The Problem with Brand Valuation

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We’re about at the midpoint between the release of Forbes’ “The World’s Most Valuable Brands” report back in last July and Interbrand’s “Best Global Brands” report which is due out on September 15th (it usually gets picked up by Businessweek.) You know those studies which report, for example, that Coca-Cola is the world’s top brand, or that Google’s brand value at $39.7BB is still way off from Apple’s at $57.4BB. So I thought now would be a good time to raise a concern I have about these methodologies.

But before you peg me as “one of those people” who make sport out of bashing these analyses, let me assure you that I see tremendous value in brand valuation (see related posts below).

brand valuation can be valuable

For corporate valuation purposes, being able to quantify the economic value contributed by brands (vs. other assets) is extremely, er, valuable. And in many cases intangible assets like brands (and intellectual property and workforce know-how) are what truly differentiates a corporation and enables it to combat competitive and other attacks, so it can be helpful to measure and track their value relative to competitors and the category average.

I’m also aware of the common criticisms waged against brand valuation (their results are skewed because private companies are not included, it’s misleading to try to reduce the richness of a brand into a single number, etc.) – as well as its misuse (the head of advertising for a leading consumer electronics firm told me her company leadership used brand valuation to evaluate the performance of her group.) But even these are not my primary cause of concern.

What I take issue with is a specific aspect of the valuation methodology which seems to be present in all the brand valuations I’m familiar with: a factor to account for the impact of brand on purchase decision which gets applied on a category basis to each company’s market value.

brand impact is factored into all methodologies

Interbrand’s method incorporates a “role of brand analysis” which is described as “a measurement of how the brand influences customer demand at the point of purchase…We use in-house market research to establish individual brand scores against our industry benchmarks to help us define the role a brand plays within the category. For example, we know that Role of Brand is traditionally much higher in the luxury category than in the energy and utilities sector.

Forbes’ describes its approach to incorporating category-level brand impact saying, “We allocated a percentage of [net earnings] to the brand based on the role brands play in each industry. (Brands are crucial when it comes to beverages and luxury goods, but not so much, say, with airlines, when price and convenience are more important.)

Even the more rigorous, albeit lesser known, brandmetrics study incorporates such a factor in its modified Delphi forecasting technique “which is used to work out the percentage of the brand’s value added profits that are directly attributable to the brand.” It calculates the influence of the brand on core premium profit generators (control of costs and customer relationships for example) to determine the “brand premium profit” by category – e.g., the portion of economic profit attributable to the brand for media titles is 80-90%, retail 63-67%, and energy 45-50%.

The problem with these category-level brand impact factors is that they assume brand impact is the same across the category and brand impact is a given for the category – neither of which are safe assumptions.

brand impact varies

It’s incorrect to assume that brand impact is universal within a category. Consumer decision-making is not so clear cut.

Need-states play a significant role in how important a brand is (a need-state is defined by a group of consumers who seek similar product benefits and attributes in a particular usage occasion). Take hospitality – different people in different situations pay attention to brands very differently when it comes to choosing a hotel. If you’re a wealthy businesswoman on an expense account or family with kids traveling to a foreign country, your hotel selection might be driven a lot by brand, whereas a road-tripping college student probably couldn’t care less.

Brand impact also varies within category depending on whether your brand is at the high or low end. Generally speaking, brands are more important at the high end where attributes other than price have stronger influence. You probably don’t know or care what brand of cheap flip flops you bought at the beach this summer but you’re sure to remember that your Manolo Blahnik’s cost your entire paycheck.

brand impact isn’t a given

It’s also incorrect to assume that the impact of brand is static for a category.

All it takes is one company to launch a serious effort to make brand make more a difference, and the dynamics of the entire category change. Jet Blue made lots of people care about the brand of airline they selected; Cuties made me more selective about the brand of tangerine I put into my shopping cart; Shoebox made my friend spend more time in the greeting card aisle. Before these brands came onto the market, their categories were driven more by distribution – but now brand plays a much greater role.

And as category structure changes, brand impact changes as well. If a category is dominated by one player, like Google in search, brand probably doesn’t have as much impact as it does in a highly crowded category like apparel retail. A strong challenger can either break up a monopoly and increase the role of brand in a category by giving people a choice in brands – or it can make brand differentiation much less important by commoditizing the category with super-low prices.

Finally as the impact of a category changes, so does the impact of brands in the category. This past June oil company brands became a lot more salient to a lot more people when the BP well exploded. Right or wrong, I’m guessing people are now paying more attention to the gas stations they patronize. Likewise, the brand wars between Evian, Aquafina, and Dasani have probably fizzled as less people drink bottled water now.

what do you think?

I understand why brand valuation firms feel a need to incorporate a measure of brand impact – they’re trying to isolate the brand from the business. But until there is a more accurate, more dynamic way of accounting for brand impact, I’m afraid I can’t fully endorse any of the methods.

What do you think? Do current brand valuation methods appropriately account for brand impact? I’d love to hear your POV.

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