BRAND VALUATION – A COMPARATIVE STUDY OF THE METHODS ADOPTED BY INTERBRAND, MILLWARD BROWN AND BRAND FINANCETITLE PAGE Abstract Registration No.: ICBM08109 Title: Brand Valuation – A Comparative Study of the Methods Adopted by Interbrand, Millward Brown and Brand Finance. Author: R. Harish Affiliation: Faculty Member, IBS (Icfai Business School), Bangalore Contact Details: R. Harish, Faculty Member IBS (Icfai Business School) # 19/3, Srinivasa Industrial Estate, Near Metro Kanakapura Road, Bangalore – 560 062. Ph: 080-26860100 Extn: 252; Mobile: 0-9880696970 E-mail:
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[email protected] Conference Track: Brand Valuation Key Words: Brand Valuation, Interbrand, Millward Brown, Brand Finance BRAND VALUATION – A COMPARATIVE STUDY OF THE METHODS ADOPTED BY INTERBRAND, MILLWARD BROWN AND BRAND FINANCE Synopsis This paper presents a summarization of the brand valuation methodologies adopted by three globally renowned consulting firms – Interbrand, Millward Brown and Brand Finance. The material is presented based on information available from published sources and is meant to serve as a ready-reference guide to academicians and researchers. Purpose of the Study Global brand rankings by Interbrand, Millward Brown and Brand Finance receive wide publicity in the world press, year after year. However, all the three are commercial consulting firms and the methods used by them are proprietary. Hence, details of the methodology adopted by them do not receive much coverage and are not explained clearly and comprehensively by any single source. This paper attempts to bridge this gap by presenting a simple and systematic summarization of the brand valuation approaches adopted by the three firms, by putting together relevant information that is available from various sources in public domain. In effect, the purpose of this paper is to present a brief description of the brand valuation methodologies propounded by Interbrand, Millward Brown and Brand Finance, together with a gist of similarities and differences among them. Evolution of the brand valuation concept, current accounting treatment and major approaches to brand valuation are covered briefly in the introductory sections. Brand Valuation – Its Evolution & Current Position The First Brand Valuation Brand valuation first came into prominence in 1988 when Ranks Hovis McDougall (RHM) – a multi-brand company based in the U. which influences customer buying behavior long after the specific campaign period. it presents a comparative study of the brand valuation methodologies adopted by three well-regarded brand consulting firms. As mentioned above. This document is therefore different from what is conventionally considered as a research paper. Several figures and exhibits have been taken directly from the original sources or have been adapted suitably. It does not advocate or test any new hypotheses or models. . This paper is documented based on secondary information and insights available from published sources in public domain. as it did not consider the value of its brand portfolio. Interbrand (one of the three firms whose approach to brand valuation is covered in this paper) valued RHM’s internally generated and externally acquired brands at £ 678 million and the same was indicated in the company’s annual report for the year 1988. It does not present any literature survey with references. warded off a hostile takeover bid by Goodman Fielder Wattie (GFW). based on accounting practice. including websites of the three consulting firms and their publications. A bibliography of the most important sources is given at the end of this paper.K. The sources of such figures and exhibits have been duly acknowledged.Research Methodology This is not an academic research paper in the conventional sense. based on the argument that GFW’s bid was too low. However. as it presents models and methods which are already being practiced and widely accepted in industry circles. Accounting Principles & Brand Valuation Advertising and marketing expenditure contribute to brand-building.. . and obviously have an inherent value in them. However. The brands were required to be valued independently. This permitted acquired brands to be carried as intangible assets and amortized over their useful economic lives (up to 20 years or even more) from the date of acquisition. many investment analysts still valued companies based on traditional accounting measures such as balance sheet asset values and earnings per share. Current Accounting Treatment The position was first clarified in the UK through the Financial Reporting Standard 10 (FRS 10). Even as recently as during the late 1980s. The value attributable to brands also forms part of the “goodwill. the