Brand Valuation - The Marketer's Perspective


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Analysis of why brand valuation has failed to deliver the benefits that marketers had hoped for - the artificiality of its premise; and the inconsistency of the current valuations produced by Interbrand, Brand Finance, Millward Brown and the European Brand Institute.
Comparison of the valuation of brand by the accountants (for the purposes of post purchase goodwill accounting) and by the brand consultants.
Recommendation that marketers are better served by framing brands as having a multiplier/magnifier effect on the impact of business strategy, rather than being viewed as standalone assets whose value is independent from the value of the business.

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Brand Valuation - The Marketer's Perspective

  1. 1. Brand Valuation: The Marketer’s Perspective Recommendations for Marketing Professionals Type 2 Consulting New York October 2013 Does Marketing Matter? January 2009 P1
  2. 2. Marketers’ Motives for Valuing Brands are Laudable… BENEFITS THAT MARKETERS EXPECT FROM BRAND VALUATION •  Dialogue with senior management in language they recognize (cash flow and business value) •  Recognition that brands represent true economic assets (that is, they generate future cash flow) •  Acknowledgement by senior management that ROMI (Return on Marketing Investment) needs to be measured in terms of short-term ROI and changes in brand equity •  Appreciation of the contribution of the marketing function to overall business value P2
  3. 3. So, Why has Brand Valuation Failed to Deliver? TWO REASONS WHY MARKETERS HAVE BEEN DISAPPOINTED •  Brand Valuation is based on an artificial premise: –  Brand valuation is based on the concept of a brand as a standalone piece of intellectual property (“trademark and associated goodwill”) whose financial impact can be isolated from all the other factors that contribute to customer preference and purchase behavior –  This creates a “zero sum” dynamic between marketing and other departments (such as sales, NPD, customer service) about who is really responsible for the incremental brand-related earnings •  Brand Valuation produces inconsistent results: –  Comparison of the results of the brand valuations published by Interbrand, Brand Finance, Millward Brown and the European Brand Institute reveal a disturbingly high level of inconsistency –  This inconsistency undermines the credibility of brand valuation in the eyes of business executives P3
  4. 4. The 2013 Brand Value League Tables Compared The four top 100 lists feature Only 213 different brands 28 brands are common to all four top 100 lists There is an average difference of 2.3x between the high/low values of these 28 brands 15 For of these 28 brands there is disagreement about whether the brand increased or decreased in value relative to 2012 P4
  5. 5. The Top 30 Brands in the Four 2013 Lists Eurobrand data originally published in Euros and converted at €1 = $1.32 P5
  6. 6. Valuation of the 28 Brands Common to the 2013 Lists Eurobrand data originally published in Euros and converted at €1 = $1.32 P6
  7. 7. Three Key Points for Marketers to Note •  All four consultancies base their valuations on credible “economic use” methodologies: •  The differences in the resulting valuations are primarily due to differences in the key assumptions in their respective models, not methodological differences between the models •  This subjectivity in assumptions is the consequence of the lack of a GAAP-style standard for measuring the strength of brands and their role in driving revenue and margin: •  This results in significant differences between the models in the proportion of profitability solely attributable to the brand (models that use the “earnings split” approach) or the royalty rate (models that use the “relief from royalty” approach) •  But, most importantly, the concept of a brand as a standalone asset is not a view that marketers should be promoting P7
  8. 8. The Artificial Premise of Brand Valuation •  Marketers expend considerable energy convincing senior management that brand is holistic concept that encapsulates the entire customer experience, and that “brand thinking” be incorporated into all aspects of how the company operates •  It therefore seems inconsistent – and narrowly self-serving – that, when it comes to brand valuation, marketers are ready to claim exclusive responsibility for a significant proportion of the cash flows of the business •  Brand Valuation comes across as a “land grab” by marketers to attribute an artificially large proportion of cash flow and business value to their activities P8
