MetriScient          a PORTAL BY JOY JOSEPH

Brand Equity

Brands are intangible and conditional assets that are dependent on tangible assets to deliver the full value of their benefits. Of course partial value may be realized without material assets through licensing. Brand Equity on the other hand, as defined by Marketing Science, is ‘the set of associations and behavior on the part of a brand’s customers, channel members and parent corporation that permits the brand to earn greater volume or greater margins than it could without the brand name'.

Broadly speaking, Brand Equity is the intrinsic value customers attribute to a brand, beyond its fair market value. This metric can be calculated in several ways, especially between the disciplines of Marketing and Finance. In Finance, this metric is an intangible portion of Firm value that is typically valued during times of acquisitions/divestitures. For publicly traded firms, financial Brand Equity can be measured as the difference between Market Value of the firm (total outstanding share multiplied by share price).  On the other hand Marketing Brand Equity is measured as a weighted function of several constructs: 

Brand Equity Components

Brand Awareness: Brand Awareness can be measured by customer ability to recall brand related features or advertising, either aided or unaided. 

Brand Resilience: This is the Brand’s ability to resist new competitors in the category by defending market share against market entrants.

Brand Premium: Brand Premium is the extent to which customers will pay a premium for your product when compared to similar competing products. This can be negative if the product needs to be offered at a discount to competitors to induce purchase. 

Brand Leverage: One dimension of Brand Equity is the trust customers put in the Brand by their willingness to try new products or line extensions under the brand name. Extensive usage of Brand Leverage could result in Brand Dilution, especially if the new products or line extensions fall below customer expectations.

Market Leverage: Market leverage of a brand is its ability to gain market access via distribution channels. 

Brand Equity can be considered as a weighted average of each of these metrics. Weights for each Brand Equity can be derived from expert judgment or by quantitative methods, for example by regressing long-term market-share time-series (approximated by moving average estimates) against time-series of each of these metrics collected from a sufficiently large and random sample of respondents.

Brand Valuation Brand value is as important an aspect of a firm's value as the value of it's tangible assets and cash-flows. Brand value has several different dimensions and components. Brand Assets are indirect drivers of brand value because they help maintain the brand's competitive position, premium and consumer perception, which in turn help the brand drive excess cash-flow over and above what the tangible assets and services of the firm would be expected to generate.

Brand Valuation

Consumer-based Brand Valuation Models These models rely on consumer perception to assess quantify different attitudes and behavior that ultimately result in financial benefit to the brand. These methods do not necessarily quantify the financial impact of the brand's equity. Another potential drawback is that these methods on survey data to quantify consumer perceptions and there may be a gap between stated vs. actual attitudes.

Financial Brand Valuation Models Financial valuation models include cost-based approaches that basically assumes that the value of the brand is the summation of all investments in the brand including R&D, Marketing and Advertising. The disadvantage is obvious, valuation will be biased by management quality and effectiveness behind these investments. This can definitely provide a number to the shareholders when considering if an offer covers their costs or not.

Another approach is Comparable Valuation- by creating a set of brands most similar to the brand being valued, for which estimates of brand values are known (through M&A, or disclosed values). Again not the most accurate approach, since every brand by definition has unique characteristics that differentiates it from other brands making comparison very difficult. However this approach can definitely provide another data point for triangulation.

Price premium that consumers pay for the brand's products vs. Generic or Private Label products- problem is it is always difficult to say what is really generic. One advantage is that it is closer to market perception of the brand though.

A more complicated financial approach is the Economic Use model that that values the brand as the net present value (NPV) of all future cash-flows/earnings generated by the brand in it's specified use. This is also an approach that ties the value of the brand to financial realities, but may underestimate value of growing brands and overestimate values of maturing brands.

All in all the best approach is to use all of the above and take a weighted average approach.

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