value of in-house brands is not recognized in conventional accounting practice. The valuation of RHM’s brands and the successful warding off of a low-value takeover bid raised the issue that brands are protectable and saleable.” and no cognizance was taken of this value in the long term. Most accounting standards including US GAAP and International Accounting Standards now permit acquired goodwill/intangible assets (including patents. based on discounted cash flows. as most analysts now value companies and businesses by discounting free cash flows to a net present value. Thus. and amortize the same within a short period after acquisition. When a company or business is acquired for a price in excess of the value of its tangible assets. They are often developed over a period of decades supported by vast marketing resources. it has been the practice to designate this excess amount under the head “goodwill”.such expenditures are written off within a short timeframe. which came into effect from December 1998. which created severe distortions as was brought to light in the context of valuation of RHM’s brands by Interbrand. capitalization of internally generated brands would tantamount to “creative accounting. This problem has however now been overcome. and are not capitalized and carried forward to be matched against future sales revenues. leases & licensing agreements.” as it leads to resurrection of costs already written off in the profit and loss account. litigation support. trading-related investigations.. minus allowance for impairment or depreciation. thereby significantly underestimating the price at which the brand might change hands in an arm’s length transaction. neither of these (i. which creates long-term brand value. securitized borrowing. Cost-based valuation: This method is based on what it actually cost to create the brand (historical cost) or what it might cost to re-create the brand at present (net current replacement value) with equivalent consumer appeal and commercial utility. historical cost and net current replacement cost) might correctly reflect the actual current value of the brand. allocation of marketing budget. research & development of the product & packaging. However. These approaches are also broadly applicable to the valuation of other intangible assets. . global accounting standards have now widely accepted that acquired brands can be recognized and valued as distinct assets. and these are described briefly below. Thus. There might be very little correlation between the development costs and the impact on revenues and profits. Brand Valuation Methodology – Major Approaches There are in essence four approaches to brand valuation. a statement of brand values for internal brands too may be added as an adjunct to the balance sheet. etc. Applications of Brand Valuation Brand valuation has a variety of uses – planning and negotiation of mergers & acquisitions. external investor relations. and part of the advertising and promotional expenditure. licensing and franchising. Supporters of brand valuation now argue that logically.e. balance sheet reporting of acquired brands. 1. internal communications and marketing management. The cost elements to be included in such valuation would encompass cost towards registration of brand name. as they fail to account for the economic benefit of the brand to the owner. and marketing-related assets such as brands and trademarks) to be separately recognized on the balance sheet.artistic assets such as plays/films. For many years. 3. Here. This method involves estimating sales for future years. published an annual estimate of brand values based on this approach. information on actual sale prices of comparable brands would be used for valuing a brand. one should estimate the actual excess cash flow attributable to the branded product as opposed to an equivalent generic product. Hence.2. calculating a stream of notional brand royalties based on an appropriate royalty rate. a US financial analysis magazine. In effect. Nonetheless. By owning the brand. ‘Financial World’. the value of a brand is estimated as being equivalent to the royalty that one would have to pay for using the brand as a licensee. which are explained below. each brand and its context are unique. a royalty would have to be paid on the turnover. this is called the royalty relief method or the relief from royalty method. Royalty relief method: This approach is based on the premise that if a brand is to be licensed from another party. for using the brand. a stream of future cash flows or net earnings attributable to the brand (after charging the profits attributable to all other assets including financial charges and taxes) is discounted to arrive at the brand value. The earlier practice