Heard the news about Facebook being valued at $ 50 billion? Any idea what exactly is being valued that high, as to rake in billions of that order? – a strong part of it is the Brand.
Brand, for any company is an intangible. An asset, for sure, but an intangible nevertheless. But still, these intangible assets are valued, and given a number as their price tag. In this post, we would try and understand how to determine this magic number as well as the need to do so.
First off, the definitions and delineations – Brand is one of 4 major types of intangible assets that a company might possess:
1. Knowledge-based (patents, softwares etc)
2. Business Process-based (manufacturing practices, business hierarchy system etc)
3. Market Position-based (the licenses, distribution rights etc), and
4. The Brands
The intangible called Brand would cover a lot of things, including trademarks, logos and logotypes, packaging designs, certain sensory inputs (audio jingles etc), anything and everything which intentionally leads to a brand recall (and hence the price premium)
Next concern – why do you need a number attached to an intangible like a brand? – to remove subjectivity and introduce objectivity. The top brass of the company would like to base strategic decisions on something more measurable than a ‘our brand has a strong recall factor!‘ or ‘people like our new jingle‘. They would want something in numbers, which allows comparison between different alternatives, comparing different divisions or SKUs of the company etc. A valuation would also help in legal and administrative decisions. A lot of M&A decisions need to be based on the value of a brand.
Valuation of brands, or in general, all intangibles has come strongly into forefront in the recent times.
Reasons: increased used of techniques like benchmarking and TQM makes quality- or price-based PODs redundant. So the POD between competitors is more on the intangibles – the special manufacturing techniques, the unique brand connect, the royalty-earning patent etc.
We will restrict our discussion to a brand perspective, although broadly the same discussion can be extended to all intangibles.
So, what all parameters are taken care of when determining the value of a brand? There are multiple approaches to this, which we will discuss next:
1. Historic and Replacement Costs Approach: Determining the costs that went into making the brand, for advertising, trademark registrations, promotions etc and what would be the investment required to replace the brand by a substitute.
2. Price Premium Approach: Comparing prices of branded products with generic variants. The price premium garnered (loosely similar to brand equity) is taken in the context of sales volumes of the product (per unit premium is multiplied by no. of units sold) and counted as the value added by the brand.
3. Break-even Economic Return Approach: In this case, the price of branded products is compared to the break-even price (which is the input cost for the company). Again, taking up the context of sales volumes (again, the same multiplication is performed), the added value is attributed to the brand.
There might be minor confusion between the above two approaches. Let me take a quantitative example for this :
If, for making one unit of a product, Rs X is spent, a generic packed product (with no branding) would charge say Rs X+5 and a branded product might be priced at say, X+25. In Approach 2, the difference between ‘X+25’ and ‘X+5’ is considered, while in Approach 3, ‘X+25’ and ‘X’ are considered.
The above three are the primary approaches which are used to put some number as estimates of a brand value. There are some other, lesser used ones like those based on royalty rates of brand licenses. We understand that none of the methods is precise or accurate by any means. But the goal was to reduce subjectivity and introduce objectivity, and these methods help move on the way to achieving that goal, even with a known ambiguity factor.
A free download from the following link at BrandFinance (you just need to create a free User ID): http://www.brandfinance.com/knowledge_centre/articles/brand-valuation-what-it-means-and-why-it-matters
An interesting review of the Facebook valuation mentioned earlier (Jan 5 blog post) : http://aswathdamodaran.blogspot.com/