How to Calculate Brand Value

Throughout this course, we’ve discussed the central role a brand plays in the success of any business. We’ve talked about the meaning and significance of a brand (Module 1), as well as how to establish (Module 5), grow (Module 6), and protect (Module 7) your brand’s value.

But this raises a logical question: Can you calculate your brand’s value? Can you determine an actual dollar amount (or percentage of your company’s overall valuation) that you can attribute specifically to your company’s brand? 

The answer is yes, and in this module we’ll show you a few ways to do it. This module will also cover:

• The two primary categories of brand value measurement
• Four methodologies for calculating brand value
• The Forbes formula for valuing the world’s greatest brands
• Three ways brand value contributes to a business’s success 

 

The Two Primary Categories of Brand Value Measurement

Before you can identify the most appropriate methodology for your company to measure your brand’s value, you need to be clear on why you’re conducting this calculation in the first place.

Broadly speaking, there are two categories of brand value measurement, and they differ according to the business’s reasons for conducting the calculation. 

 

1. TECHNICAL BRAND VALUATION

Businesses typically conduct technical brand valuations for accounting-related reasons. They need a number to assign to the brand asset for balance-sheet reporting, tax preparation, securitization, mergers and acquisitions, or litigation.

Because the business is simply trying to quantify the brand asset to more accurately understand the company’s overall value, the cost approach to brand-value calculation might make the most sense in these cases.

We’ll discuss the cost approach in more detail below, but essentially this is a methodology that attempts to calculate what it cost the company to build the brand into its present state.

 

2. COMMERCIAL BRAND VALUATION

If you are looking to quantify that special something, that unique emotional connection your brand has developed with customers, then you’ll probably want to focus on a commercial brand-valuation strategy.

These are the approaches to assessing brand value for the purposes of market strategy, budget allocation, or brand architecture. 

For these types of valuations, you might want to the Interbrand model (described in detail below), which assigns value to your brand across many areas including market trends, your brand’s industry-leadership position, and the support it receives from key market players.

Because a commercial brand valuation approach will help you measure both your brand’s special something and a hard-dollar amount that you can apply to your balance sheet, generally speaking a commercial brand valuation makes more strategic sense. It can, if calculated properly, give you a comprehensive view of your brand’s value.

 

Four Methodologies for Calculating Brand Value

Now let’s review a few of the actual approaches businesses and analysts use to calculate brand value.   

 

1. THE COST APPROACH

As we discussed above, businesses often use the cost approach to measure brand value when their goal is to ascribe a dollar amount to the brand asset strictly for accounting purposes. 

With this method, you’ll estimate your brand value based on all of the costs that have gone into developing it: research and development, advertising, marketing, manufacturing, labor, licensing, regulatory-compliance expenses, etc.

In other words, you are quantifying the current value of your brand according to the brand’s total replacement cost (based on historical data, which might not reflect today’s realities).

Although this approach can give you some idea of how to value your brand in a technical, financial-record-keeping way, it will obviously be lacking in capturing that special something we’ve been discussing throughout this course.

In Module 1, for example, we described your brand as the cumulative effect of the emotions of your company and products evoke for your customers. Marketing author Seth Godin describes a brand’s value as “how much extra people will pay, or how often they choose, the expectations, memories, stories and relationships of one brand over the alternatives.”

Those elements, of course, are going to be missing from the cost approach. So unless you are conducting this exercise primarily for accounting purposes, it might not be the best approach for determining your brand’s value.

 

2. THE INCOME APPROACH

This is the methodology most widely used by financial analysts in quantifying brand value. 

Using the income approach to brand valuation, you will determine a value for future earnings that are attributable specifically to the brand. The goal here will be to quantify your brand value according to the present value of revenue, profit or other factors that you can attribute to the brand asset.

The income approach is actually a broad methodology that encompasses several specific approaches to brand valuation, including:

• The price-premium method (which estimates brand value by determining the price difference between the branded product and an identical but generic version).
• The “reasons to buy” method (which seeks to identify the specific brand drivers that lead customers to make purchase decisions).
• The gross-margin-comparison method (which quantifies brand value by multiplying the gross-margin difference between the branded product and the average gross margin of its competitors, by the sales of the branded company).
• The company-with-and-without-brand method (which calculates the income that can be assigned directed to the brand by taking the existing value of the business — with the brand — and estimating what that value would be without the brand).
• The excess margin method (which subtracts the returns on the company’s tangible and financial assets from the business’s total return rate — and then seeks to calculate the portion of the remaining margin can be attributed specifically to the brand).
• The customer lifetime value method (which quantifies brand value by estimating how much of a customer’s lifetime value can be attributed to the brand, and then extrapolating this estimate to all customers).

 

3. THE MARKET APPROACH

With the market approach, you attempt to quantify your brand value by comparing it to other, similar brands on the market.

As with the income approach, the market-based method gives you many options for the specific details to review and compare in competitive brands to help you arrive at a solid brand value estimate.

