Marketing Perspectives on Brand Valuation

By James T. Berger and Diana Tadzijeva

James T. Berger, principal of Evanston (IL)-based James T. Berger/Market Strategies, does extensive consulting and expert witness work for intellectual property attorneys throughout the U.S. His areas of expertise are marketing communications and surveys. His survey work focuses on infringement issues including likelihood of confusion, trade dress and secondary meaning. He both develops IP surveys and critiques adversarial surveys. He is a faculty member at Roosevelt University where he teaches a variety of courses in marketing and is an often-published freelance business writer. He can be contacted at (847)328-9633 or via e-mail at jberger@jamesberger.net. His Web site is www.jamesberger.net.

Diana Tadzijeva is Research Associate at James T. Berger/Market Strategies. Her background is in strategic planning, research development, project management and resource management.

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In trademark infringement litigation, getting a judgment or agreement on brand or trademark infringement is only half the battle. The other half is attempting to determine what the damages are, and the key to trying to make that determination is the ability to calculate what the brand or trademark is worth from a marketing perspective.

The marketing valuation is far different from the accounting valuation. Accounting methods determine trademark and/or brand values based on the real value of the asset. Such calculations are relatively easy to determine because they are based on book values of the assets — the value of the brand or trademark as reflected in financial statements.

Marketing values are far more complex and require an understanding of the intellectual property valuation of the brand or trademark in the marketplace. Often there are great differences between accounting and marketing values of brands and trademarks. Such differences are often reflected by merger/acquisition transactions when one company purchases another and the value of the exchange exceeds by many times the “book value” of the assets being purchased.

In the intellectual property area, damages in trademark infringement litigation have to be tied to some marketing value – and NOT an accounting value. This is especially true when a “famous” or well-known brand is damaged or diluted.

Calculating the marketing value of a brand or trademark is often easier said than done. However, there are a variety of methods and techniques that one can use to determine that marketing value. Once such a value is determined, one can then attempt to assess damages by estimating the percentage of the brand or trademark’s that can be attributed to the infringement.

There are many approaches to trademark and brand valuations. The approaches presented in this two-part article are among the most commonly used qualitative and quantitative approaches. Following are some of the most popular techniques for determining the marketing value of the brand or trademark.

Cost-Based Approaches

Cost-Based Approaches involve calculating the costs associated with:

-- Creating the brand (market research, development of the product concept, market testing, packaging, advertising, etc.)

-- Continued promotion through the product life cycle

-- Product improvement over time and the insuring costs connected with the product improvement

According to “Strategic Brand Valuation: A Cross-Function Perspective” by Karen Cravens and Chris Guilding (Business Horizons, July/August, 1999) the cost-based method “is the most conservative method of valuation and provides little future-oriented information that is useful in the brand management process.”

According to Cravens/Guilding, accountants are more familiar with this approach and assert this is the most acceptable way to value brands. “However,” write Cravens/Guilding, “marketers are not likely to support the technique because it fails to capture value-added through the application of strategic brand management activities and processes.”

They add that a fundamental problem with cost-based approaches is that “all brand-related costs that were previously expenses must be included.” Yet, they point out, it is often difficult to identify the costs that were not directly attributable to the brand but were expensed in support of it.

They provide the example of entrepreneur Richard Branson’s tremendous costs incurred in conjunction with his attempt to circumnavigate the globe with his Virgin Global Challenger balloon. Total costs were $4.9 million and the brand name associated with these costs was “Virgin.” Cravens/Guilding question whether this activity was solely undertaken to build the “Virgin” brand name, which is the same brand name used by Branson for his multitude of other entrepreneurial endeavors such as Virgin Air, Virgin Records and other ventures. “Obviously, the indirect costs in this case may be substantial,” write Cravens/Guilding.

Another problem is valuating new versus mature brands. Cravens/Guilding write: “Similarly, the time horizon used to start collecting the costs may be a problem in the case of mature brands because many of the costs may be difficult to identify.” Compounding this problem is the difficulty to valuate the expenditure due to the “intangible nature of the benefit.”

Yet another consideration is the time value of money. Cravens/Guilding write: “If the historical costs involved can be readily determined, it is then necessary to consider how discount rates can be applied to equate historical expenditures to the present. An alternative costing approach considers replacement costs. This is a very subjective valuation method in that experts are asked to estimate the levels of cost necessary to recreate the brand.”

According to “Brand Valuation Basics” by Lindsay Moore of KLM, Inc., the cost-based protocol is to list all the individual costs which can be documented as the expenses incurred in creating the brand from the earliest inception to its state at the time of valuation.

Market-based Approaches

This approach is based on estimating the value of the brand or trademark by attempting to calculate the market price at which the brand or trademark can be sold. Also, the market value of the brand or trademark in question could be estimated through comparing the brand being valued to a substitute brand not related to the firm. Moreover, future benefits associated with owning the brand or trademark are discounted to the present value to arrive at the trademark/brand value.