was to use a multiple of historical brand earnings. However. It is however much more common now to estimate brand values by discounting projected future brand earnings. Economic use method: This is the most widely used method of brand valuation. by using an appropriate discount rate. It would therefore be difficult to find market transactions that are strictly comparable. In theory. and discounting the same to a net present value – which is the brand value. Market-based valuation: Here. and is based on the economic value of the brand in its current use to the current owner. However. Hence. as this is difficult to . available market transaction data could serve as a cross-check on brand valuation carried out through other methods. It does not consider the prospective value of the brand for a different user or any hope value to account for possible new uses for the brand. this is also known as sales comparison method. payment of royalty is avoided. 4. Interbrand’s method uses available market and financial data and is based on standard formulae and procedures drawn from marketing and financial theory. A lump sum ‘annuity’ is added to the final year’s earnings to account for the brand’s earnings beyond the forecast period. which reflects a measure of return on investment. . facilitated regular and consistent revaluation. monopolies & mergers commissions and judicial courts in many countries including the USA and countries in Europe. Interbrand evaluated various alternatives while developing its brand valuation methodology. The method is therefore comparatively more transparent. Interbrand’s approach was based on the premise that the value of a brand was the present worth of the benefits of future ownership. and was revised substantially in 1993. Interbrand’s brand valuation methodology has also been accepted by the world’s leading auditing firms.’ as both of them begin with a stream of projected net future earnings. and convert the same to a value estimate. Interbrand – The Pioneer in Brand Valuation Interbrand was founded in London in 1974 in the name of Novamark and has now grown into a full-service brand consulting firm operating in 25 countries. and was suitable for both home-grown and acquired brands. an adjusted profit figure is used as a surrogate for the cash flow premium commanded by the brand. The valuation methodology was developed in 1988 jointly by Interbrand and London Business School. Interbrand’s method is accepted by tax authorities. followed basic accounting concepts. such valuations are based on a five to ten year earnings forecast. Interbrand’s “Top 100 Brands” Report is published annually in the Business Week. by using a discount rate.estimate. Usually. It wanted to arrive at a method which considered financial. effectively in perpetuity. marketing and legal aspects. Royalty relief method and economic use method both fall under the broader category of ‘income approach. financial analysis. brand strength analysis.interbrand. Interbrand Zintzmeyer & Lux.”1 (Refer Exhibit 1) Exhibit 1: Interbrand’s Approach to Brand Valuation Segmentation Consumers’ attitude and purchase behavior towards brands differ across regions (countries/continents).Interbrand’s approach is based on three economic functions of the brand: “1) to create cost synergies. depending on a variety of local conditions. The overall value of a brand is therefore determined by initially assessing the value in individual segments comprising of 1 “Brand Valuation. calculation of the net present value of brand earnings. http://www. 2) to generate demand for the products and services. The method employed to evaluate brands comprises five steps: segmentation. and. demand analysis.ch/e/pdf/IBZL_Brand_Valuation_e. The key to unlock the benefits from your brand assets”. and 3) to secure future demand and thus reduce operative and financial risks.pdf Fin n l An a cia . finally. Tax and Amortization). A charge on the total capital employed. depreciation.09 21 101 277 378 1. as a path towards isolating the brand earnings.41 20 1.ch/e/pdf/IBZL_Brand_Valuation_e. Cost of sales. Interbrand Zintzmeyer & Lux. This analysis is based upon published company annual reports and analysts reports from organizations such as JP Morgan Chase and Citigroup.54 19 Source: “Brand Valuation: The key to unlock the benefits from your brand assets”. the applicable tax is deducted to calculate NOPAT (Net Operating Profit After Tax). 