Marketing Perspectives on Brand Valuation – Part 1 of 2

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 at0 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. 

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 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, then 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 – comprised 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.

Part 2 will be published in our September issue.