How marketers should use brand valuation
The techniques and methodologies of brand valuation have had a dramatic impact on business. Generally this has been positive, with vastly increased interest in the value of intangibles leading to the disclosure of the value of acquired brands on the balance sheet. However, ‘brand valuation techniques’ is a marketplace and the competition between different valuation techniques has caused confusion and inappropriate (often misleading) league tables. Janet Hull argues that brand valuation needs to be positioned away from league tables and be incorporated more into the day-to-day marketing and brand management activities of practitioners.
ANECDOTAL evidence suggests that, in the weeks leading up to the Business Week issue of Interbrand’s annual brand league table, bets are placed among the biggest US brand owners on who will be top, and who will have moved up most places. Putting aside any cynicism about the mechanics of the calculations behind the brand valuation, the league table itself has entered the boardroom psyche, and, for a moment in time, occupies the attention of CEOs. Perhaps this level of interest is understandable given that, typically, half of the top 100 brands in the Interbrand global brand league table are US bred and owned.
There is no doubt that the founders of Interbrand, John Murphy and Tom Blackett, who first developed the concept of brand valuation and a methodology for estimating it, were visionaries and revolutionaries. They were the precursors and champions of a new breed of consultancy, keen to ‘bridge the gap between marketing and finance’ (in the words of another eminent brand valuation consultancy, Brand Finance). But, 20 years on, where has the marketing community got to? How far along the road to revolution have marketing departments and agencies travelled? Are we any closer to achieving our ambition of being recognised, as an industry, for the shareholder value we create, through nurturing and developing brand assets?
This article is written from a generalist, practitioner viewpoint. My observations are based on an amalgam of this experience and address three key areas: where have we made headway, where have we shot ourselves in the foot, and what might the future hold?
1. Where have we made headway?
Increased media interest in the financial value of brands
League tables have proliferated, both globally and by geographic territory and sector. Hardly a month goes by without another brand league table appearing. We have bought our way into the market with exclusive sponsored features and supplements. Notable proponents are Interbrand (Business Week), Millward Brown Optimor (Financial Times), Brand Finance (Financial Director), and The Intangible Business (The Grocer).
Outside these sponsored features, media reporting of the value of brands has undoubtedly increased. Consideration of brand value now stretches to assessments of celebrities, football teams, countries and political leaders.
Although UK in origin, interest in brand valuation is definitely going global. Interbrand is now a global network. Brand Finance now has affiliate offices in 18 countries and claims that its India office, in particular, is doing a roaring trade.
Increased economic interest in Intangibles
Intangible value has entered the vernacular of economists and politicians alike.
Economist and columnist Roger Bootle, writing in 2003, in his breakthrough book, Money for Nothing, indicated that the industrial revolution was behind us and that we had now entered the intangible age.
The creative economy programme, now under development through the Department of Culture, Media and Sport, is a direct result of recognition by the UK Treasury that over 7% of UK gross value added (GVA) is derived from the combined output of the UK creative industries, placing them on a par with the UK financial services sector in terms of economic value.
The first Global Intangible Tracker (GITTM), based on analysis of the enterprise value of listed companies on the top 25 stock markets of the world, and launched by Brand Finance in association with the IPA in early 2007, calculates that 62% of the value of the world’s quoted companies resides in intangibles, and that brands constitute 20% of this intangible value on average.
New standards promote the disclosure of acquired brands on the balance sheet
While brand valuation consultancies make the running in terms of profile on the shop floor they now compete with management consultancies. PwC is a prime example of a management consultancy bringing an audit pedigree to the business of brand valuation. Equally, brand valuation is a service offered by mergers and acquisitions advisers in investment banks.
This growth of interest in the financial value of brands at acquisition, because of the relative disparity between book value and market value, has been recognised in the most recent International Financial Reporting Standards.
The International Financial Reporting Council, under IFRS 3, now recommends a breakdown of ‘goodwill entries’ in balance sheet reporting – a move that has been spurred on by massive lobbying by brand valuation consultancies). Although only acquired brands are allowed to be reported in this way (not internally developed brands), the originators of the brand valuation philosophy must have felt they had made significant headway when this development in global accounting guidelines became reality in 2007.
