How do you value a brand?

Several years ago, I was interested in buying a local bookshop.  The bookshop was located in a market town and had no direct competition from major chains such as Waterstone’s.  It looked like a decent business opportunity.  I therefore had a close look at what exactly was on offer.

The existing proprietor of the business was asking for a large five-figure sum for the business and looking at what was being sold, this seemed a very high price.  The existing stock of the business was not for sale; if I wanted to purchase that, I would have to value the stock and make an additional offer.  The business premises were not for sale, they were rented from a local landlord; a lease which was about to expire.  The shop premises were small with little room to expand the business and the existing business was doing very little in the way of marketing.  The owner was relying on passing trade and was not getting involved in local cultural and social festivals.  I believed that the proprietor had significantly over-valued their business.  When the proprietor signed a new long-term lease for the premises, I withdrew my offer.  I had achieved a significant reduction in the offer price but one of my major concerns was that the shop was in a bad location and for the business to thrive, larger, more prominent premises were needed.  It appeared all that was being sold by the owner was the goodwill existing in the business and the value of the shop name.

So if all that is on offer is the intangible attributes of a brand, how do you value those assets?

Most accountants and financial analysts would use tools such as Net Present Value to assess brand worth.  Comparisons may be made with the net present value of competitors brands.  Calculations may subtract the earnings directly attributable to tangible elements of the brand to value intangible brand attributes.

For brands which are sold through licence or franchise arrangements, the valuation can be based on the royalty income from the licence being compared to the brand licence rate.

Marketing analysts will use net present value calculations but will also consider factors such as market segmentation, revenue forecasts and directly attributable earnings from the brand.

Philips Consumer Electronics created a method of brand valuation based on:

  1. Uniqueness – Does the product offer something new?
  2. Relevance – Is the product relevant to target consumers?
  3. Attractiveness – Do consumers want the product?
  4. Credibility – Do consumers believe in the product?

The advertising agency, Young and Rubicam developed a brand valuation model based on customer perception.  this looked at four areas; perceived brand differentiation; relevance to consumer lifestyle; esteem customers hold in a brand; and consumer knowledge of the brand.

The branding agency Interbrand created a proprietary brand valuation model which separates tangible product value from intangible brand value.  It assesses the portion of profits directly attributable to a brand and uses the growth rate and discount rate of the brand to assess value.

David Aaker developed Brand Equity 10 which uses ten specific metrics to determine brand value.  Metrics include brand awareness, perceived quality, differentiation and customer satisfaction with the brand.  Brand Equity 10 is often used in association with market share calculations and distribution coverage.

Moran has developed a formula which creates a method of assessing brand value on a year by year basis.  the formula is:

Brand Equity = Effective Market Share x Relative Price x Durability Index

Effective Market Share is the market share of a brand in a specific sector or geographic area multiplied by the percentage of brand sales which are generated in that area or sector.

The relative price is the price of your product divided by the average market price of that sector’s products.

The Durability index is the percentage of your customers who repeat purchase in the next twelve months.

Let’s imagine you run a coffee shop business with two premises in neighbouring towns.  Shop A has a market share of 30% and shop B has a market share of 50%.  Shop A provides 60% of your sales. Shop B provides 40% of your sales.

So the relative market share of the brand is:

Shop A:   30% x 60% = 0.18

Shop B:   50% x 40% = 0.20

Relative Market Share = 0.38

The average price of a coffee is £2.00.  Your average price is £2.50.  The relative price of your product is therefore 1.25.

You expect half of your customers to repurchase within the next 12 months (this is for the example, I would expect most coffee shops to have a regular clientele).  Your durability rate would be 0.5.

Using Moran’s formula, the Brand Equity value for the business would have increased by a factor of 0.2375.  This can be charted on an index and compared to the brand equity value of competitors.

Another tool often used in assessing brand value is conjoint analysis.  This estimates brand value by assessing the overall preferences of consumers in relation to alternative choices.

Say there are two attributes of a product, price and size. Three price options are given to consumers who are asked their preference.  90% of customers would prefer a product at a price of £50. 10% of customers prefer a price of £100 and 100% of customers reject a product at £200.

There are three potential sizes of product. 70% of consumers surveyed would like a small product; 10% of consumers would reject a medium-sized product and 60% of consumers would reject a large product.

These calculations of consumer perception are known as Partworth.  By adding these factors, conjoint analysis would show:

  • A combined worth of 1.6 for a small product costing £50
  • A combined worth of 0.8 for a small product costing £100
  • A combined worth of -0.3 for a small product costing £200
  • A combined worth of 0.8 for a medium-sized product costing £50
  • A combined worth of 0 for a medium-sized product costing £100
  • A combined worth of -1.1 for a medium-sized product costing £200
  • A combined worth of 0.3 for a large product costing £50
  • A combined worth of -0.5 for a large product costing £100
  • A combined worth of -1.6 for a large product costing £200.

It is clear that consumers would opt for the small product at £50 and would reject a large product costing £200.  If it is impossible to produce a small product for £50, it is clear that consumers would opt for either a small product at £100 or a medium-sized product at £50 rather than a medium-sized product at £100.

Conjoint analysis can be very complicated when you are dealing with multiple product attributes and, for accuracy of consumer perceptions, large-scale consumer surveys may have to be taken.  However, if you can show that your brand produces products which match consumers perceptions more closely than those of your competitors, a higher brand valuation can be expected.

Calculation the value of a brand should not be assessed solely in terms of accountancy measures.  Brand equity is often dependent on intangible attributes and consumer preferences.  The tools discussed above can help determine your wider brand equity.