The Value of Branding

[ViJiT]

The Value of Branding
Ramesh Jude
Principal Executive Officer, Equitor

Brand valuations are useful for many reasons but the applications tend to fall into two main categories: strategic brand management and financial transactions. The former focuses mainly on internal audiences by providing tools and processes to manage and increase the economic value of brands. The latter provides a rupee price to facilitate brand related transactions with outside parties.

Strategic brand management
The growth in the economic value of brands and pressures from investors for ever-higher shareholder value has increased demands on the management of the brand. To meet these demands, companies need to establish procedures for brand management that are aligned with those for other business assets as well as for the company as a whole. Economic value creation becomes the focus of brand management and all brand-related investment decisions. The following insights and decision tools may help in understanding and managing brand value.

Optimise business investments
Brand valuation identifies the value contribution of the brand asset to shareholder value and makes it comparable to other intangible and tangible company assets. This enables management to optimise resource allocation between all business assets to achieve an overall higher return on all business assets.
Return on brand investment (ROBI)
Brand valuation provides clearly identifiable and manageable links between investment in, and return from, the brand asset resulting in a firm and credible return on brand investment calculation (ROBI). Through brand valuation, management can set and measure clear performance targets for brand investments. Brand management and marketing service providers can be measured against clearly identified performance targets.

Optimise brand investment
Brand valuation identifies the value creation of brands in their key markets enabling management to prioritise brand investments by brand, customer segment, geographic market, product or service, distribution channel, etc. Brand investments can be optimised for cost and impact resulting in an overall higher return on brand investments.

Internal licensing
Brand valuation can establish an internal licensing program between parent and subsidiary companies to instil a brand-centric culture within the corporation. The value contribution of parent and subsidiaries are fairly assessed to derive the appropriate royalty rate the subsidiary pays for the use of the brand. This enhances management attention and care for the brand asset by the subsidiaries. The use of the brand by subsidiaries becomes clearly accountable and manageable.

Marketing as profit centre
Brand valuation identifies the economic value derived from the brand asset. The relationship between investments in, and returns from, the brand becomes transparent and manageable. Through brand valuation management can convert the marketing department from a cost into a profit centre making the marketing function clearly accountable. Remuneration and career development of marketing staff can be linked to, and measured by, brand value development.
Allocating marketing expenditures
Brand valuation identifies the economic benefit to all parts of the business. Management can allocate brand investments among different departments more accurately according to the benefit derived from the brand.

Brand architecture
Brand valuation identifies the value provided by
the brands used within a business. Management
can optimise the use of, and relationship between, brands according to their respective economic value contribution.

Co-branding Implications
Brand valuation quantifies the economic benefits and risks of brand combinations. Management can assess the economic implications of co-branding with respect to its own brand as well as the co-branded venture.

Choice of brand after merger
Brand valuation identifies the value of each of the merging parties’ brands to assist management in the choice of the appropriate brand for the merged entity. The choice of the appropriate brand can be based on a clear economic rationale.

Brand migration
Brand valuation assesses the economic risk of migrating from one brand to another. Brand migration can be more successfully managed by understanding and quantifying the economic risk of losing one brand and potential of another brand to capture and increase the value creation of branding within the business.

Brand Value Scorecards
Brand valuation defines the relevant parameters for brand value enhancing scorecards. Based on the understanding of the drivers of brand value, Brand Value Scorecards provide focused and actionable measures for optimal brand performance.

Brand portfolio management
Brand valuation provides the ideal management tool for measuring and managing brand portfolios across a variety of markets. Brand performance and brand investments can be assessed on an equally comparable basis to enhance the overall return from the brand portfolio.

Shareholder value management
Brand valuation aligns the management of the brand asset with existing value-based management frameworks. Brand valuation identifies and analyses the specific shareholder value creation of the brand asset. Brand valuation provides the necessary management tools to monitor and increase the economic value of the brand asset and thus overall shareholder value.

Investor relations
Brand valuation provides a useful tool for communications with investors and financial analysts. Specifying the economic value creation of the brand can assist in supporting share prices and funding from financial markets.

Financial transactions
Brands constitute a key asset in a variety of financial transactions. The origin of brand valuation dates back to the balance sheet recognition of brand value in the late 1980s. In 1988, the first known financial valuation for brand assets was prepared by Interbrand for Rank Hovis McDougall, a leading British food group that capitalised the value of its brand portfolio as a successful defence strategy against a hostile takeover bid. Today accounting and tax regulations around the world, as well as mergers and acquisitions, increasingly require the employment of brand valuation.

Tax planning
Brand valuation is a key tool in corporate tax planning. A good brand valuation exercise provides the basis for fair and defendable royalty rates that can be charged to subsidiaries for the use of the brand asset. Royalties can be repatriated as income to corporate headquarters in a tax-effective way. The assessment of brand royalties is based on the profit-split approach, which is now recommended by most tax authorities around the world including the US Internal Revenue Service (IRS) and the UK Inland Revenue, as it provides market specific licensing rates that reflect true economic benefit of the brand to licensee and licensor.

Licensing Issues
Brand valuation provides fair and robust brand royalty rates for optimal exploitation of the brand asset through licensing the brand to third parties. The approach determines the fair split of the economic benefit from the brand between licensee and licensor and thus the most appropriate royalty rates for the use of the brand. The brand royalty rates apply to all relevant commercial situations including co-branding and licensing into new categories as well as geographical markets.

Balance sheet
Brand valuation is required today for capitalising brand assets on the balance sheet according to US GAAP, IAS and many country-specific accounting standards. This implies that both the initial valuation, as well as the periodical impairment tests for the derived values is required. These brand valuations are recognised and audited by the leading accounting firms around the world.

Mergers & acquisitions
Brand valuation provides fair and robust sell or purchase value for brand assets as well as clear identification of the value that brands add to a transaction. Brand valuation assesses not only the current but also the potential value of the brand asset. In many transactions, the brand valuation has identified additional value, thereby significantly enhancing the final sell or purchase price.

[rwalawalkar]

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