Tag: Financial Management

A consumer behavior analysis helps you identify how your customers decide on a product or a service. To study their behavior you need a mix of qualitative and quantitative data from customer surveys, customer interviews, the information gathered from observation of their behavior in-store and online.

• According to Engel, Blackwell, and Mansard

‘Consumer behaviour is the actions and decision processes of people who purchase goods and services for personal consumption’.

• According to Louden and Bitta

‘Consumer behaviour is the decision process and physical activity, which individuals engage in when evaluating, acquiring, using or disposing of goods and services’.

Consumer buying behavior is the sum total of a consumer’s attitudes, preferences, intentions, and decisions regarding the consumer’s behavior in the marketplace when purchasing a product or service. The study of consumer behavior draws upon social science disciplines of anthropology, psychology, sociology, and economics

Characteristics

• Process

Consumer behaviour is a systematic process relating to buying decisions of the customers. The buying process consists of the following steps;

• Need identification to buy the product.
• Information search relating to the product.
• Listing of alternative brands.
• Evaluating the alternative (cost-benefit analysis)
• Purchase decision.
• Post-purchase evaluation by the marketer.

 

• Influenced by Various Factors

Consumer behaviour is influenced by a number of factors.

The factors that influence consumers are: Marketing, Personal, Psychological, Situational, Social, Cultural etc.

• Different for All Customer

All consumers do not behave in the same manner. Different consumers behave differently. The difference in consumer behaviour is due to individual factors such as nature of the consumer’s life style, culture, etc.

• Different for Different Products

Consumer behaviour is different for different products. There are some consumers who may buy more quantity of certain items and very low/no quantity of some other items.

• Region Bounded

The consumer behaviour varies across states, regions and countries. For instance, the behaviour of urban consumers is different from that of rural consumers.

Normally, rural consumers are conservative (traditional) in their buying behaviour.

• Vital for Marketers

Marketers need to have a good knowledge of consumer behaviour. They need to study the various factors that influence consumer behaviour of their target customers. The knowledge of consumer behaviour enables marketers to take appropriate marketing decisions.

• Reflects Status

Consumers buying behaviour is not only influenced by status of a consumer, but it also reflects it. Those consumers who own luxury cars, watches and other items are considered by others as persons of higher status.

• Consumer behavior has a spread effect.

The buying behaviour of one person may influence the buying behavior of another person. For instance, a customer may always prefer to buy premium brands of clothing, watches and other items etc.

This may influence some of his friends, neighbours, colleagues. This is one of the reasons why marketers use celebrities like Shahrukh Khan , Sachin to endorse their brands.

• Standard of Living

Consumer buying behaviour may lead to higher standard of living. The more a person buys the goods and services, the higher is the standard of living.

• Keeps on Changing

The consumer’s behaviour undergoes a change over a period of time depending upon changes in age, education and income level. Etc, for instance, kids may prefer colorful dresses, but as they grow up as teenagers and young adults, they may prefer trendy clot

Scope

• Marketing Management

Effective business managers know the importance of marketing towards the success of the business. Understanding consumer behaviour is essential for the long-run success of any marketing program. A better understanding of consumer needs and wants helps the business to plan and execute the marketing strategies accordingly.

• Demand Forecasting

Consumer behaviour helps in the forecasting of the demands for the business. Every business identifies the needs and wants of the customers by understanding their behaviour. Forecasting helps them to find out the unfulfilled demands in the market easily. If the company knows what their consumer wants, they can design and produce the product accordingly.

• Selecting the Target Market

Consumer behaviour helps in identifying target customers from the market. Study of customer behaviour identifies all customers segments with unique and distinct needs. It helps in segmentation of the overall market into different groups. Grouping of customers and identification of their needs will help business in serving them better. The business will be able to design their products in a better way as per the needs and wants of their customer. It makes clear to businesses who are their target customers and what they want.

• Educating Customer

Consumer behaviour helps marketers to identify how customers spend on their buying decision. By understanding their behaviour marketers can easily guide their customers about how they can improve their buying decisions. They can suggest ways to save their money and guides them with better options available in the market. Customers get aware of different opportunities available to them as per their behaviour.

• Market Mix.