9%) Discount Factor Discounted Earnings Value Until the Year 2010 Terminal Value (Growth = 2%) Net Present Value of Brand Segment Previous Years 2003 2004 2005 440 (357) 83 (22) 61 110 (11) 50 480 (390) 90 (24) 66 120 (12) 54 500 (407) 94 (25) 69 130 (13) 56 2006 Forecast for Future Years 2007 2008 2009 2010 550 (447) 103 (27) 76 140 (14) 62 25 580 (472) 108 (29) 79 150 (15) 64 26 620 (503) 117 (31) 86 160 (16) 70 28 650 (528) 122 (32) 90 160 (16) 74 29 520 (423) 97 (26) 71 130 (13) 58 23 1.19 21 1.pdf Financial Analysis The first analytical step is to arrive at the Economic Value Added (EVA). http://interbrand. Exhibit 2: A Simplified Brand Valuation Template – Interbrand Methodology Year Branded Revenue Operating Costs EBITA Tax (say. marketing costs. other overheads and central cost allocation are deducted from the branded revenue to arrive at EBITA (Earnings Before Interest. Thereafter. a three-year weighted average of historical profits is used as the base figure for making future projections.comparatively homogeneous customer groups. based on the weighted average cost of capital (WACC) is . 26%) NOPAT Operating Assets/Capital Employed Weighted Avg Capital Cost (say. As valuation may be distorted by an unrepresentative profit in the immediate preceding year. Valuations at regional market levels are then aggregated to arrive at the total value. 10%) Economic Value Added (EVA) Brand Earnings (Based on 40% RBI) Discount Rate (say.30 20 1. value for money. with various weightages assigned to each of them (Exhibit 3).”2 Nonetheless. The discount rate is determined by a “Brand Strength Score” (BSS). R&D. i. “Marketing Perspectives on Brand Valuation”. the risk that the forecast Brand Earnings will actually materialize. “this model is not perfect. ease of use. for example several of the components have a built in preference for older brands and so may not give adequate recognition to the value of newer brands such as Amazon or Starbuks.asp . innovation.e.. To arrive at the RBI. EVA multiplied by RBI gives the “Brand Earnings”.. The “Role of Brand Index” (RBI) provides a measure of how the brand influences consumer demand at the point of purchase. design. management strength. patents. Brand Strength Analysis The projected brand earnings are required to be discounted to a present value using an appropriate discount rate. Intellectual Property Today. 2 Berger James T and Tadzijeva Diana. Demand Analysis The percentage of the Economic Value Added that is actually attributable to the brand is worked out through a proprietary analytical framework referred to as “Role of Brand” analysis. the factors that influence consumers to purchase (such as quality. The EVA thus calculated includes contributions from various intangibles such as brands. which reflects the risk factor.deducted from NOPAT. BSS considers seven parameters (identified by Colin Bates of Hong Kong-based Building Brands Ltd). http://www. EVA tells whether or not the business is earning returns that exceed the cost of capital. reliability. BSS is measured with reference to a notional ideal score of 100.iptoday.com/articles/2008-8-berger. etc. according to Bates himself. are projected for a period of five years (Refer Exhibit 2). However. the methodology is robust and has stood the test of time. and these are added together to arrive at the Role of Brand Index. i. right up to the EVA stage. the specific associations with the brand are calculated. For each factor. The financial figures.e. the earnings attributable to the brand. leadership and product features) are weighted in terms of their bearing on demand. to arrive at the Economic Value Added (EVA). a simplified brand valuation template is presented at Exhibit 2. The Brand Strength Score is converted to brand risk (or more specifically.Interbrand designates Brand Strength Scores for individual brands based on information available from company annual reports and other published materials. The total brand value is arrived at by adding together the individual segment values.ch/e/pdf/IBZL_Brand_Valuation_e.interbrand. Score 25 15 10 25 10 10 5 100 Sources: Ellwood Iain. and still weaker brands are discounted at higher rates. The strongest brands are discounted at the risk-free rate of return applicable to the market. As already referred to. Exhibit 3: Brand Strength Scoring Pattern Parameters 1. Interbrand Zintzmeyer & Lux. Profit Trend 6. which is linked to brand strength. Exhibit 4: Brand Strength Score & Discount Rate . Diversification 5. Market 4. London. legal coverage & monitoring Max. Support 7. while average-strength brands are discounted at the industry’s weighted average cost of capital (WACC). “The Essential Brand Book”. Stability 3. Protection BRAND STRENGTH Components Market share & awareness Satisfaction & sustained customer loyalty Market sector growth & industry concentration Geographic & offer-related diversifications Consideration & attractiveness over time Share of advertising & identity Date of registration. supplemented with inspection visits to distributors and retailers. Kogan Page.pdf Net Present Value Calculation The value of future brand earnings is inversely related to the brand’s risk. opinions of managers and customers. Leadership 2. http://www. p. The key to unlock the benefits from your brand assets”. 