In summary, we have created a more favourable climate for more meaningful discussions about the value of brands to take place.
2. Where have we shot ourselves in the foot?
Fighting among ourselves about Methodologies
In the attempt to differentiate themselves from each other, brand valuation consultancies in-fight about methodologies and definitions. Is it enterprise value or market value that is the basis of analysis? Is it brand strength or brand power or brand voltage that is the key dynamic? And how are any of these defined?
In the case of Interbrand, brand ‘strength’ is ascertained through a structured evaluation (marks out of 100) of the brand’s market, stability, leadership position, growth trend, support, geographic footprint and legal protectability.
In the case of Brand Finance, brand strength is called Brand Beta ® and is scored against the parallel attributes of time in the market, distribution, market share, market position, sales growth rate, price premium, price elasticity, marketing spend, advertising awareness and brand awareness. A score of 50 out of 100 implies that the brand offers average investment risk. A score of 100 implies a theoretically risk-free brand, which would be discounted at the risk-free rate. A score of zero implies a particularly weak brand that doubles the equity risk premium.
In the case of Millward Brown, brand strength is a combination of brand presence, brand ‘voltage’ and brand equity, and draws on the combined data sets of the WPP ‘Brandz’ study and other Millward Brown brand tracking proprietary tools.
The degrees of variation might fit on a pin-head, but the consequence of the wide range of different vocabulary in use is a perceived lack of clarity, consistency and comparability, and a broad suspicion of self-interest and subjectivity in the choice of methodology.
M&A specialists at investment banks claim not to accept at face value any valuation that is provided to them, and tend to do their own. There is even a risk that, because of the disparity in approaches to brand valuation, the IFRS decision to recommend brand valuation on the balance sheet, in the case of acquired brands, may be reversed. David Haigh, of Brand Finance, who is chairing the IFRS committee looking at standardisation of brand valuation on the balance sheet, claims to be increasing sceptical about what the outcome might be.
Finance directors using brand valuation as a financial instrument
In addition, there is a real risk that, rather than bringing finance and marketing closer together, brand valuation is being hijacked by the finance department.
More brand valuations, it appears, are commissioned for financial purposes than for marketing purposes. They are being used, for example, to optimise tax advantages across subsidiaries and geographies; to bolster a balance sheet in difficult times; to fight a reverse takeover; and, in some cases, to restructure marketing departments and brand portfolios.
In conversations with brand valuation consultancies, the lasting impression is that most of the demand for their services is coming from the finance or legal teams, rather than the marketing departments of major corporates, or, indeed, from agencies.
The fact that the impairment test for brands on the balance sheet only allows for a potential value reduction, but not an increase, demonstrates a profound lack of understanding, on the part of the financial community, about the fundamentals of the value of branding and sound brand stewardship.
Marketing and agency folk failing to utilise brand valuation’s ‘potential’
Up until five years ago, the head of a sister agency to Interbrand was still describing ‘brand valuation’ as a ‘flash in the pan’. The members of the IPA Value of Advertising Group, which has the responsibility of promoting and breeding an effectiveness culture between agencies and marketing, recognise the need for greater understanding of its current application or broader relevance.
Although the word ‘brand valuation’ trips freely off the tongues of many marketers, there appears to be limited understanding of the process. How many marketing or agency folk can claim that they have been involved in a brand valuation, or are applying the principles or practice of brand valuation to their day-to-day decision making and management of brand assets?
When Brand Finance last ran a wellpublicised masterclass in London, linked to a Haymarket Events Brand Summit on the application of brand valuation to brand marketing, of the 20 people in attendance, only two were from the UK. The remainder of the delegates were from the Middle East, Canada and Asia.
Against this backdrop of a lack of broad engagement, there is a real risk that we in the UK are failing to capitalise on the inherent promise of brand valuation, and are even intent on devaluing the concept before it has reached maturity in the market, or has delivered against the original vision set for it. Arguably, brand valuation consultancies have got stuck in a rut of their own making, and are perceived by the wider market to be focused on league tables and balance sheet reporting; and marketing and agencies haven’t exactly picked up the baton.
What might the future hold?