Cravens/Guilding point out: “One way to determine the financial market effects is to separate tangible assets from intangible assets. The market value created by the intangibles can be inferred once the entire value of the asset is determined.”

The classic case in miscalculation using the market-value approach was the ill-fated acquisition of Snapple Beverages by Quaker Oats Company in December, 1994. Quaker, which had the highly successful Gatorade brand, believed that the Snapple brand created synergy for their beverage line. The acquisition was for $1.7 billion, which according to a report issued by Tuck School of Business at Dartmouth, represented 28.6 times earnings and 330 percent of revenues. The book value of Snapple at the time of the acquisition was estimated at $300 million. The Quaker/Snapple deal was a loser from the beginning. A Business Week story called the deal one of the “Top Ten” worst mergers of the 1990s.

In 1997, Quaker gave up on Snapple, sold it to Triarc Company for its approximate book value of $300 million. According to the Tuck report, “After two and one-half years, the Snapple mistake cost Quaker somewhere between $1 - $1.5 billion, depending on how one chooses to account for tax issues and the opportunity cost of selling the pet-food brands (which Quaker had to sell to obtain the funds to buy Snapple). (William) Smithburg, (Quaker CEO) resigned soon after the sale, and PepsiCo eventually acquired Quaker in December 2000 for $13.4 billion in stock.”

The Snapple example illustrates the volatile and changeable nature of this approach. At one point the brand had a premium of over $1 billion and less than three years later the brand was worth, essentially, its book value. The Snapple debacle effectively killed Quaker Oats, one of America’s oldest and most successful companies.

Income-based approaches

This involves calculating the present value of future net revenues and profits attributable to the brand. If the brand has been damaged or diluted, than the difference between the present value of future cash flows between the brand or trademark undamaged or undiluted versus the estimated present values or future cash flows for the damaged or diluted brand.

According to Moore, this approach identifies “brand after-tax operating income” to establish the value with the premise that “brand value is the ability to produce after-tax income.”

According to Moore, there are various specific methods for setting an income-drive valuation. Such methods include:

-- Price premium over an unbranded or minimally branded entity in the marketplace.

-- An estimate of an annual royalty rate under a “brand licensing agreement.”

-- Formal comparison of a “brand after-tax net income” between the target brand and an unbranded or weak-branded marketplace entity in the same product or service category.

‘Economic Use’ Approach

Economic Use Method is one of the most popular approaches of brand valuation in UK. Its major focus is on the economic return earned as a result of owning the brand and the brand’s contribution to the business both now and in the future. According to the “Brand Valuation” – a chapter from the book Brands and Branding prepared by Interbrand, the reason this approach is so effective, is because it combines the fundamental principles of both marketing and finance.

-- In the marketing part of the valuation it tries to capture how the brand creates customer demand, which is then translated into revenues, repurchase and customer loyalty.

-- In the financial part, the ‘Economic Use’ method suggests to account for the net present value of future earnings of the brand, which should be discounted thereafter using a discount rate associated with the risk level of these future earnings being realized.

There are five steps in the process of valuing a brand using this method:

1. Segmenting the Market – the brand is divided into small homogenous groups of consumers in all of the present markets. The market value of the brand would be the sum of brand values in each of these segments.

2. Financial Analysis – the future revenues from the intangibles is forecasted in all of the market segments. (Intangible earnings = brand revenue-operating costs-applicable taxes-capital expenses).

3. Demand Analysis – in this step the ‘role of branding index’ is determined which is multiplied by the number in step 2. Here the ‘role of the branding index’ is determined through identifying various demand drivers in the previously identified market segments and then the degree to which each of the drivers are directly affecting the brand is determined.

4. Competitive Benchmarking – in this step the competitive environment is carefully analyzed in areas similar to the seven factors in Interbrand’s valuation method. This analysis is then combined into a ‘brand strength score’ which forms the basis for the discount rate used to discount the net present value of the future earnings.

5. Brand Value Calculation – comprises of multiplying the net present value of the expected future earnings (calculated in step 3) by the brand discount rate found in step 4.

Brand Due Diligence Approach

This method is very similar to the ‘Economic Use’ approach, but it involves valuation from a slightly different perspective. Unlike the upper mentioned method, the brand due diligence is a mixture of due diligence in legal, commercial and financial areas that is focused on an individual brand. This involves working through a rather complex work sheet involving the answering of the questions in the following areas:

-- In legal review and risk analysis the valuator usually investigates legal considerations associated with that particular brand: how and where the trademarks were registered, whether they were being properly protected, whether there were other parties that shared, bought or licensed these rights and if there are any damages from counterfeiting the brand.

