Brand Valuation

Marketers should distinguish brand equity from brand valuation, which is the job of estimating the total financial value of the brand. In some well-known companies, brand value is typically more than half the total company market capitalization.

Assignment: Validating the take-over of a company

Your CEO asks you to validate the purchase of another company. Your company is in the beverage industry and has the opportunity to buy a local competitor. The finance department calculated the asset value of the property. Your CEO wants to know from you what the dollar value of the brand represents. 

What criteria are you using to assess the brand value?

How Interbrand estimate the dollar value of a brand.

Top brand-management firm Interbrand has developed a five-step model to estimate the dollar value of a brand and help firms maximize return on brand investment. 

FYI: Interbrand, a division of Omnicom, is a New York-based marketing consultancy, specializing in brands and branding management. Interbrand has 24 offices in 17 countries.

As explained in the Interbrand’s video:

The first step is market segmentation to determine variations among the brand’s different customer groups. 

The second step is financial analysis to assess purchase price, volume, and frequency and help calculate accurate forecasts of future brand sales and revenues.
This step also requires deducting all associated operating costs to derive earnings before interest and tax (EBIT) and deducting taxes and a charge for the capital employed to operate the underlying business. The result is Economic Earnings, the earnings attributed to the branded business.

The third step is market research to assess the role of branding and calculate the percentage of Economic Earnings generated by the brand, which yields Brand Earnings.

The fourth step is to assess the brand’s strength and determine the likelihood that the forecasted Brand Earnings will be realized. For each segment, Interbrand determines a risk premium for the brand and adds it to the risk-free rate, represented by the yield on government bonds. The Brand Discount Rate, applied to the forecasted Brand Earnings forecast, yields the net present value of the Brand Earnings.

The final step is to calculate Brand Value, the net present value (NPV) of the forecasted Brand Earnings, discounted by the Brand Discount Rate