Three Approaches to Brand Valuation
by Don E. Schultz and Heidi F. Schultz
excerpted and adapted from an upcoming book titled Kellogg on Branding, John Wiley.

Over the years we've come to the conclusion that there are three primary approaches to measuring, tracking, and evaluating brands over time. Each approach has distinct goals and management information objectives. The challenge is to determine which one to use and for what purpose.

Approach #1: Customer-Based Brand Metrics

The first approach consists of quantitative and qualitative measurement approaches to understanding the consumer’s or brand user’s awareness, understanding, and relationship with the brand. The most common approach is to measure current brand perceptions, knowledge and understanding, then track changes over time. These changes are then related to the marketing communication programs conducted on behalf of the brand.

The measurement approaches used stem from the marketing philosophy that attitudes, opinions, and beliefs drive consumer brand behaviors. Thus, if the consumer or prospect holds certain marketer-generated “right” attitudes and beliefs about the brand, they will most likely behave in the “right way” toward the brand. Likewise, if the consumer’s attitudes, opinions, and beliefs about the brand are not positive, they will likely purchase or use a competitive brand.

Thus, the principal question is whether or not the marketing organization has successfully created, reinforced, or changed the attitudes, opinions and beliefs of its consumers and prospects.

Approach #2: Incremental Brand Sales

The second approach consists of measuring short-term incremental sales or cash flows generated by the brand. These measures are primarily behavioral, consisting of known past consumer behavior or likely future actions. In addition, the measures used are financially oriented, seeking to identify the incremental financial returns the brand generates as a result of marketing activities and investments.

This approach is focused on identifying the short-term incremental financial value, generally increased sales volume, premium pricing, or other outcomes that can be attributed to brand activities. The measurable impacts are commonly related to how those activities influenced the brand’s demand. Obviously, this approach is heavily focused on the economic and financial aspects of brand management and measurement, as opposed to the attitudinal orientation of the customer-based approach.

The incremental brands sales approach uses two basic methodologies, both focused on determining the financial impact of branding investments:

• Marketing Mix Modeling is used to determine historical brand return on investment (ROI). These measures help a firm determine the extent to which different activities (advertising, promotion, special events, etc.) impact sales volume, revenues, and profits over time.
• Predictive Modeling forecasts potential returns on future branding activities (return-on-customer-investment - ROCI). These tools project the likely impact branding activities may have in the near term, usually the current fiscal year. Typically, predictive methods rely on forecasts of what specific customers or groups of customers might do in the future.

The primary difference between determining historic brand investment returns (Marketing Mix Modeling) and predicting future returns (Predictive Modeling) is this: in historic analysis, understanding the customers who created the returns is not a critical issue — it is the aggregated marketing activities that are relevant. By contrast, in predictive modeling, the primary concern is more often about which customers are the most valuable or the most likely to respond which can be used to forecast future returns.

Approach #3: Branded Business Value
The third approach measures the financial value of the brand to the firm over the longer-term. These approach generally treats the brand as an organizational asset in which investments can be made and returns achieved. Typically these measures provide a valuation or appraisal of brand assets for use in mergers and acquisitions, taxation, and licensing. Brand valuation is often conducted at the request of senior management to provide guidance on the strategic use of corporate resources

The goal here is to understand the brand as a separable, organizational asset — that is, to understand the economic worth of the brand to its owner. This calculation is not a defined statistical process, such as Marketing Mix and Predictive modeling. Instead, it is a process based on combining hard financial data, market research, industry benchmarks, and generally accepted accounting principles to arrive at an estimated valuation for a brand under a given set of assumptions.

There are essentially three levels of valuation:

• Trademark valuation: focuses on appraising the value of a specific trademark, name, logo, or other identifying element. This is the most basic definition of a brand and the narrowest view of valuation. For example, such a valuation might look at the value of the trademark for purposes such as tax planning, licensing, or entering in to a joint venture where the trademark will be used by a strategic partner.
• Brand valuation. This valuation expands the work to encompass broader range of intellectual property rights and identifying elements of the brand, such as design rights, domain names, trade dress, packaging, copyrights, and secondary elements such as colors, smells, sounds, advertising materials, and so on.
• Branded business valuation. This valuation is a corporate or organizational brand and includes not just the trademarks, names, logos and so on, but also the culture, people and programs that combine to create the brand experience for customers. Typically, this level of valuation is more reflective of the totality of the brand than an analysis conducted only on the outward identifying elements.

Knowing the financial value of the brand allows management to compare it against other tangible and intangible assets and consider how to best apply finite resources to create additional value. Typically, the brand is one of the most valuable assets the firm owns, so it only seems prudent for management have a clear idea of the brand’s financial worth.

But that's another subject; we'll look at the benefits of brand valuation in a separate column.

Don Schultz is professor of Integrated Marketing Communications at the Medill School of Journalism, Northwestern University. He is also president of the consulting firm, Agora, Inc. Don is the author of thirteen books, including his latest “Brand Babble: Sense and Nonsense about Brands and Branding.” Early in his career Don worked at Tracy-Locke Advertising and Public Relations. He received his B.A. from the University of Oklahoma and a Ph.D. from Michigan State University. 28

Heidi Schultz is Executive Vice-President of Agora, Inc., a marketing and branding consulting firm based in Evanston, IL, and a lecturer in Northwestern University's Department of Integrated Marketing Communications. Heidi received her Bachelors’ Degree fro m University of Southern California School of Journalism and her Master’s Degree from Northwestern University’s Kellogg School of Management. She joined Agora in June 1995 after almost 10 years at Chicago, the nation’s largest monthly city magazine. Schultz is the co-author, along with her husband Don Schultz, of several articles and columns on IMC, brands and branding. In 2003 the couple completed two books, “IMC: The Next Generation” published by McGraw-Hill, and “Brand Babble: Sense and Nonsense About Brands and Branding.” published by South-Western/Thomson Publishing.