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How Much Are Brands Worth? – Part 1 of 2

By Paul Hague of B2B International Ltd

Brand values and cash value

We frequently refer to ‘brand values’ as if everyone knows what we mean. It is assumed that there is a general understanding that a brand stands for something and what it stands for must have a value. These values can be critically important or small inconsequential things but above all they are the things which give the brand its worth and differentiate it from all others. Through these brand values a product or service is enhanced beyond its functional purpose. In this context the brand provides the consumer with more value and this is why they are prepared to pay a premium to acquire it.

Various studies have been carried out in consumer markets to determine the premium that people will pay for brands over and above a base line. Assessing the value of intangibles by asking consumers to separate out the brand and place a monetary value on it is difficult because this is not what we do in the real world. In fact, most consumers, when asked to place a monetary value on brands are in denial about paying a premium just for the name. That is for all the other mugs, not for me.

That said, when people are asked to place a monetary value on a car (the same car is used in the photographs but different badges are superimposed on the bonnet to suggest it is a different brand) the Volkswagen brand is seen to be worth more than that of Ford while the Mercedes brand has a value above both. In each case, the brand is seen to be worth around 10 per cent of the retail value of the car.

We now want to consider the value of brands in another context – that of a company’s monetary worth if sold on the open market and how this value can be estimated even when disposal is not anticipated. At the outset it is important to draw a distinction between individual brands owned by a company (eg Kit-Kat) and a brand which is also the company name (eg Speedy Hire).

Goodwill and the value of brands

When a company is sold, it seeks to obtain a value over and beyond that of its tangible assets. Historically this has been referred to as `goodwill’ and was taken to mean the value of the loyalty of the firm’s customers. This is an interesting concept as loyalty is an important component of branding – so already it is clear that there is a strong link between goodwill and brands. After all, a good brand is one which customers insist on by name and for which they are prepared to pay a premium. This loyalty would have a value if the brand was ever sold.

Accountants are now refining their views of goodwill and accept that it extends beyond loyalty. On these grounds goodwill is taken to include other intangibles which enable a company to earn `super profits’ or those profits over and above what could be expected from the tangible assets of the company alone. This concept of goodwill is important as it signifies that it is an asset, namely something which an organisation controls and which will provide future benefits. The asset of goodwill can be realised by the sale of a company but its very existence implies that it can also be assessed at any time and given an internal valuation – this view departs from the traditional approach which crystallised goodwill only at the time of sale.

Firms have a collection of intangible assets in the form of people (key personnel such as a skilled workforce, managers, scientists), special company procedures, distribution agreements (which keep the product in and the competition out) and patents (which give a product protection over a finite number of years). All these intangible assets have a value and in theory at least could be assessed within goodwill. In practice it is only aspects of goodwill such as patents that have been readily separated out for valuation. But other intangibles can in theory be separated out and one of relevance to this discussion is brands.

The recognition of brands as an asset to the company is not new to firms making consumer products but, hitherto, it has been largely ignored by industrial companies. In effect there has been a failure of industrial companies to recognise that brands do have a value, including the possibility that they also have a value on the balance sheet. However, as already mentioned, that the company name and brand are often one and the same in industrial markets, presents additional difficulties.

Internal valuations of goodwill are the subject of some contention in accountancy circles. Conventionally, it has been accepted that goodwill is something which only arises when a business is sold and until this happens the value of goodwill is not included in balance sheet assets. In this view goodwill is the difference between the price paid for the business the value of its net assets at that time.

This view recognises three components to goodwill. Two of them are of little importance to us here. The first includes any benefits which the company possesses, perhaps because it has a monopoly position or because it occupies a particular niche which others would find difficult to enter for legal or technical reasons. The second component arises from the fact that accountants find it difficult to precisely value all the identifiable assets and so there will be some over or under valuation which enters into the equation. It is in the third component of goodwill, the value of separately identifiable intangible assets, that our interest lies as it is here that any value attached to brands would fit but so too would any value that could be recognised in a company’s distribution routes, key personnel or customer lists. Up to recently all these things have been lumped together as it has been deemed too difficult if not impossible to separate them from each other and the other components of goodwill.

Part 2 will be published this Friday (6th)

This entry was posted on Wednesday, October 4th, 2006 at 9:48 am and is filed under Branding, Market Research, White Papers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.