Proper development and designing all-important elements like product, price, place, and promotion are essential for every business. It helps them to identify the likes and dislikes of the customers. This allows marketers to design optimum marketing mix plans and improve the effectiveness of marketing strategies. The proper implementation of a marketing mix helps organizations to attract more customers, thereby increasing profit.

• Assists In Designing Product Portfolio

Designing the right product portfolio is a challenging task for every business. Every business should design such a portfolio consisting of all class of products. Consumer behaviour helps in identifying the class and requirements of peoples. This helps in designing products as per people’s needs and include in the product portfolio of the company. This way business is able to design the optimum product portfolio and able to serve its customers in a better way.

Relevance

• Know the effect of price on buying

Consumer behavior can help to understanding the effect of price on buying. Whenever the price is moderate on cheap more and more customers will buy the product.

After the time of production, there comes a time in which the company has to decide what the price of our product will be because it helps to divide the categories of the customer and also helps to attain more sales.

• Innovate new Products

Continuous strive for improvement in success rate largely depends on the innovation in the offered product or services line. To accurately predict and ace innovation, the need for study of Consumer behaviour is a must. Researching the same not only enables to make new products/services satisfying the needs and wants of consumers but also to tweak the present line of offerings to fulfil the consumer’s needs and demands.

• To design production policies

All of the production policies have designed taking into consideration the consumer preference so that product can be successful in the market.

In every business, the main motive is to enhance the production and as well as sales of the company and to do all these, any company or business has to win the trust of its customers and studying about their tastes, likings, and preferences.

Need for Consumer Behaviour

Consumer behavior is a crucial aspect of marketing and business strategy. Understanding why and how consumers make decisions about what to buy or not to buy is essential for businesses to thrive.

• Product Development and Innovation:

Knowledge of consumer preferences and needs helps businesses create products and services that align with customer expectations. Understanding consumer behavior can drive innovation by identifying gaps in the market and areas where improvements or new solutions are needed.

• Marketing Strategy:

Marketers can tailor their messaging and promotional strategies based on an understanding of consumer behavior. This includes selecting the right advertising channels, creating compelling content, and using effective communication techniques. The study of consumer behavior helps in market segmentation, allowing businesses to target specific consumer groups with customized marketing approaches.

• Brand Building:

Consumer perceptions and attitudes toward a brand are influenced by their experiences and interactions. By understanding consumer behavior, businesses can build and maintain a positive brand image. Recognizing the emotional and psychological factors that influence consumer choices can contribute to the development of brand loyalty.

• Price and Value Perception:

Consumers don’t just evaluate products based on their price; they also consider the value they receive in return. Understanding how consumers perceive value helps businesses set appropriate pricing strategies. Consumer behavior studies can reveal insights into the pricing sensitivity of different market segments.

• Customer Satisfaction and Retention:

Knowing what satisfies or dissatisfies customers enables businesses to improve their products and services continuously. Building strong relationships with customers and understanding their post-purchase behavior can contribute to customer retention and repeat business.

• Market Trends and Forecasting:

Analyzing consumer behavior provides insights into current market trends and helps businesses anticipate future changes. Predicting consumer preferences allows businesses to adapt their strategies proactively, staying ahead of competitors and market shifts.

• E-commerce and Technology Impact:

In the digital age, where online shopping and e-commerce are prevalent, understanding consumer behavior is crucial for online retailers. This includes optimizing website design, streamlining the purchase process, and utilizing data analytics for personalized recommendations.

• Policy and Regulation Compliance:

Consumer behavior studies help businesses comply with relevant laws and regulations, ensuring that their products and services meet consumer expectations and legal requirements.

Brand valuation is the process of estimating the total financial value of a brand. A conflict of interest exists if those who value a brand were also involved in its creation. The ISO 10668 standard specifies six key requirements for the process of valuing brands, which are transparency, validity, reliability, sufficiency, objectivity; and financial, behavioral, and legal parameters. Brand valuation is distinct from brand equity.

Brands are ideally suited to this task because they communicate on a number of different levels. Brands have three primary functions; navigation, reassurance and engagement:

• Navigation: brands help customers to select from a bewildering array of alternatives.
• Reassurance: they communicate the intrinsic quality of the product or service and so reassure customers at the point of purchase.
• Engagement: they communicate distinctive imagery and associations that encourage customers to identify with the brand.

