“I’ll have a cola.” Have you ever answered this when asked at a restaurant? You more than likely have said “I’ll have a Coke” or “I’ll have a Pepsi” but probably not “I’ll have a cola.“ That’s the power of branding.
A key element of differentiating from the competition, a powerful brand can illicit loyalty from satisfied customers and typically allow a company to charge a higher price relative to its competitors.
Consumers regularly pay more for branded products as compared to store brands, and they will pay even more for a premium brand as compared to a mass-market brand.
A brand is often identified by a trademark or tradename – a recognizable logo that identifies the product and/or manufacturer.
Some of the most iconic transformations of a brand’s identity are the ones in which the brand becomes synonymous with a the object as a noun or verb. For example, when someone asks for a “Q-tip” or a “Kleenex” (instead of a cotton swab or tissue) – or when someone says “Google this” or “FedEx that” rather than requesting an internet search or using expedited shipping.
But this type of recognition doesn’t necessarily last forever. Have you heard anyone ask to make a “Xerox” of something recently?
Large brands, such as Apple or Google, carry billions of dollars worth of value. However, even small businesses can carry strong brand value within their industry or local market. Brand equity is one of the few assets in business that can provide a sustainable competitive advantage, but because the idea of a brand’s value means different things to different people, brand valuation is not an objective concept. The different methods used to calculate brand value means companies can manipulate the value of their brand equity to work in their favor. This becomes especially important if you are considering a sale or merger, or attempting to expand with help from a loan or outside investors. To demonstrate that your brand’s valuation is accurate and reliable, identify the objective of the valuation and use the appropriate method and assumptions to determine a fair value.
Before calculating your brand’s valuation, determine what the brand includes. You should consider the value of anything that consumers associate with your brand and image, such as your trademark, brand name, visual assets such as a logo or colors, unique marketing strategy, digital assets or licenses, and level of customer loyalty.
Brand value is an essential tool for developing your brand and forecasting the value of your business. There are multiple ways to approach the valuation of a brand, and which method you choose will depend on your business, industry, and situation.
- Cost-Based Brand Valuation
Cost-based valuation is similar to saying that a home is worth the amount of money it took to build and furnish it. This method values a brand using the costs that have been incurred to build the brand since its beginning. Items you would include when evaluating costs are historical advertising, promotion expenditures, cost of campaign creation, licensing and registration costs, and cost of any trademarks. Using cost-based valuation requires you to evaluate the cost of the brand and restate the actual expenditures in current cost terms. You can use this method of brand valuation if you have just launched or if you’re going through the process of re-developing your brand.
It’s important to keep in mind that, while this method uses concrete costs to estimate your brand value, the final figure doesn’t necessarily represent the current value of a brand. Changes in public perception of your brand, media attention, or changes in your industry can all raise or lower your brand’s value relative to the cost of building it.
2. Market-Based Brand Valuation
Market-based valuation is similar to researching the prices of houses in your neighborhood before you set a price for selling your home. It uses one or more points of comparison between your business and similar brands that have been sold. The points of comparison can be the specific sale of a brand, comparable company transactions, or stock market quotations. Market-based brand valuation is the amount for which a brand can be sold, and is equal to a market transaction price, bid, or offer for identical or reasonably similar brands.
3. Income Approach to Brand Valuation
The income approach to brand valuation is similar to looking at a house’s potential earnings as a rental property and using that to estimate its current value. This method is often referred to as the “in-use” approach. To calculate the brand value, the income approach uses future net earnings that can be attributed directly to the brand to determine its current value. The brand value using this method is equal to the value of income, cash flow, or cost savings—actually or hypothetically—due to the reputation or recognition of the brand.
One important use of such a brand-value metric is the information gained when looking at the directional changes. That is, one can identify the brands gaining value versus the brands loosing value. Further investigations may suggest, a variety of factors such as defection rates, effective campaigns, or a variety of market-based developments. By breaking down to the market and consumer insights, one can create meaningful campaigns with investments justified by the brand value changes.
Go have a coke.
Check out my related post: Are you in the reputation economy?
Post note: Jade from Qualtrics contacted me and shared a wonderful article “Customer retention: how to measure, track and improve your customer loyalty”
I encourage you to check it out if you want to learn more about brand value! Thanks for sharing this with me, Jade!