2002. 209 “Brand Valuation. to the discount rate) using an S curve (Exhibit 4). brands which do not have at least one-third of brands with negative EVA are not valued. % Limitations and Conditions iscount Rate) Interbrand however does not include parent companies (such as Unilever and Procter & Gamble) their revenue from outside the home country.Measuring the Brand’s Consumer Equity D iscountra efor t b nde rnin s ra a g e 9 . Visa and Wal-Mart do not figure on Interbrand’s annual brand rankings for one or the other of these reasons.g 0 .Risk era -fre te e 3 . Further. financial and market data are not publicly available are excluded. % Millward Brown is a global market research and consulting firm based in London. Mars. B2B brands which do not have a market face and and airline companies in its rankings.g. brands for which brands such as CNN.1 % . Its specialist financial and ROI arm – Millward Brown Optimor announces the annual “BRANDZ™ Top 100 Most Powerful Brands”. The valuation methodology combines financial data analysis with Ind ry W ust ACC e . As already indicated earlier. Some large and well-known Millward Brown’s BrandZ .g. . on the premise that brand value depends on consumer sentiment and the company’s ability to convert the same into shareholder value. whose purchase decision is determined by the brand’s promise rather than by its specific product features. which is claimed to be the world’s largest storehouse of brand equity data. This metric. This is arrived at based on primary research data from the BrandZ database.Project the brand value using a brand multiple. The data required for this step are sourced from Bloomberg. based on Millward Brown’s annual surveys. The BrandZ ranking lists the top 100 brands from around the world and also the top brands in 16 business categories. called Brand Contribution. the brand’s risk profile. Step 2: Brand Contribution . identify the company’s intangible earnings and allocate them to individual brands and countries of operation. Datamonitor (www. . BrandZ database and Millward Brown Optimor’s own research. This is done with the help of publicly available financial data and projections from Bloomberg. reflects the brand’s share of earnings from its most loyal customers. The brands are valued in three steps: 1. Over the years. Step 3: Brand Multiple . growth potential and Voltage™ as measured by Millward Brown’s BrandDynamics™ (explained later below).000 brands. Brand Contribution is indicated on a scale of 1 to 5.datamonitor.com) and Millward Brown Optimor’s own research. Millward Brown defines brand value as the financial value of a brand.From the corporate earnings. This is based on market valuations.e. which is the sum total of all the earnings that the brand is expected to generate. The consumer research data is drawn from BrandZ. 2.Determine the portion of intangible earnings attributable to the brand alone (as opposed to other factors such as price and location). 3. product and service brands that are directly bought by individual and business customers). where 5 indicates strongest Brand Contribution. Step 1: Intangible Earnings . Millward Brown has interviewed over one million consumers across 31 countries (including India) on 50. Millward Brown Optimor values only market facing brands (i.consumer research findings. The BrandDynamics™ Pyramid (Exhibit 5) depicts the strength of relationship consumers have with the brand. BrandDynamics™ Millward Brown’s proprietary tool called BrandDynamics™ measures a brand’s consumer equity. i. and it also covers strong brands which operate in just a single country. The Pyramid indicates as to how many consumers have a relationship with the brand at five key stages. Respondents are asked to recall all the brands that they know in a given category and evaluate them competitively. Apart from brand value. consumers’ predisposition to purchase a brand. The BrandZ field survey data is collected by interviewing consumers about brands belonging to the product/service categories in which they shop regularly. The Pyramid is constructed for the brand. Two unique e features of the BrandZ approach are that it considers a brand’s short term (1-year) growth prospects in calculating brand value. in the right price range or in the consideration set . Sector-wise rankings are also provided. Each interviewee is assigned to one of the levels in the pyramid depending on his/her responses to a set of questions. which are overlooked by some of the others. distribution strengths. based on consumer interviews. so that