Brand value

Traditional marketing methods examine the price/value relationship in terms of dollars paid. Some marketers believe customers perceive the value to mean the lowest price. While this may be true for commodities, some branding techniques are moving beyond this evaluation.

Brand valuation emerged in the 1980s. Early pioneers in brand valuations included the British branding agency, Interbrand, led by John Murphy and Michael Birkin, which is credited with leading the concept’s development. Millward Brown was also a leading brand valuer.

Both companies maintained “Top 100” lists of companies by valuation. In 1989, Murphy edited a seminal work on the subject: Brand Valuation; Establishing a true and fair view; and in 1991, Birkin laid out a brand earnings multiple models of brand valuation in the book, Understanding Brands. A 2009 paper identified “at least 52” brand valuation companies.

Valuation methodologies

There are three main types of brand valuation methods:

The cost approach

This is based on the cost of creating the brand. The fundamental premise of the cost approach is that it should not be worth more than it would cost to build an equivalent. The cost of building a brand minus any expenses is reflective of market value.

The market approach

In this approach, the market price is compared. This valuation method relies on the estimation of value based on similar market transactions (e.g. similar license agreements) of comparable brand rights. Given that often the asset undervaluation is unique,[clarification needed] the comparison is performed in terms of utility, technological specificity and property, considering the asset’s perception by the market. Since the market approach relies on comparisons to similar assets, it is most useful when there is substantial data available regarding recent sales of comparable assets. Data on comparable or similar transactions may be accessed through the following sources:

• Company annual reports.
• Specialized royalty rate databases and publications.
• Court decisions concerning damages.

The income approach

This approach measures the value by reference to the present value of the economic benefits received over the rest of the useful life of the brand.[5] There are at least six recognized methods of the income approach, with some authorities listing more.

• Price premium method: Estimates the value of a brand by the price premium it generates when compared to a similar but unbranded product or service. This must take into account the volume premium method.
• Volume premium method: Estimates the value of a brand by the volume premium it generates when compared to a similar but unbranded product or service. This must take into account the price premium method.
• Income split method: This values the brand as the present value portion of the economic profit attributable to the brand over the rest of its useful life. This has problems in that profits can sometimes be negative, leading to unrealistic brand value, and also that profits can be manipulated so may misrepresent brand value. This method uses qualitative measures to decide the portion of economic profits to be accredited to the brand.
• Multi-period excess earnings method: this method requires a valuation of each group of intangible assets to calculate the cost of capital of each. The returns for each of these are deducted from the present value of future cash flows and when all other assets have been accounted for, the remaining is used as the value of the brand.
• Incremental cash flow method or Excess Margin: Identifies the extra cash flow in a branded business when compared to an unbranded, and comparable, business. However, it is rare to find conditions for this method to be used since finding similar unbranded companies can be difficult.
• Royalty relief method: Assume theoretically a company does not own the brand it operates under but instead licenses the use from another. The royalty relief method uses available data of similar arrangements in the industry and assigns the value of the brand as the present value of future royalty payments.

Historical Cost Method

Brand valuation through the historical cost method is used at the initial stage of brand creation. The historical cost method isolates the direct costs and contributes to indirect costs. It attempts to recreate the historical development and creates an assessment value for the future. However, the cost of creating a brand does not play a major role in the present value.

Replacement Cost Method

This method values the brand keeping the investment and expenditure necessary to replace the brand with a new one which has equivalent utility to the company.

Market-Based Approach: A market-based method of brand valuation deals with the amount at which a brand is sold and the highest value that a buyer is willing to pay for it. The market-based approach is classified into:

Brand Sale Comparable Approach

In this method, the brand is valued by the recent transactions that involve similar brands in the same industry. It is viewed from a third party perspective and cannot be applied to all cases for comparing data.

Brand Equity Approach

The brand equity approach includes advertising and results in price premium profits. In this case, the value of brand equity is estimated using the financial market value.

Residual Method

The residual value is arrived at when the market capitalisation is subtracted from the net asset value. The variables such as risk-free interest rate, current exercise price, the variance of the asset, time of expiration of the option and value of the underlying asset are included. It helps to calculate the potential value of line extensions.