If we go back to the basics of what brand valuation is about, it is clear that it is increasingly relevant, in an era of ever-greater focus on marketing accountability.
Alex Batchelor, earlier in his career, at Interbrand, writing in Brands and Branding, explained the concept of brand valuation as follows:
‘The value today of a brand’s future earnings is a function of how high these earnings are, and of how likely it is that they will be achieved. It should thus take into consideration three things about the brand:
1. its financial performance (in order to identify its true net earnings)
2. its marketing strength and its competitive advantage over other brands (to establish security of demand)
3. its legal position (to prove that it is a separable property).’
Paul Temporal, writing in Advanced Brand Management, enlarges upon this by explaining brand valuation in terms of economic value:
‘How do brands add value? In economic terms the answer is simple: they impact on both the demand and supply curves. On the demand side, brands enable a product to achieve a higher price at a given sales volume. On the supply side brands require lower cost of capital, lower staff acquisition and retention costs, volume economies of scale, higher trade and customer recognition and loyalty.’
Jan Lindeman of Interbrand, also writing in Brands and Branding, argues that what’s important is that the basis of brand valuation – economic value – makes it comparable with other investment decisions within organisations. He advocates a multitude of possible applications for brand valuation; from making decisions on business and brand investments, to organising and optimising the use of different brands in the business according to their respective economic value contribution, to measuring the return on brand investments, to linking remuneration and career development of marketing staff to brand value development. In short, he advocates value-based management systems that can align the management of the brand asset with that of other corporate assets.
It is unlikely that anyone in marketing or agencies would deny the relevance of these core beliefs coming from some of the leading exponents of brand valuation consultancy. So the fundamental relevance of the thinking behind brand valuation is beyond dispute.
Being able to justify brand investment, in terms of its contribution to future cash flow and profitability encourages a mid- to long-term perspective on the value of marketing activity. Being competent in making the economic argument for maintaining or increasing levels of spend relative to the competition, in order to increase market share or optimise the impact of brand improvements, is something that most marketers and agencies aspire to.
Having the knowledge and wherewithal to be held accountable for value creation excites that contingent in the marketing and agency community, the IPA Finance Policy Group among them, who are keen to engage in more realistic discussions about value-based remuneration.
Perhaps the biggest flaw in the brand valuation process, at the current time, is the undue public and promotional emphasis placed on pinpointing net present value at a moment in time, in order to meet the requirements of league tables and accounting standards.
By focusing market understanding on the retrospective balance sheet, we have failed to gain acceptance for the broader predictive relevance of the brand valuation process. Brand valuation needs reframing as a strategic forward- planning and performance measurement tool, not a balance sheet reporting tool after the event.
We need to transform ‘point in time valuation’ into ‘dynamic brand evaluation’.
Martin Deboo, equity analyst at Investec, speaking to an IPA seminar in spring 2007, advised the audience of strategic planners and marketers:
‘Don’t stress about “intangible assets” too much – get the growth/investment/ margin equation right and let me worry about the valuation implications.’
There is no doubt that the analyst community is becoming increasingly marketing-savvy and is ready to be engaged in a more informed dialogue about the relationship between marketing investment and shareholder value. From IPA conversations with equity analysts there is a real hunger for information that enables the ‘City’ to evaluate the quality and quantity of marketing activity in quoted companies: in order to understand the difference between good and bad brand stewardship, and to assess the effect of this intangible asset in future tangible cash flows.
There is a trend for more analysts to come from the industries they are following. The big investment banks are becoming big purchasers of data, which was traditionally the preserve of marketing and agencies. They’re buying from the likes of Nielsen, TNS and IRI, and are reported to be frequent commissioners of adhoc research. Even YouGov daily brand tracking is starting to make inroads.
Martin Deboo’s recommendation to the industry from the same IPA seminar, was as follows:
‘Adopting a metrics-based approach, rather than putting brands and other intangibles on the balance sheet, is the best way forward. Identify yourselves firmly with the organic (sales) growth agenda – make it your business to understand how what you do contributes to this. Think financial payback and drill down, rather than intermediate variables and drill up – help your client “tell the story” of where growth has come from. Work proactively with your clients around how best to operationalise a metrics-based reporting system.’
