resource allocation and prioritization markets and extend into adjacent categories. weaknesses, both internally and externally. based on the opportunities to enhance brand A broad skill set, combining market research, It supports strategic brand management performance that are expected to have the brand, and business strategy, together by prioritizing areas of highest impact greatest impact on brand and business value. with business case modeling, is required to for managers. quantify the latent financial potential of the Typical deliverables from a Brand Strength Strategy / Business Case Applications target brand. analysis are: From time to time, businesses need to Interbrand’s brand valuation methodology evaluate significant changes in brand A ‘heat map,’ indicating areas of can also be used to complement other more strategy, whether it be repositioning, brand strong and weak performance for the traditional techniques for setting royalty rates architecture, brand extension, or even a brand (this can be across geographies, for brands. By identifying the value created complete rebrand. These kinds of changes products, or customer groups, by a brand for its business, combined with typically involve significant financial outlay for example). an evaluation of the relative bargaining power upfront, along with a high degree of of the parties involved, we are able to advise Drill-down analysis into specific uncertainty over when, or whether, a positive on the proportion of brand value that should segments in the portfolio to identify return will be made on that investment. be paid out as a royalty rate in return for the reasons for over- and under- Some CEOs are willing to make these right to exploit the brand.1 performance. critical brand strategy decisions based on Recommendations for improvement qualitative strategic analysis and intuition. Brand Management Applications on Brand Strength factors, together The majority, however, are looking for a Ultimately, everything we do as brand with a cost benefit analysis to inform business case that goes further. They want managers should be considered through prioritization. to understand the likely overall financial a value creation lens. Considerable impact on the business over time, covering a The core benefits of Brand Strength analysis investments are made in brands and, range of alternative scenarios. In addition to are that it: ultimately, it is important to determine a detailed breakdown of the expected costs if these actions are creating value for your Enables constructive dialogue about to deliver, a rounded business case will also customers and, in turn, your shareholders. the brand between different parts quantify the expected impact on the top line Interbrand’s brand valuation methodology of the business by creating a common through the modeling of key revenue drivers seeks to determine, in both customer and language for discussion of brand (these will vary based on the business, but financial terms, the contribution of the performance. could include customer acquisition, churn, brand to business results. price premiums, share of wallet, frequency Provides global and local managers with of purchase / visit, average basket size, A strategic tool for ongoing brand an actionable tool to make informed and so on) and on profit margins from any management, it brings together market, marketing decisions – empowering operational changes required to deliver brand, competitor, and financial data into management with insights to implement the new strategy. Finally, sophisticated a single, value-based framework within brand strategy. techniques such as Monte Carlo simulation which the performance of the brand can be Allows responsibility for performance may be employed, running thousands of assessed, areas for improvement identified, on the ten Brand Strength factors (see possible permutations in order to estimate and the financial impact of investing in below for further details) to be allocated the most likely outcome. the brand quantified. It also provides a to functions across the business, common language around which a company By bringing together market, brand, building engagement and a sense of can be galvanized and organized. competitor, and financial data, the brand responsibility for the brand across valuation model is the ideal framework within Role of Brand analysis lets us know the organization. which such business case modeling can be where investment in (and focus on) brand conducted.2 improvements will have the biggest impact. It can be thought of as a measure of ‘brand leverage’. For more details, please read the whitepaper “Financial applications for brand valuation. Delivering value beyond the number”. 1  For more details, please read the whitepaper “Making the business case for brand change. Connecting brand strategy to business results”. 2  Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 5 As global competition becomes tougher of the individual parts (or segments) of a for example, manufacturing facilities, and many competitive advantages, such as business to ensure that differences between distribution channels, and working capital. technology, become more short-lived, the those segments in terms of the three key Interbrand, therefore, allows for a fair return brand’s contribution to shareholder value components of the brand valuation (financial on this capital before determining that the will only increase. Brands are one of the few performance, Role of Brand and Brand brand itself is creating value for its owner. business assets that can provide long-term Strength) can be taken into consideration. We build a set of financial forecasts over competitive advantage. From a brand management perspective, the five years for the business, starting with insights and recommendations that result revenues and ending with economic profit, Companies as diverse as Samsung, Philips, from the brand valuation exercise will be at which then forms the foundation of the Hyundai, and AXA, among many others, the segment level, so it is also important that brand valuation model. A terminal value is have used brand valuation to help them they are at an actionable level for the client’s also created, based on the brand’s expected refocus their businesses on their brands, brand teams. financial performance beyond the explicit motivate management, create an economic forecast period. The capital charge rate is rationale for branding decisions and The number and choice of segments determined by reference to the company’s investments, and make the business case therefore depends on: weighted average cost of capital. for change. The strategic priorities of the business Role of Brand Although many brand metrics are available, and of the brand valuation exercise. Role of Brand measures the portion of the few can link the brand to long-term financial purchase decision that is attributable to the value creation and this, along with its many The level at which brand management brand, relative to other factors (for example, other applications, makes brand valuation a decisions are taken. purchase drivers like price, convenience, versatile strategic tool for your business. or product features). The Role of Brand The number of parts of the business Index (‘RBI’) quantifies this as a percentage. that can