In a recent blog post, I had written that a necessary, even if not very engaging, part of building a brand is how it is valued. And I had promised to share some of my initial thoughts on the subject. As a writer in the advertising and brand communications industry who also happens to be good on strategy, I can hardly be blamed for being keener on the strategic and creative parts of building a brand.
In today’s world of M&As and deal-making, where company valuations are sometimes astronomical even when the company in question isn’t making profits, you wonder what accounts for sky-high valuations. Of course, company valuations are distinct from corporate brand valuations, and are determined by investment banks.
In this article, I am confining myself to brand valuations – both corporate brands and product/service brands. I am, of course, writing about brand valuations as an advertising and brand communications professional and these are only my very preliminary thoughts on the subject.
Having said that, there are quite a few brand valuation agencies that specialize in offering these services and more of them tend to be from the advertising and brand communications agency networks. Interbrand of the Omnicom Group and BrandZ from Kantar Millward Brown (WPP) are the better-known ones while the third, BrandFinance, isn’t part of any agency network yet.
From what little I have read of these they appear to either focus a lot on investors’ interests (market capitalization) or on IPR (intellectual property assets) in arriving at the brand valuation. To my mind, both methods apply to corporate brands alone, and in addition, they miss the main point of what brands are actually made of and what they represent.
Remember that Peter Drucker said the purpose of business is to create a customer. I would add “and to keep them”. Brands are bonds or relationships that consumers/customers have with companies and their products, so brand valuations ought to be measuring the strength of that relationship.
Broadly speaking, there are several dimensions to this relationship, and each has a qualitative part, while also manifesting itself in a quantifiable metric.
Let’s begin here. Brands enjoy a bond or attachment with consumers, based on certain factors. The most important of them in terms of the relationship would be:
- Perceived brand benefit
- Price-value equation
- Product usage experience
- Repeat purchase
- Brand loyalty
In brand benefit and price-value equation are embedded certain unique features of the product often arising from IP such as patents, copyrights, trademarks, brandmarks, etc. The remaining three factors are based on usage experience and can only be measured over time.
The best measure of consumers’ preference for a brand is its sales, and to that extent net revenue from operations (adjusted for price increases) and market share would be the metrics to use. Repeat purchase, product usage and brand loyalty on the other hand are based on consumers experiences with the product/brand and can be gauged from share of growth from existing customers, and replaceability or substitutability of a brand which are best measured through a consumer survey.
Product brand dimension
Every company has a few power brands in its portfolio, that lead the charge in terms of creating growth for the company. This is more common in consumer goods industries, but is not confined to them.
These power brands have the capacity to make or break a company’s future and enjoy strong relationships with consumers on their own merit. As I had written in a recent blog post on brands and slide presentation, corporate brands have a relationship with their product/service brands and each contributes to the other. Which is why I recommend that companies build their corporate brands with their leading product/service brands and also ensure that these are well integrated with the corporate brand.
The product/service brands that contribute most to a company’s revenue and deliver the best returns on marketing investments are the ones that should be included in corporate brand valuations.
Companies innovate to extend a brand or a product line, in order to increase the width and depth of consumption and thereby grow their revenues and profits. And because they help widen and deepen the relationship with consumers, innovations (product, process, packaging, delivery system) ought to be an important part of brand valuations.
Product and other innovations would also employ considerable IPR, so these should feature in brand valuations. However, I would think that only those IPR and intangible assets that are currently in use, should be part of brand valuation calculations. This is because companies nowadays develop and acquire a lot of intellectual property, often merely to prevent competition from acquiring access to them, and therefore, not all of it is always employed.
It is possible that for company valuations, investment banks consider all of the intellectual property owned by a company, and might even consider the company’s annual spends on R&D. However, for brand valuations, I don’t think these are relevant.
In the case of corporate brands, another important aspect to consider is investor appetite, as it is this that also enables and fuels innovation, growth, and strong consumer relationships. The most important metrics to consider here would be market capitalization and change over previous year, PE ratio (future earnings) and return on equity.
To the extent that these reflect investor appetite and the profitability of the company, they also reflect the strength of the company’s relationship with consumers.
However, I would be careful not to give too much weightage to this dimension, lest it skew the brand’s valuation towards investors over consumers. Of the four dimensions, it is perhaps the weakest, and should have no more than 20% weightage in brand valuations.
Finally, with all these relevant ingredients, let us look at the best means to arrive at brand valuations. As we can see in the diagrammatic representation above showing the relationship between these four dimensions, customer dimension and product brand dimension have a direct relationship with each other. While innovation and investor dimensions have a direct and indirect relationship (indicated by a dotted line arrow) with other dimensions. It ought to be clear by now that because brand valuations ought to place the greatest emphasis on the consumer and customer dimension, a consumer survey with a large and representative sample size ought to form an important part of the brand valuation exercise. The other important part of measuring the metrics would have to come from company and stock market reports.
Besides, there could be several levels of the brand valuation exercise. One within each industry as well as the overall pan-industry level, that adjusts for cyclical and seasonal differences between industries. We could also have corporate brand valuation and another product brand valuation. Speaking of industries, time was when oil and gas companies used to dominate company valuations as well as the Fortune 500, for example. In the ‘90s and early 2000s, it was a mix of FMCG and tech companies that would top brand valuations, with companies like Coca-Cola, Apple, IBM, and Google among the top five. Now it is tech giants almost all the way, including internet companies that dominate the top 10 brand valuations.
It is a sign of the times, I suppose, that people seem to value their social media and smartphones more than food and drink, clothes, or personal care brands. In the future too, perhaps we can expect to see changes at category and industry level, as more of our life gets digitized and more shifts take place to services. Having said that, I think that the large weightage given to market capitalization is another big reason for such skewed brand valuations in favour of tech giants.
One feature will stay constant, though. Brands and brand-building will still matter even as certain categories are preferred by consumers over others. In all this, I can’t help concluding with a sincere wish that the advertising and brand communications industry that helps build all these brands with strategies and ideas, is rightfully recognised as creators of intellectual property and is remunerated on better terms.