  9. 9. Contrasting Opinions of the Value of Brands •  Comparison of the valuation of brands in post-merger accounting (PPA – post-purchase goodwill allocation) with the league table data reveal a huge difference of opinion: •  PPA analysis reveals that accountants attribute an average of only 7% of the overall purchase price to brands/trademarks (T2 analysis of goodwill allocation in the 300 largest M&A transactions 2002 to 2012) •  Analysis of the league tables shows that the brand consultants consider that brands represent 18% of overall enterprise value (T2 analysis based on the consolidated results of the 2009 to 2012 league tables) Industry Sectors Consumer Discretionary Consumer Staples Energy Healthcare Industrials IT Materials Telecom Total 1 2 Brand Value as % EV 1 22% 23% 5% 10% 12% 29% 9% 18% 18% Trademarks as % EV 2 5% 12% 3% 10% 8% 3% 1% 3% 7% Brand Value data available for years 2009 to 2012 PPA data available for years 2002 to 2012; EV assumed = Net Transaction Value P9
  10. 10. Is “Brand” or “Branded-ness” the Real Objective? •  If marketers believe that customer value is the ultimate source of business value: –  Peter Drucker said “marketing and innovation produce results” because these are the only two business disciplines that are focused on providing customers with what they value •  Then the goal of Marketing is to ensure that a company delivers distinctively valuable experiences to customers: –  Marketing is therefore about the entirety of the customer experience, not solely the actions of the marketing department •  And the real business question is about the value of “branded-ness” (the customer experience), not “brand”: –  How much incremental value can a company generate by focusing on the delivery of a distinctive experience across all aspects of the customer’s interaction with the company and its products? P10
  11. 11. “Brand-ness” vs. “Brand” •  “Branded-ness” is the true economic asset of the business: –  The distinctive identity that the company or product enjoys in the minds of customers and other audiences is the true source of the incremental cash flow that the company is able to generate •  “Branded-ness” is more intuitive to senior management: –  Senior executives are ready to acknowledge the business value of “corporate reputation” and “market perception” •  “Branded-ness” avoids the artificiality at the heart of the current approach to brand valuation process: –  The sleight of hand at the heart of brand valuation currently is the attribution of the financial impact of “branded-ness” to the intellectual property (the trademark and associated goodwill) because that is the “asset” that the accountants will recognize P11
  12. 12. Towards a Better Model of “Brand Valuation” •  If customers’ perception of the company (“branded-ness”) is the real economic asset of the business, then the value of branding is better thought of in terms of a multiplier effect •  The value-added of marketing investment can be measured in terms of how it magnifies the effectiveness of the underlying business strategy, rather than a standalone asset: –  Branding is as an integral part of a deliberate go-to-market strategy for identifying the most suitable audiences (segmentation) and delivering distinctive levels of value to them (value proposition) •  This means that marketers should focus on demonstrating how brands impact the key value drivers of the business: –  What is the differential impact of “branded-ness” on the growth, price realization, cost structure and risk profile of the business? P12
  13. 13. Brand Strength as a Multiplier of Business Value KEY FINDINGS •  As expected, corporate valuation is driven primarily by changes in profitability (the valuation multiples are most sensitive to movement along the X-axis) •  Brand strength shown to be a magnifier of underlying business performance, improving market value multiples by 20% for low-EVA companies to 50% for high-EVA companies High 1.2 Low Low 2.9 1.0 Brand Strength The table opposite summarizes the findings of research into the relative impact of profitability and brand strength on business valuation The research involved 140 companies over a 10 year period and drew on corporate performance data from Stern Stewart’s EVA database and brand strength data from Young & Rubicam’s BrandAsset Valuator database 1.9 Profitability (EVA) High Reference: J Knowles “Value-based brand measurement and management” Interactive Marketing, July/September 2003 Note: EVA = Economic Value Added (profitability after making a charge for the use of the capital invested in the business) P13
  14. 14. Summary of Key Points •  Marketers often have unrealistic expectations of what brand valuation can deliver •  Brand valuation is based on an artificial construct that credits the trademark (the legal asset that the accountants are prepared to recognize) with the full financial value of “branded-ness” (the customer’s perception of the company) •  The real economic asset is the customer’s perception, and this is based on the totality of the actions of the business, not just those of the marketing department •  A more convincing approach to “brand valuation” is to think of brands as magnifying the effectiveness of business strategy •  ROMI (Return on Marketing Investment) can be expressed in terms of its differential impact on the growth, price realization, cost structure and risk profile of the business P14
  15. 15. 226 Fifth Avenue 6th Floor New York NY 10001 C: 646 345 6782 T: 212 537 9200 F: 212 658 9869 P15