companies can readily compare their own brands with those of competitors. one more metric – Brand Momentum. This is an index of the brand’s short term growth rate (on a ten point scale) in comparison with the short term growth rate of all brands in the BrandZ ranking.The BrandZ brand valuation study is being carried out each year by Millward Brown on behalf of the advertising conglomerate WPP since 1998. which contribute to a brand’s financial equity. Findings from The BrandZ Top 100 Report are being published in the Financial Times since 2006. production efficiencies.e. The five stages in increasing order of relationship with the brand are: 1.. is also calculated. etc. BrandZ also covers retailer brands.. Relevance – Relevant to consumer’s needs. Presence – Active awareness based on past trial or knowledge of brand promise 2. as distinct from other factors such as patents. Performance – Felt to deliver acceptable product performance and is on the consumer’s short-list 4.brandz. Data from this analysis is used to calculate the BrandVoltage™ score. which is an indicator of the brand’s future growth potential. http://www. and that consumers in the ‘Bonding’ level contribute the most to the brand’s revenue.com/output/Branddynamicspyramid. Exhibit 5: Millward Brown’s BrandDynamics Pyramid The shape of the BrandDynamics™ Pyramid would vary across brands depending on the percentage of consumers who are at each level of the Pyramid. Bonding – Rational and emotional attachments to the brand to the exclusion of most other brands. 3 The BrandDynamics™ and BrandVoltage™ results determine the brand multiple.3. in valuing the brand. Advantage – Felt to have emotional or rational advantage over other brands in the category 5.aspx Strong relationsh High share of category expend . They spend more of their category expenditure on the given brand.3 It has been validated that brand loyalty is progressively higher among consumers who are in the higher levels of the Pyramid. which is used “What is the BrandDynamics Pyramid?”. It is not possible to value the numerous brands belonging to companies such as Hindustan Unilever. and is an independent consulting firm engaged in the valuation of businesses and intangible assets of all kinds. so that annual accounts are readily available. syndicated market research. Calculate the Economic Value Added by separating out earnings attributable to other factors. only customer facing corporate brands are valued. Carry out a risk analysis (βrand βeta® Analysis) to arrive at the Discount Rate . which calculates the royalty that a company would have paid for licensing its brand from a third party. Brand Finance values the brand names of only those companies which are listed on the Bombay Stock Exchange. The brand valuation process comprises of the following steps (refer flow chart in Exhibit 6): 1. in case it did not own the same. third party transactions. Brand Finance adopts the ‘relief from royalty’ approach for valuing brands. transactions support and tax planning & compliance purposes. Extract the Brand Value Added from the above through an analysis of the demand drivers. particularly for financial reporting. The net present value of the projected royalty stream represents the brand value. 3. for example.) In India. etc. Also. this method can be applied by using publicly available financial information (including company annual reports. as it arrives at brand values by reference to documented. Arrive at Brand Forecasts based on financial analysis (to calculate brand business earnings) and market analysis (to factor-in market and competitive conditions) 2. 4. because revenue streams of individual brands are not publicly available. Further. Brand Finance states that it prefers the royalty relief method because this is favoured by tax authorities and courts.Brand Finance – Royalty Relief Method Brand Finance plc was founded in the UK in 1996. press reports. analysts briefings. It is also Brand Fo . Firstly. it is important to consider only the economic value added. a five to ten year cash flow forecast is made for the business related to the brand that is being valued. Calculate the Brand Value Exhibit 6: Snapshot of Brand Finance’s Valuation Framework Market Data Brand Forecasts Based on financial and market data. which reflects the fully absorbed earnings of the brand. from the cash flow attributable to the brand’s business. Thereafter.5. if any. the cash flow stream that is used should exclude earnings from the sale of unbranded goods or sale of products under other brand names. a fair return has to be provided to all fixed assets and working capital used in the business. Economic Value Added In order to avoid overvaluing the brand. which is then adjusted to include an equity risk