You can review similar brands that have been sold outright. You can also review the estimated brand value attributed to a competitor’s brand as a percentage of the company’s overall value—or, better yet, find the average brand value of several competitors—and then apply a similar formula to your own brand.

 

4. THE INTERBRAND APPROACH

Consulting firm Interbrand has developed its own methodology for calculating brand value, built on a broad analysis of seven factors that comprise what the company calls a business’s Brand Index. 

The company uses a weighted-scoring framework to these seven factors to come up with a brand’s overall value score.

• Market (weighted at 10% of total brand value)
  This metric focuses on the brand’s larger industry and whether the market has high barriers to entry.
• Stability (weighted at 15% of total brand value)
  This metric focuses primarily on customer loyalty.
• Leadership (weighted at 25% of total brand value)
  Here the brand earns brand value for its position in its industry.
• Trend (weighted at 10% of total brand value)
  This metric assigns additional brand value to brands based on analysts’ view of whether the brand is growing or moving into new, fertile markets
• Support (weighted at 10% of total brand value)
  Here the brand earns brand value according to the level and sources of support it has received — from the media, other credible enterprises, and industry tastemakers.
• Internationalization (weighted at 25% of total brand value)
  This metric evaluates the strength of the brand globally.
• Protection (weighted at 5% of total brand value)
  Here the brad is evaluated on the company’s ability to protect it — from competition, commoditization, piracy, etc.

 

The Forbes Formula for Valuing the World’s Greatest Brands

Each year Forbes ranks the world’s leading brands by dollar amount. The businesses that top this list each year are familiar, global brands: Disney, Coca Cola, Amazon, Samsung. In 2018, Apple was ranked #1 on the list, with an estimated brand value of $182 billion, nearly equal to the 228 billion Apple earned in revenue that year.

Even more interesting on the 2018 list: Forbes estimated Coca Cola’s brand value at $57 billion—more than twice the $23 billion the company earned in revenue.

In other words, Forbes estimates that the value of the Coca Cola brand alone—just that emotional connection Coca Cola makes with consumers—is worth more than two times what the business earns in an entire year.

But how does Forbes know this? What’s their formula for calculating brand value, and can you use it for your own company?

 

The Forbes Methodology

Forbes uses a modified version of the income approach to brand-value calculation. Here’s a step-by-step overview of their approach.

Step 1:
Select a group of large, familiar, multi-billion-dollar companies, and gather three years of revenue and earnings (before interest and taxes) for each company.

Step 2:
Calculate the average annual earnings for each company over these three years, and then subtract a charge of 8% of the company’s capital employed.

Step 3:
Next, apply the maximum corporate tax rate in the home country of the brand (or the brand’s parent company) to the next earnings figure from step 2.

Step 4:
Now allocate a percentage of these earnings to the company’s brand, based on the degree to which Forbes determines brand plays a role in that company’s industry. (An apparel or luxury-goods company’s brand will receive a higher percentage of the earnings attribution here than, say, an airline, which often attributes more of its earnings to convenience and price than its brand.)

And yes, you can use a similar approach to the Forbes model to estimate your company’s brand value.

 

Three Ways Brand Value Can Contribute to a Business’s Success

 Finally, let’s look at how brand value actually adds to the bottom line. Here are just a few real-world examples of the power of a strong brand.

 

1. IT LETS YOU CHARGE MORE

Think of Apple. The company’s brand is so strong in the market, consumers trust and are so deeply invested in the Apple brand that the company enjoys what economists call “inelastic demand.” This simply means that, even if Apple raises the price of its iPhone another $100—or even $200—consumer demand for new iPhones won’t fall sharply.

Building brand value allows your company to charge a premium for your products—without losing customers.

 

2. IT GROWS THE VALUE OF YOUR COMPANY 

As both the Forbes and Interbrand methods of brand valuation demonstrate, a brand can be a significant intangible asset on a company’s books. Businesses looking to invest, merge with, or acquire a company will view its strong brand value as both a sign of stronger future earnings and a greater market valuation in the present.

For publicly traded companies, brand value also adds a premium to the stock price—as investor trust in the brand makes them more willing to buy at a higher price.

Building brand value makes your entire company more valuable. 

 

3. IT CAN GET YOUR COMPANY THROUGH DIFFICULT TIMES 

Think of Disney. Imagine an accident at one of the company’s theme parks, or a movie that fails spectacularly at the box office, or a short-term drop in earnings due to a slowing in toy sales. Now imagine these negative stories generate lots of media attention—and concerns that the decades-old Disney might finally be losing its step.

Although this might hurt the company’s stock price and investor confidence in the short run, even a sharp drop in the price of Disney’s stock would likely attract new investors to buy in. That is because the Disney brand is so strong in the market, and has earned such public trust for so many years, the brand itself would help the company to weather this storm—or just about any other.

 Building a great brand can get your company through a disaster.