Income-Based Approach: In this approach, the potential of the brand is calculated by the future net earnings that directly contribute to determining the value of the brand. The following are the classifications in the Income-Based Approach:

Royalty Relief Method

As per this method, the value of the brand is related to characteristics applied by the company or valuer. The valuer will have to estimate the base for calculation and determine the appropriate royalty rate, a growth rate, expected life and a discount rate for the brand. This method is accepted by tax authorities and has an edge of being industry-specific.

Differential Price to Sales Ratio Method

This method will calculate the brand value as a difference between the estimated price to sales ratio for a company with a brand and the price to sales ratio for an unbranded company. This will be multiplied by the sales of the branded company.

Price Premium Method

The approach of this method is that a branded product should sell for a premium over an unbranded product. The value is calculated by comparing the cost involved for production and cost produced after sales. It creates the impact of assuming that the brand helps to accumulate additional profit.

Discounted Cash Flow

Cash flow acts as an important component for determining the value of an asset. It takes into account the increasing working capital and fixed asset investments. It estimates the amount of future cash flow that the brand can generate.

Intellectual property rights valuation or IPR Valuation is one of the most critical areas of finance that comes into play during the sale and purchase of companies and during solvency, merger, and acquisition transactions. Intellectual property is intangible assets that are either already patented or a patentable product, process, or service, or a trademark, copyright, or brand. It’s the unique creation of the organization, responsible for its distinction in the market. Though intangible, it’s often a major driver of success for an organization. Valuation of Intellectual Property Valuation Rights fundamentally means the process of arriving at a fair value of a Company’s Intellectual Property that can be monetized and can leverage the overall selling price of the company. For a profitable sale transaction, it’s extremely important to place the selling price at such a rate that it’s sold at the best possible value. The IPR valuation process helps to achieve a part of this justifiable selling price.

Reasons of intangible assets valuable to a business

• Registered patents prevent competitors from launching similar, competing products and potentially pushing the business aside within the market.
• Holding the rights to a product design enables an organization to create a singular offering to their market, and price their products accordingly.
• The company’s position and profile as an innovative business are boosted.
• For design-only businesses, the license for IP, utilized by third parties to manufacture and sell their products, provides a major and valuable income stream.

Essentially, holding assets can increase revenue or reduce business costs, and once they generate an income for the business being sold, a variety of valuation methods will be utilized.

There is no particular method of valuation that’s suitable for each business sale, however the foremost appropriate one depends on a variety of things, including whether the intellectual property rights (IPR) are fully developed and functioning.

Valuation Based on Replication Cost

This is the cost that the acquirer would have to incur in order to replicate the intellectual property. There is also a time component to this calculation, in that the acquirer might require years of effort in order to create the intellectual property. If the acquirer wants access to the property immediately, it should be willing to pay a premium to buy it from the acquiree.

Valuation Based on Market Price

This is the price that third parties would pay for the intellectual property if it were put up for bid in a fair market, with multiple bidders. An acquirer may want to pay more than this amount in order to avoid a bidding war with potential competitors.

Valuation Based on Discounted Cash Flows

This is the present value of the cash flows currently generated by the intellectual property, with certain assumptions included regarding possible changes in those cash flows over future years. The rate at which these cash flows are discounted to a present value is subject to interpretation and negotiation.

Valuation Based on Relief from Royalties

This approach is based on the cost that the acquirer would otherwise incur if it were required to pay a royalty for access to the intellectual property. This approach may not work if access to the intellectual property cannot be obtained through a licensing arrangement.

Intellectual property assets such as patents are the core of many organizations and transactions related to technology. Licenses and assignments of intellectual property rights are common operations in the technology markets, as well as the use of these types of assets as loan security. These uses give rise to the growing importance of financial valuation of intellectual property, since knowing the economic value of patents is a critical factor in order to define their trading conditions.

Cases of application

Valuation of patent rights is one of the main activities related to intellectual property management within an organization or company. Indeed, knowing the economic value and importance of the intellectual property rights assists in the strategic decisions to be taken on the company’s assets, but also facilitates the commercialization and transactions concerning intellectual property rights.

