Historical Perspectives and Interbrand’s Brand Valuation Methodology

Historical Perspectives

Traditional brand management performance measures usually are short-term oriented and give no incentives to invest in brands but rather lead to short-term activities which harm long-term brand value. This is alarming, especially for companies where brands are the main assets. Brand value, if correctly measured, could represent a useful goal for the management of brands. In mergers and acquisitions, brand value could help in determining a corporation’s price and support the decision process. Another area where a valid brand valuation method would be helpful is the licensing of brands. Finally, brand valuation is needed for balance sheet purposes.

Interbrand’s Brand Valuation Methodology

The valuation method of the consulting company Interbrand includes a financial analysis where, business earnings are identified, a market analysis where the proportion of earnings attributable to the brand is determined, a brand analysis where brand power is analyzed, and a legal analysis.

Brand power is seen as the primary determinant of the risk profile of the brand. Low brand power will increase the risk that projected earnings will not be realized. Therefore, two brands can have different values even if they have identical earnings forecasts just because their brand power and consequently their risk profile is different. The risk profile concluded from brand power has an effect on the discount rate that is used to discount future earnings. 89 To determine brand power, seven criteria groups with 80 to 100 sub-criteria that influence brand power are evaluated. The seven criteria groups involve:

• Stability: Long-established brands are considered to be more valuable than for example recently launched brands.
• Trend: Evaluation of the growth potential of the brand.
• Marketing support: Evaluation of marketing activities, e. g. amount spent in supporting the brand, quality and consistency of that support.
• Market: Since brands in markets such as fast-moving consumer goods are generally stronger than brands in markets that are more vulnerable to fashion changes, the dimension “market” has to be considered.
• Leadership: Dominant brands that are able to influence the market are obviously more valuable than brands with an unimportant market-share.
• Internationality: Evaluation of the ability of the brand to be successful abroad.
• Legal protection.

Brand Balance Sheet and Nielsen Brand Performance

Similar to the Interbrand method, Nielsen developed a brand valuation method, the Brand Balance Sheet, that evaluates brand power with a scoring model. Six criteria groups with nineteen sub-criteria groups are evaluated and weighted according to their importance for brand power.

The maximum score that could be achieved amounts to 500 points. A brand with less than 200 points is considered a weak brand. The criteria groups include the following:

• Market potential (e. g. size of the market, development, value added of the market)
• Market share of the brand (e. g. relative market share, profit market share)
• Brand evaluation of the retailers (e. g. brand distribution)
• Effort of the firm (e. g. product quality, prices of the brand, share of voice)
• Brand evaluation of the customers (e. g. brand loyalty, confidence in the brand, share of mind)
• Expansion of the brand (e. g. international expansion of the brand, international legal protection)