Having left Interbrand to head up marketing at Orange, Alex Batchelor, wrote about his experiences in the board room, in Market Leader in summer 2005:
‘To survive board meetings, you need to put what you are saying in context, and particularly how it relates to the momentum of the company: whether you are getting better or getting worse.’
In his experience:
‘Data has to be in a manageable form that points clearly to action, and in an accessible form to enable management to understand why particular strategies are necessary.’
Above all, we need metrics fit for purpose
Brand valuation specialists are as dependent as any of us on the quality of the market and brand data made available to them for the quality of their valuations. The subjectivity of which they sometimes stand accused, is often the consequence of a lack of relevant data in appropriate formats. Brand valuation experts, many of whom come from a finance background, find themselves struggling to make sense of the marketing and brand data available to them.
The new IPA publication, KPIs for Marketing Reporting, proposes a framework for thinking about marketing metrics, and provides a comprehensive set of 20 generic performance indicators from which to develop specific data sets. These include measures of success (business value, customer value, brand value); predictors of success (A&P investment strategy, promotional mix, innovation intensity) and financial metrics (marketing payback). The publication advocates that marketing departments and agencies work together to create a coherent approach to marketing reporting, using this framework as stimulus.
Finding the right research tools and techniques should then flow from using this framework. In the quest for the right metrics, our best advice is that measurement strategy precede tactics, and that, before jumping to the detail of research measures, we take a step back and think about what we need to measure and why; then set a brief to research companies indicating the type of metrics that will be of most value; and make them aware of how these metrics need to be reported and connected. In short, invite research companies to respond to client and agency needs rather than being dictated to by the techniques and tools they already have in play.
If we are successful in this process, and whether we progress to full brand valuation or stop at the point of dynamic brand evaluation, we will be better placed to communicate the value and contribution of marketing to business performance across all functions and departments, including finance. And it should follow that the quality of marketing activity will become appreciated better by external shareholders and stakeholders. Again, the IPA’s endeavours to focus reporting about marketing and brand performance on the narrative section of annual reports and accounts, rather than the financial section, is confirmation of a belief in the value of this new direction. The IR Magazine UK Award for Best Narrative Reporting, and accompanying literature and research, is sponsored by the IPA for this purpose.
The objective of this article was to offer a generalist, practitioner view on the future of brand valuation.
It argues that in the first 20 years of the life of brand valuation, we have prepared a more favourable climate for meaningful discussions about the value of brands. But we have failed as yet to capitalise on the huge potential that brand valuation principles and practices offer for mainstream marketing reporting and decision making.
It advocates that brand valuation needs to be repositioned away from league tables and balance-sheet reporting. It should be a metricsbased approach to day-to-day marketing and brand management that is capable of withstanding boardroom scrutiny. It should also be capable of being reported in the narrative sections of companies’ annual reports.
Brand valuation consultancies may well argue that there is nothing new in what I am saying and that they have strong case examples of all these things being in play. However, my belief is that there is still much room for improvement. Marketing departments and agencies in the UK are best placed to lead the charge, but need to move quickly if they are not to be overtaken by Asia, which is displaying a real appetite for improving its marketing professionalism
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Bootle, R. (2003) Money for Nothing: Real Wealth, Financial Fantasies and the Economy of the Future. Nicholas Brierley Publishing.
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Deboo, M. (2007) How analysts think about intangibles and brands. Speech given at the IPA ‘Intangible Revolution’ seminar, February.
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Global Intangible Tracker (GITTM) (2007) Brand Finance with IPA.
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KPIs for marketing reporting: a frame work for effective marketing disclosure (2008) IPA.
Temporal, P. (2002) Advanced Brand Management: From Vision to Valuation. John Wiley & Sons.
Walshe, P. (2008) ‘What price a strong brand? Market Leader. Spring.
Although UK in origin, interest in brand valuation is definitely going global. Interbrand is now a global network. Brand Finance has affiliate offices in 18 countries and claims that its India office, in particular, is doing a roaring trade Brand valuation needs reframing as a strategic forward-planning and performance measurement tool, not a balance sheet reporting tool after the event Brand valuation experts find themselves grappling to make sense of the marketing and brand data available to them