be identified where financial Interbrand’s Brand Valuation Methodology Customers rely more on brands to guide their performance, Role of Brand and There are three key components in all of choice when competing products or services Brand Strength are considered to be our valuations: an analysis of the financial cannot be easily compared or contrasted, sufficiently different to warrant separate performance of the branded products or and trust is deferred to the brand (e.g. analysis. services, of the role the brand plays in the computer chips), or where their needs are purchase decision, and of the competitive emotional, such as making a statement about The availability of data. strength of the brand. These are preceded their personality (e.g. luxury brands). RBI by a decision on segmentation and at the tends to fall within a category-driven range, end of the process are brought together to Financial Analysis but there remain significant opportunities for enable the financial value of the brand This measures the overall financial return to brands to increase their influence on choice to be calculated. an organization’s investors, or its ‘economic within those boundaries, or even extend the profit.’ Economic profit is the after-tax category range where the brand can change operating profit of the brand minus a charge consumer behavior. Segmentation for the capital used to generate the brand’s Segments are typically defined by geography, revenues and margins. A brand can only business unit, product, service or customer exist and, therefore, create value, if it has group. Why is segmentation important? A a platform on which to do so. Depending robust valuation requires a separate analysis on the brand, this platform may include, “CEOs are placing more emphasis on their companies’ brands in investor communications … and the significant role they can play in enhancing business performance.” Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 6 Figure 3. Interbrand’s brand valuation methodology scale, based on an evaluation across ten key factors that Interbrand believes make a strong brand. Performance on these factors 1. Segmentation is judged relative to other brands in the industry and relative to other world-class brands. The strength of the brand is inversely related to the level of risk associated with the brand’s financial forecasts (a strong 2. Financial 3. Demand 4. Competitive brand creates loyal customers and lowers Analysis Analysis Analysis risk, and vice versa). A formula is used to connect the Brand Strength Score to a brand-specific discount rate. (See below for Economic Role of Brand Brand Strength more information on Interbrand’s ten factors Profit Index (RBI) Score (BSS) of Brand Strength). Brand Value The brand-specific discount rate is used to discount brand earnings back to a present value, reflecting the likelihood that the brand will be able to withstand challenges and Brand Brand Risk deliver the expected earnings into the future. Earnings (Discount Rate) This is equal to brand value. Focus on: Brand Strength Our experience shows that brands that are 5. Brand Value best placed to keep generating demand and Net present value of brand earnings profit into the future are those performing strongly (relative to competition) across a set of ten factors, shown below. Note: Interbrand was the first company to have its methodology certified as compliant with the requirements of ISO 10668 – requirements for monetary brand valuation, as well as playing a key role in the development of the standard itself. Four of these factors are internally driven, and reflect the fact that great brands start from within. The remaining six factors are more visible externally, acknowledging the RBI determinations can be derived in 3. Qualitative assessment. Based on fact that great brands change their world. three ways (and are described in order of management discussions and past preference below): experience. This is used where no market research is available. 1. Primary research. Specifically designed research, such as choice modeling RBI findings are cross-checked against (although other techniques are historical roles of brand for companies in the available), where RBI is same industry. Finally, RBI is multiplied by statistically derived. the economic profit of the branded products or services to determine the earnings 2. Existing research plus Interbrand attributable to the brand (‘brand earnings’) opinion. Existing research addressing that contribute to the valuation total. the relative importance of purchase drivers is combined with Interbrand’s Brand Strength opinion on the extent to which the Brand Strength measures the ability of the brand influences perception of how the brand to create loyalty and, therefore, to product or service will perform against keep generating demand and profit into the each driver. future. Brand Strength is scored on a 0 – 100 Brand Valuation: A versatile strategic tool for business Interbrand | Pg. 7 Figure 4. Brand Strength factors Internal Factors External Factors External Factors Leadership Engagement Relevance Direction Distinctiveness Presence The degree to which there is a clear purpose and The existence of uniquely ownable signature The degree to which a brand feels omnipresent to ambition for the brand, a plan to deliver on them assets and experiences that are recognised and relevant audiences, is talked about positively, and is over time, and a defined culture and values to remembered by customers and difficult to replicate. easily recalled when a customer has a need in the guide how those plans should be executed. brand’s category. Coherence Alignment Trust The degree to which customer interactions, The degree to which the whole organisation is whilst varying depending on channel and context, The extent to which a brand is seen to deliver pulling in the same direction, committed to the remain authentic to the brand’s narrative and feel. against the (high) expectations that customers brand strategy and empowered by systems to have of it, is perceived to act with integrity and with execute it across the business. Participation customers’ interests in mind. The degree to which the brand has the ability to Empathy Affinity draw in customers and partners, create a sense The degree to which the organisation is in tune of dialogue and encourage involvement and The degree to which customers feel a positive with customers and wider stakeholders, actively collaboration. connection with the brand, based on the functional listening to and anticipating their evolving needs, and/ or emotional benefits provided, and/or a beliefs and desires, and responding effectively and sense of having shared values. appropriately. Agility The speed to market that a company demonstrates in the face of opportunity or challenge, enabling it to get ahead and stay ahead of expectations. Mike Rocha Global Director, Brand Valuation [email protected] Mike leads Interbrand’s brand valuation practice globally, providing overall strategy, thought leadership and consistency across its network. He has over ten years of experience in understanding and measuring the value of brands, their impact on business performance and in uncovering insights from the valuation process to drive brand value growth. © 2017 Interbrand www.interbrand.com