premium. The objective is to estimate the extent to which the brand stimulates demand and supports the price. this approach tracks the changing importance of various drivers in specific markets. reflects residual earnings related to the brand’s business that is attributable to intangible assets. it is also important to consider the likelihood that it will do so. one estimates the contribution made by the brand to Economic Value Added. This begins with the risk free borrowing rate prevailing in the applicable geographic market. through Brand Value Added BVA™ Analysis.important to provide for taxation. one sub-segment of consumers to another and one product class to another. At this stage it may be pointed out that in the case of international brands. and these are aggregated to arrive at the global value of the brand. Brand Risk Analysis While Brand Value Added reflects the brand’s potential to generate income. one time period over another. Thus. one of which is the brand to be valued. thus arrived at. The Economic Value Added. The Brand Value Added is computed by applying the Brand Value Added BVA™ index to the Economic Value Added. This reflects the expected average . market and brand risks. thereby guiding in resource allocation towards difficult demand drivers and also tracking the impact of such resource allocations. This analysis is based on a large sample customer trade-off survey or conjoint analysis. the brand is valued separately in various regions based on local business volumes and corresponding demand drivers. Importance of the brand to the purchase decision is estimated through consumer research at various levels – tradeoff of one brand over another. through a suitable discount rate that would take into account economic. Brand Value Added In this step. The βrand βeta® rating determines the rate of return to be used in brand valuation. Time in market (0-10) 2. Sales growth rate (0-10) 6. as it is theoretically risk free. This last step is carried out based on βrand βeta® Analysis. The βrand βeta® score determines the extent to which the discount rate for the specific brand should be above or below the average for the relevant industry category and geographic market. βrand βeta® Score. which scores the brand on ten objectively verifiable indicators of brand performance relative to other brands in the category (Refer Exhibit 7). Brand Rating & Discount Rate . Advertising awareness (0-10) 10. A brand achieving a score of 100 is discounted at the risk free rate. Elasticity of price (0-10) 8. Market share (0-10) 4. Brand awareness (0-10) TOTAL (0-100) © Brand Finance plc. This composite discount rate is thereafter adjusted for the risk pertaining to the business sector in which the brand operates. Source: ‘Understanding the Financial Value of Brands’ Report prepared for the European Association of Advertising Agencies by Brand Finance plc. Marketing spend/support (0-10) 9. A βrand βeta® score of 50 attracts the average composite discount rate applicable to the industry sector and geographic market under consideration. Price premium (0-10) 7. A βrand βeta® score of 0 attracts the highest discount rate of risk free rate + two times the equity risk premium (Refer Exhibit 8). Market position (0-10) 5. This is then further increased or decreased based on the risk profile of the specific brand to be valued. Exhibit 7: βrand βeta® Scoring Proforma Attribute Score 1. June 1999 Exhibit 8: βrand βeta® Axis.returns for equity investors in the relevant market. Distribution (0-10) 3. CCC CC C D future brand cash flows.βrand βeta® Score 91-100 81-90 71-80 61-70 51-60 41-50 31-40 21-30 11-20 0-10 Brand Rating AAA AA A BBB BB B D: U 8 10 12 14 16 18 20 22 23 24 Discount Rate % Source: Adapted from ‘Understanding the Financial Value of Brands’ Report prepared for the European Association of Advertising Agencies by Brand Finance plc.6 Year 3 580 87.0 290 14. June 1999 Brand Valuation RiskFre Re u e t rn +Tw Eq it ice u y RiskPre iu m m 24. ount Rate % Finally.5 62.9 22.5 72.0 250 12.8 51.5 325 16.5 275 13.9 20.5 54.8 68. A simplified numerical example is shown in the Brand Valuation Template in Exhibit 9.3 60.0 65.4 Year 4 620 93.3 81.1 Year 5 650 97. the brand value is calculated by applying the identified discount rate to the projected Exhibit 9: Brand Valuation Template – Brand Finance’s Discounted Future Earnings Method Year 0 500 75.0 .5 46.0 Net Sales Operating Earnings Tangible Capital Employed Charge for Capital @ 5 % Economic Value Added (BVA) BVA Index @ 75% Year 1 520 78.0 260 13.5 58.0 48.8 Year 2 550 82.5 77.0 310 15. 