There are several business situations where valuation is required:

Valuation of a company for the purposes of a merger, acquisition, joint venture or bankruptcy

Most of the technological companies are highly based on intangible assets and investment in knowledge, research and innovation. According to studies, expenditures on knowledge, through investments in R&D or software, have grown at a higher rate than expenditures in tangible assets. This change in investments has consequently been reflected by a heavy importance of intangible assets and patents in companies. Therefore, to know the value of companies it is essential to know the value of their intellectual property.

Negotiations to sell or license intellectual property rights

As in other business transactions, organizations negotiating agreements to sell or license intellectual property and patent rights commonly have to agree on a price. Knowing the value of the intellectual property rights is essential to reach such an agreement, but also to make sure the parties are engaging in a good deal.

Support in situations of patent conflict or dispute

In scenarios of patent conflict, such as patent infringement proceedings or alternative dispute resolution mechanisms, quantification of damages is often a necessary step of the process. The correct valuation of the intellectual property right at stake is therefore essential to guarantee a fair recovery of the damages.

Fund raising through bank loans or venture capital

Valuation of the intellectual property to be used as security for bank loans or to attract venture capital and investors is essential. Several studies reveal that, in particular, owning patents and a proper intellectual property management play a crucial role in the decision of venture capitalists.

Assisting internal decision making for patent protection strategies

Valuation also plays a role on decisions concerning the patenting strategies and country selection for registration of intellectual property rights, or can assist organizations to identify weaknesses such as ownership uncertainties that have an impact in the value of the intellectual property rights and on decisions for the exploitation of such assets.

For accounting and taxation purposes

Organizations are required to report on their assets, including their intangible assets. Valuation is therefore a necessary step, as well as in situations of tax planning involving intellectual property.

Defining the objectives and context of the valuation is essential, since it determines the strategy as well as the type of valuation method that should be used. This is therefore the first step to take when performing a valuation.

Methods

Different approaches of patent valuation are used by companies and organizations. Generally, these approaches are divided in two categories: the quantitative and qualitative valuation. While the quantitative approach relies on numerical and measurable data with the purpose to calculate the economic value of the intellectual property, the qualitative approach is focused on the analysis of the characteristics and potential uses of the intellectual property, such as the legal, technological, marketing or strategic aspects of the patented technologies. Qualitative valuation deals also with assessing the risks and opportunities associated to the intellectual property of the company.

Quantitative approach

Several methodologies are used on the quantitative approach, but generally they can be grouped in four methods:

• Cost-based method
• Market-based method
• Income-based method
• Option-based method

Cost-based method

This method is based on the principle that there is a direct relation between the costs expended in the development of the intellectual property and its economic value. Two different techniques are mainly used to measure costs:

• Reproduction cost method: Estimations are performed by gathering all costs associated with the purchase or development of a replica of the patent under valuation.
• Replacement cost method: Estimations are performed on the basis of the costs that would be spent to obtain an equivalent patent asset with similar use or function.

Market-based method     

The market-based valuation method relies on the estimation of value based on similar market transactions (e.g. similar license agreements) of comparable patent rights. Given that often the asset under valuation is unique, the comparison is performed in terms of utility, technological specificity and property, having also in consideration the perception of the asset by the market. Data on comparable or similar transactions may be accessed in the following sources:

• Company annual reports.
• Specialized royalty rate databases and publications.
• In court decisions concerning damages.

Option-based method

Differing relative to the above methods, an option-based methodology takes into consideration the options and opportunities related to the investment. It relies on option pricing models (e.g. Black–Scholes) for stock options to achieve a valuation of a given intellectual property asset. In these cases, patents may be valued using the techniques developed for financial options, as applied via a real options framework. The key parallel is that a patent provides its owner the right to exclude others from using the underlying invention, so both patents and stock options represent a right to exploit an asset in the future, and to exclude others from using it. The patent (option) will have value to the buyer (owner) only to the extent that the expected price in the future exceeds the opportunity cost of earning just as much in a risk-less alternative. Thus patent rights can be thought of as corresponding to a call option and may be valued correspondingly.

Qualitative approach

This method does not rely on purely financial analytical data. In fact, the valuation in this method is performed through the analysis of different indicators with the purpose of rating the patent right, i.e. of determining its importance quality in terms of aspects that can impact the value of an intellectual property asset, covering legal aspects, the technology level of the innovation, market details and company organization. Commonly, the method is implemented through questionnaires comprising all these different criteria. Examples of questions included in such questionnaires can be:

• How would you define the patented technology innovation compared to the actual state of the art?
• Which level of its life cycle has the patent reached?
• What is the geographic coverage of the reference market?