-- Market review and risk analysis involves examination of the external threats that the industry associated with the brand in question is or will be facing in future.

-- Competitor review and risk analysis includes a thorough analysis of the competitive landscape for that particular brand.

-- Brand image review and risk analysis includes analysis of how the brand is perceived in target markets, how it is managed, priced, supported, as well as how prepared it is to change with the shifting demographics of its consumer or how well equipped it is to respond to the arising crises.

-- In branded business review and risk analysis the work from the previous fours steps is combined and reviewed from a business standpoint.

Relief from Royalty Approach

Relief from royalty, along with the ‘Economic Use’ method are two of the most often used IP valuation approaches in U.K. According to David Haigh, a group chief executive of Brand Finance, a company specializing in intangible asset valuation, the reason this method is used so extensively is because there are a lot of comparable licensing agreements in public domain and courts as well as tax authorities highly rely on this method.

The basis of this approach is calculating how much the business would pay for the trademark of the brand it owns if it were to license it from a third party. The key areas to determine here are:

1. Forecasted future earnings of a brand (determined using historical earning data).

2. Royalty rate (key determinants: level of consumer awareness, relevancy, propensity to purchase, market share, price positioning).

The final valuation step in this method is to multiply the future earnings by the royalty rate, the sum of which is then adjusted for the applicable discount and tax rates.

Formulary Approaches

There are several approaches to trademark and brand valuations that fall under the “Formulary Approaches” umbrella. These are among the most popular methods of brand valuation because they are not as rigid as the cost-based approaches and take the greatest number of factors into consideration when determining the value of a brand. While there are many methods in this group, the most prominent are: the Interbrand approach, Brandz approach and “Brand Equity Ten” approach.

Interbrand approach

Interbrand, a division of Omnicom, is a branding consulting firm. Founded in London, in 1974 as Novamark by John Murphy, a former employee of Dunlop, Interbrand has developed into a full-service branding consultancy with 40 offices in 25 countries. Annually, Interbrand and Business Week publish “The 100 Top Brands.”

Interbrand’s approach, which is a method limited to big, high-profile brands, uses a three-year weighted average of profits after tax. The factors considered are only the ones that directly relate to the brand’s identity. Thereafter the multiplier is attached to the calculation. This multiplier takes into account seven components of brand strength as articulated by Colin Bates of Hong Kong-based Building Brands Ltd:

Market — 10% of brand strength. Brands in markets where consumer preferences are more enduring would score higher. For example, a food or detergent brand would score higher than a perfume or clothing brand, because these latter categories are more susceptible to the swings of consumer preference.

Stability— 15% of brand strength. Long established brands in any market would normally score higher, because of their depth of loyalty. For example: Mercedes Benz or Volvo would score higher than Lexus or Infiniti..

Leadership—25% of brand strength. A market leader is more valuable because being a dominant force with strong market share matters. For example on a global basis, Coca-Cola brand would out-perform Pepsi.

Profit trend — 10% of brand strength. The long-term profit trend of the brand is an important measure of its ability to remain contemporary and relevant to consumers, according to Interbrand.

Support—10% of brand strength. Brands that obtain consistent investment and focused support usually possess a much stronger franchise. However, the quality of this support is equally important as the quantity.

Geographic spread— 25% of brand strength. Brands that have proven international acceptance and appeal are inherently stronger than regional or national brands. Because they are less susceptible to competitive attack, as assets they are therefore more stable.

Protection— 5% of brand strength. Securing full protection for the brand under international trademark and copyright law is the final component of brand strength in the Interbrand model.

According to Bates, “this model is not perfect, 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 Starbucks.” Also to be considered as a limitation is the Interbrand approach’s limitation to valuing large, high-profile brands.

Brandz Study

Created by one of the world’s leading market research companies, London-based Millward Brown, the Brandz Study provides what is believed to be a highly accurate methodology. Unlike the Interbrand approach, which focuses on large brands, the Brandz methodology works just as well for smaller, lower profile brands. It is based on the combined effects of historical financial data as well as consumer studies. The basis of this approach is something called “voltage,” which is a brand’s potential to grow its market share in the future. At the heart of “voltage” is a five-level pyramid based on Bonding, Advantage, Performance, Relevance and Presence and the share of wallet – either strong or weak – the reflection of the brand’s worth.

Peter Walshe, global brand director for Millward Brown, explains that consumer perceptions are the key input into the “voltage rankings.” He explains the brand’s relationship with its market can be mapped as a pyramid. The bottom layer is “awareness” or the proportion of consumers with an active knowledge of the brand. The second layer is “relevance” which focuses on the ability of the brand to meet a consumer’s specific needs. Next comes “performance,” and this dimension asks: does the brand meet or exceed the category standards as well as the ability to deliver the brand owner’s promised experience. Moving up on the pyramid is “advantage,” and this refers to the market’s perception that the brand has some edge over its competitors such as pricing or innovation. Finally at the top of the pyramid is “bonding,” which refers to some unique advantage for individual customers that forms the best relationship to the brand and therefore has the best voltage ranking.