4 Annuity 135.9 36. However. whereas βrand βeta® Score is arrived at based on secondary information.75 22.4 33% 16.7 1. The sequence of steps adopted by Interbrand and Brand Finance are quite similar. Brand Finance does the same with the help of Brand Value Added Index.3 Value to Year 5 152..0 31. The difference is that in the case of Interbrand.15 28.0 34. While Interbrand extracts Brand Earnings from EVA through multiplication by the Role of Brand Index. Millward Brown and Brand Finance. i. In the case of Interbrand.e.52 24.1 40. . Interbrand and Brand Finance use a discount rate to compute the present value of projected future brand earnings.01 20.0 33% 19. Brand Finance does the same using βrand βeta® Score.1 32.4 1. projecting future income from the brand and converting the same to a present value. In the case of Brand Finance. Brand Value Added Index is computed with the help of consumer research.4 15% 1. both Role of Brand Index and Brand Strength Score are computed largely based on secondary data and information.3 33% 20.3 Brand Value 287. Both of them use available financial and market data to compute the Economic Value Added (EVA).8 2. Interbrand and Millward Brown adopt the economic use method. Millward Brown on the other hand uses a brand multiple.2 38. June 1999 Conclusion – A Comparative Analysis All the three firms – Interbrand. while Brand Finance adopts the relief from royalty method.4 33% 17.1 33% 17. use the income-based approach to brand valuation.5 31.9 1. the risk associated with the earnings and hence the discount rate.5 1.32 26. is computed with the help of Brand Strength Score.Tax Rate Tax Post Tax BVA Discount Rate Discount Factor Discounted Cash Flow 33% 15.8 Source: ‘Understanding the Financial Value of Brands’ Report prepared for the European Association of Advertising Agencies by Brand Finance plc. while Millward Brown’s methodology is for the most part driven by consumer research data. low-profile brands operating even in one country. “Strategic Brand Management”. BBDO’s Brand Equity Evaluation System (BEES). Keller Kevin Lane. Millward Brown’s BrandZ is applied to even comparatively smaller. David Aaker’s Brand Equity Ten model.pdf 3. The key to unlock the benefits from your brand assets”. Ipsos’ Equity Builder Model.com/images/papers/financial_value. Millward Brown’s approach is based to the highest extent on consumer research. at the same time. Prentice Hall of India. Research International’s Equity Engine Model. June 1999 2. This paper has provided only a brief description and comparison of the brand valuation methodologies adopted by three consulting firms.interbrand. While increased use of consumer research is claimed to provide a more practical dimension. SDR Consulting’s Brand Value Model and M/A/R/C Research’s BrandLink Model. http://www. 2004.Among the three methods studied in this paper. http://www. 495-501 4. pp. Winning B®ands™ from ACNielsen. Interbrand. 2007. After computation of intangible earnings. high-profile brands. A criticism against Interbrand is that its approach is limited to valuing large. “Understanding the Financial Value of Brands”. further analysis is done on the basis of “Brand Contribution” and “Brand Multiple”.ch/e/pdf/IBZL_Brand_Valuation_e. Brand Finance uses consumer survey data to a significant extent. Interbrand Zintzmeyer & Lux.brandchannel. Interbrand’s method relies to a large extent on available published data and is therefore quite transparent. Bibliography: 1. “Brand Valuation”. Report prepared for the European Association of Advertising Agencies by Brand Finance plc. There are many more competing approaches to brand valuation such as Young & Rubicam’s BrandAsset™Valuator. to name just the better known ones. which have multinational operations. which are determined by consumer survey responses.pdf . A Chapter from Brands and Branding – An Economist Book. the methodology becomes less transparent. “Brand Valuation. “BrandDynamics™”.5. “What exactly is BRANDZ™?”.com/articles/2008-8-berger.aspx 11.brandz. Report Prepared for Institute of Canadian Advertising.nmauk.pdf 13.markenlexicon. www. “What is the BrandDynamics Pyramid?”. Ellwood Iain. “Millward Brown IMS – What we do – Brand Equity Evaluation”.millwardbrown.it/convergno/atti/Attalla_completa. 2008 9. p. http://www. “Marketing Perspectives on Brand Valuation”. 209 6. “The Essential Brand Book”.com/d_texte/Verfahren_brand_dynamics.w. http://www. Kogan Page. http://www. Intellectual Property Today. May 2000 . Berger James T and Tadzijeva Diana.asp 7. Millward Brown Optimor.pdf 12. “BrandZ – Top 100 Most Powerful Brands 08”.iptoday. Brand Finance plc. 2002.uk/nma/uploads/3313/Millward%20Brown%20methodology%20_ %20for% 8.assirm. http://www.com/Sites/MillwardBrown/Media/Pdfs/en/Services/BrandDy namics.com/output/Branddynamicspyramid. “BrandDynamics™”. http://www.ppt 10. “Brand Valuation: Measuring and Leveraging Your Brand”.Chief Executive. London. by David Haigh .