Branding is a recently emerged marketing strategy where the focus is on building a corporate brand instead of just a product brand. Branding strategy, however, is usually developed by the CEO and higher management of an organization. It’s above the pay grade of the marketing staff because it involves the whole image of the corporate brand.

A brand is just limited to the name, logo or design of the company; brand equity goes much deeper than the surface and monetary value of a company. It’s the promising and emotional value of your company perceived by the people.

Brand equity is the perceived value of a customer based on their attachment, memories and emotional experience with the brand.

Brand value, on the other hand, is the calculation of brand in monetary terms; or the worth of brand in the market.

Brand equity shows you the success of a brand because more people would talk about it. The brand value will provide you the actual finances, sale value of the brand in the market.

Factors determining brand equity are as follows:

1. Brand loyalty
2. Brand awareness
3. Perceived quality
4. Brand associations in addition to perceived quality
5. Other proprietary brand assets such as patents, trademarks and channel relationships.

 

1. Brand Loyalty:

Brand loyalty central construct in marketing, is a measure of the attachment that a customer has to a brand. It reflects how likely a customer will switch to another brand, especially when that brand makes a change, either in price or in product features. As brand loyalty increases, the vulnerability of the cus­tomer base to competitive action is reduced.

2. Brand Awareness:

People will often buy a familiar brand because they are comfortable with the brand. Or there may be an assumption that a brand that is familiar is probably reliable, in business to stay, and of reasonable quality. A recognized brand will thus often be selected over an unknown brand. The awareness factor is particularly important in contexts in which the brand must first enter the consideration set. It must be one of the brands that are evaluated.

3. Perceived Quality:

A brand will have associated with it a perception of overall quality not necessarily based on the knowl­edge of detailed specifications. Perceived quality will directly influence purchase decisions and brand loyalty, especially when a buyer is not motivated or able to conduct a detailed analysis.

It can also sup­port a premium price which, in turn, can create gross margin that can be reinvested in brand equity. Fur­ther, perceived quality can be the basis for a brand extension. If a brand is well regarded in one context, the assumption will be that it has high quality in a related context.

4. Brand Association:

The underlying value of a brand name is often based on specific associations linked to it. Associations such as Ronald McDonald can create a positive attitude or feeling that can become linked to a brand such as McDonald’s. If a brand is well positioned on a key attribute in the product class (such as service backup or technological superiority), competitors will find it hard to attack.

5. Other Proprietary Brand Assets:

The last three brand equity categories we have just discussed represent customers’ perceptions and reactions to the brand; the first is the loyalty of the customer and the fifth category represents other proprietary brand assets such as patents, trademarks and channel relationships. Brand assets will be most valuable if they inhibit or prevent competitors from eroding a customer base and loyalty.

These assets can take several forms. For example, a trademark will protect brand equity from competitors who might want to confuse customers by using a similar name, symbol, or package. A patent, if strong and relevant to customer choice, can prevent direct competition. A distribution channel can be controlled by a brand because of a history of brand performance.

Standard of value

The most commonly used standards of value are Fair market value and Fair Price Value. It is important when undertaking an IP valuation exercise. Fair market value (Market value) can be defined as the price at which an asset or service passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have a reasonable knowledge of relevant facts. Fair value (Fair price) is seen as appropriate for use in post transaction purchase price allocation. It is based on the assumptions that market participants would use when pricing the asset. Whereas fair market value is seems to be more appropriate when used in the premise of value in exchange, fair value is often based on premise of value in-use. As mentioned earlier. in common situation, IP valuation is a process to evaluate the fair market value of an IP asset.

Purpose of valuation

In order to determine the premise for calculation of value, it is necessary to understand the purpose for valuation. For instance, valuation from the perspective of market value and investment would be completely different. In commercial situations, market value is the appropriate premise. International Value Standards define market value as “The estimated amount which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s‐length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.”

Valuation methods

The methodology applied and assumptions made while applying particular valuation method affects the value of IP assets. Market Method is the ost effective form of valuation. Cost method is usually refrained by companies since it ignores the novel characteristic of IP. This method is helpful for R&D costs.