“Voltage represents a real competitive advantage,” according to Walshe. It represents the No. 1 summary of the growth potential of the brand. It takes into account how many people are very loyal to the brand (the brand’s bonding score) and the claimed purchasing data for the category to produce that single brand voltage number. A brand with a positive (+) voltage score has the potential to gain share from its own marketing actions and to resist the actions of competitors. Brands with a negative

(—) voltage score can still grow, but will have to work harder and will be more vulnerable to actions of other brands.

In the Brandz study there is a ranking of eight brand typologies:

Clean Slate: Little known to most consumers (Acer).

Little Tiger: Relatively unknown but with strong following within a core group (Singapore Airlines).

Cult Brand: Not widely known and not for everyone but has attained a fanatical following (Starbucks).

Aspirational:. Well known but not suitable for a mass audience. Maybe too expensive (Tommy Hilfiger).

Classic: Well-known well-loved with a relatively large core following (Budweiser).

Olympic: Well-known, well-loved and a large core following (Wal-Mart).

Defenders: Good balance between product performance and price but not real product-based or emotionally rooted advantages (Fila).

Fading Star: Previously known and universally liked and still relevance to a mass audience but it has lost some appeal and has little product or image based advantage (7-Eleven).

In the Brandz mapping are growth rates and financial outcomes. For example, “Little Tigers” have higher average growth rates but have higher volatility (risk) while “Olympians” grow slower but more predictably.

‘Brand Equity Ten’ Approach

This flexible, qualitative approach to brand equity evaluation was developed by University of California Marketing Professor David Aaker. In “The Brand Equity Ten” Aaker identifies what he believes to be the 10 key aspects of brand performance, which illustrate the components of brand strength.

The following explanation is provided as an appendix to “Brand Valuation: Measuring and Leveraging Your Brand,” a report prepared for the Institute of Canadian Advertising by David Haigh, chief executive, Brand Finance PLC:

Loyalty Measures

1. Price Premium: Measuring the additional price that consumers are prepared to pay for a brand. For example, a structured questionnaire may be used to establish the relationship between cost and stated consumer preferences for a number of similar goods. Or, empirical evidence may be available to demonstrate from historical data the actual relationship.

2. Satisfaction/Loyalty: Researching the customer’s level of satisfaction with a brand and the level of price sensitivity allows the market to be segmented into “loyal users, price chasers and those in between.”

Perceived Quality/Leadership Measures

3. Perceived Quality: Statistical models can be used to correlate perceived quality and financial measures such as returns on investment and stock return. The changes in perceived quality scores can be measured across a variety of different sectors, allowing a comparison of relative brand health.

4. Leadership/popularity: Leadership scales attempt to measure whether a brand is a “category leader, is growing more popular or is respected for innovation.”

Associations/Differentiation Measures

5. Perceived Value: This measures whether a brand represents value for money and whether consumers have a reason to choose one brand over its competitors. In the latter sense it is a similar measure to perceived quality.

6. Brand Personality: This is a particularly important factor where there are apparently only minor functional differences between different brands in a market. Brand personality “says something” about the consumers of different brands. The soft drink market is an example of this. There may be little discernable differences in taste between Pepsi and Coca Cola, so the marketing functions in each company concentrate their efforts upon differentiating the products through image.

7. Organizational Associations: Brand strength often goes beyond the product brand which underlies it. For example, companies might seek to gauge how consumers react over time to statements such as:

-- This brand is made by an organization I would trust.

-- I admire the brand X organization

-- I would be proud (or pleased) to do business with brand X.

Awareness Measures

8. Brand Awareness: A simple measure of the distinctiveness of a brand’s personality and the effectiveness of its advertising and communications campaigns. Loyalty and purchase build from this platform. Performance relative to competitor brands is a key indicator of brand health.

Market Behavior Measures

9. Market Share: Measuring a brand via market share can be a clear indicator of consumers’ perceptions and satisfaction with that brand. A falling market share is usually a good indicator that the brand is slipping in the consumers’ estimations, although distinctions clearly need to be made between volume value share.

10. Market Price and Distribution Coverage: Brand strength can be measured by distribution percentage. Unlike market share these measures are easier to define and are less subject to short term blips that may be caused by price promotions. Measures like the percentage of shops stocking the brand, and the brand’s accessibility to the percentage of customers are often used to judge a brand’s performance.

Scheduled to be Published in
INTELLECTUAL PROPERTY TODAY
July/August, 2008

James T. Berger is a Chicago-area marketing consultant and Expert Witness specializing in IP Litigation Surveys.

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