Nature and strength of IP asset

The competitive strength of an IP asset determines the comparative valuation that it shall hold in the market. The factors such as customer responsiveness and market distribution of a product or availing service determine its IP value. The threat of new entry and substitutes affect the value of IP assets.

Licensing and Franchising

A thorough understanding of the IP Assets ensures an informed negotiation and decision making regarding the terms and conditions at the time of licensing-in or licensing-out of IP especially in determining fair and robust royalty rates. In the case of franchising too, both the franchisor and the franchisee require a thorough understanding of the value of the trademark(s) and trade secrets and know- how of other IP assets. Examples; Mc Donald’s , Pizza Hut, Dominos, Haldiram, Bikanerwala.

Merger & Acquisition, Joint Venture or Strategic Alliance

The primary reason for considering an M & A transaction is the value of the IP assets of the target company. IP valuation enables the parties to take an informed decision on the acceptable cost of capital or deciding on financial leverage strategy to be followed. It also influences positively the resulting company’s value and share price. The strategy of world class companies such as Volkswagen group and Tata group enunciates the IP valuation technique to adopt brands. The Volkswagen Group owns Audi, Bentley, Skoda, Lamborghini, Buggati , Porsche and many other well-known brands. Tata group owns Jaguar and Land Rover.

Investment in Research and Development (R&D)

IP valuation helps in budgeting and resource allocation decisions. For example, if a company is spending a significant amount of money on internal R&D but is losing ground to competitors due to slow or late product introductions, it may need to rethink its R&D strategy and processes. IP valuation also provides strategic guidance for new product development, brand-extensions, line-extensions, managing foreign filing and prosecution costs, etc.

Financial Reporting

The recognition of the increasing share of IP assets in the total market value of enterprises has contributed to the change in the way the accounting community has begun to treat IP assets in financial reporting. The international accounting standards board (IASB) now recognizes acquired and identifiable intangible assets (i.e., IP assets) and requires all acquired IP assets to be recognised as assets, separately from goodwill, on the balance sheet of the business acquiring the IP assets. For instance, when a brand is acquired, IP valuation is done for the initial valuation as well as the periodical impairment tests for the derived values to be included in the balance sheet.

Optimizing Taxation

In devising ways to optimize the tax to be paid by a company, its assets, including its IP assets, require to be valued. IP assets create numerous opportunities for tax planning in both third party transactions as well as internal strategies such as cross-border transfer pricing and centralizing the ownership of IP assets in IP holding companies. The internal revenue service or other tax authorities would like to know as much as possible about the basis for any value determination used when allocating portions of the purchase price associated with the acquisition of a company. Valuation of IP assets helps in assessing fair transfer prices for the use of IP assets, including brands, to subsidiary companies.

Insurance of IP assets

A completely new market is opening up for the insurance of IP assets with a number of major insurers in the developed countries creating products tied to the capital value of IP assets, especially trademarks/brands. Valuation is of extreme importance as far as Insurance is concerned.

Determination the value of your Intellectual Property

Evaluation of IP can be a challenging process. The most suitable method for IP assets depends upon the premise of purpose to be derived from the result, assets subjected to valuation and the specific section for which the valuation is prepared.

The two effective ways of valuation are:

Market based

This is the most commonly used approach, this approach is based on the comparison with the actual price paid for a similar IP asset under comparable circumstances. The calculation would be accurate if there exists appropriate information on the nature and extent of rights transferred, circumstances of transaction for eg; license agreed in litigation settlement. The process initiates with research of an appropriate market to obtain the transaction information about sales, licensing of subject IP. The second step is to select relevant units of comparison such as “per drawing”, “per location”. “per customer” and develop a comparative analysis for the units considering factors such as profitability, risk, Industry, company structure, strength of IP rights, etc.

Income Method

It values the IP on the basis of amount of financial income that IP is expected to generate. In order to evaluate, project the revenue flow over remaining useful life of asset and offset those revenues by the cost related to asset. The risk has to be discounted from the amount of income by using discount rate or capitalization rate. The method is most suitable for capturing value of IP that generates stable cash flows. However, the method does not consider independent risks associated with an IP asset and lumps all the risks together to be adjusted in discount rate.