A brand is one of a company’s most valuable assets. Branding is so vital to its identity that you can often use the words “company” and “brand” interchangeably.
When you think of Coca-Cola, what flashes in your mind? Your first thoughts are likely of iconic red cans and polar bears—not warehouses or supply lines. Likewise, your brain may associate Nike with images of determined athletes striving toward excellence instead of rows of shoeboxes.
“Brand value is created through meaning-making,” says Harvard Business School Professor Jill Avery, who teaches the online course Creating Brand Value. “After all, brands are vessels of meaning. Managing brands requires being a meaning-maker, a story-crafter, and a storyteller—finding and telling the stories that consumers need to hear to make their lives more fulfilling.”
But how do you determine that meaning’s worth? The answer is brand valuation.
What Is Brand Valuation?
Brand valuation is determined by calculating a brand’s economic significance over time.
“Calculating the financial value of a brand’s assets provides strategic guidance to brand managers,” Avery says in Creating Brand Value. “It helps assess the performance of a brand, and it measures the return on investment of marketing efforts in a brand over time.”
Brand valuation is especially valuable when preparing to sell or license your brand to another company, as it turns abstract ideas into concrete numbers.
Part of what makes brands valuable to firms is that they increase customers’ loyalty and willingness to pay a premium for their products or services.
While brand attributes like customer loyalty play a strategic role in your company’s balance sheet, they’re intangible and, therefore, challenging to measure. By conducting a brand valuation, you can apply tangible worth to your company’s intangible assets.
Brand Valuation Techniques
A branded product commands a premium price over an unbranded product. Still, you must consider several factors when determining how that premium translates into brand strength and lasting value.
“While it’s interesting to know how much your brand is worth, for most companies that aren’t actively looking to sell or license their brands, the actual dollar amount is less important than measuring how brand value is changing over time—and understanding how marketing investments are driving that change,” Avery says in Creating Brand Value. “This allows managers to calculate the return on investment of their brand investments.”
Before calculating brand valuation, use the following techniques to avoid common mistakes when determining intangible assets’ worth:
- Be skeptical
- Verify metrics
- Use multiple methods
- Consider brand equity and relevance
Keep these in mind to help ensure an accurate brand valuation.
Related: Listen to Professor Avery discuss how to build a winning brand portfolio on The Parlor Room podcast, or watch the episode on YouTube.
Brand Equity Versus Brand Valuation
An important distinction to consider when making calculations is the difference between brand equity and brand valuation. As defined in Creating Brand Value:
- Brand equity is the sum total of consumers’ thoughts, feelings, and attitudes about a brand—all of which impact their willingness to pay. For instance, if a brand communicates its ethical sourcing, that might increase customers’ attachment to it and drive positive brand equity.
- Brand valuation is the estimation of a brand’s tangible and intangible assets to determine its monetary worth. This is often—but not always—conducted before the sale of a business. How this is accomplished is explored in more detail below.
If you want to calculate your brand’s value, there are multiple ways to estimate it. Keep in mind that your brand valuation will never be exact, but by taking one of the approaches below, you can get a strong understanding of your brand's worth.
Related: Brand Equity Explained: How to Build and Measure Success
How to Calculate Brand Value
Brand valuation provides many economic benefits and insights, but it can be difficult to put a numerical figure on your brand. It’s also complicated because you can employ different methodologies to measure brand strength, and there’s no universally accepted approach.
“Return-on-investment measurement within the brand space is really tricky,” says Mike Moynihan, vice president of marketing at toy company Lego, in Creating Brand Value. “And I think anybody telling you that they’ve got the formula for doing that is probably not being genuine.”
Creating Brand Value presents three ways to estimate brand value:
- Cost-based valuation
- Market-based valuation
- Income-based valuation
Each uses a different approach to put a dollar figure on brand value.
1. Cost-Based Valuation
Cost-based valuation establishes brand value based on one of two criteria:
- The costs required to build the brand from scratch
- The costs required to build a brand of equivalent market strength (for example, the same level of awareness, perceived quality, and loyalty as the brand being valued)
Cost-based valuation methods are often used when your brand is acquired by another company.
An example of a cost-based valuation would be the sale of a small startup. By analyzing the core costs of initial product development, website and logo design, marketing campaigns, and trademark registration, the brand’s value begins to take shape.
2. Market-Based Valuation
Market-based valuation determines the value of a brand by comparing it to equivalent brands that have recently been sold in public transactions. By determining the worth of similar brands in your sector, you better understand the cost of your own.
Market-based valuation methods are often used during acquisitions of a “home-grown” brand that’s been created internally and has no history of being acquired by another company—but you can also use them when trying to determine the value of something with unique qualities.
An example of one such unusual market-based valuation—featured in Creating Brand Value—is bringing Leonardo Da Vinci’s painting, Salvator Mundi, to auction. Legendary auction house Christie’s considered comparable works’ values as part of its process and, in 2017, valued Salvator Mundi at $450 million.
3. Income-Based Valuation
Income-based valuation estimates brand value by taking into account how much money a brand makes and how much it can be reasonably expected to make in the future.
This methodology considers your company’s future cash flows by estimating the price premium it can earn—as well as the cost savings it can garner—via positive, consumer-based value associated with the brand.
Income-based valuation methods are often used when you want to value your brand in normal business practice, outside of an acquisition situation. To better understand income-based valuation, the course asks learners to consider how willing someone is to pay for a branded item versus a non-branded one. You might be willing to pay $200 for a handbag with no branding, but for one with Louis Vuitton’s iconic branding, you might pay $2,000 or more. The price premium that the brand can drive ($1,800 in this case) helps to determine its income-based valuation.
Valuation Use Cases
Creating Brand Value explores valuation through the lens of the iconic global brand Lego.
Lego, as a privately held family company, has an advantage in taking a long-term view of brand investments. Its unique corporate structure allows Moynihan to robustly back the brand with investors’ full support.
The company relies on income-based methodologies when establishing its brand valuation. While those help estimate Lego’s brand strength, they fall short of providing a complete picture.
“There’s a tremendous value that comes from our fans around consumer social influence and advocacy,” Moynihan says in Creating Brand Value. “The amount of online chatter and advocacy is pretty significant, and I don’t think it gets captured into our valuation model.”
Despite these insufficiencies in the methodology, Moynihan still advocates for income-based valuation over other strategies. He explains how other companies’ value is increased because of Lego. For instance, a Lego theme park is co-owned with another company that benefits from being associated with Lego, and the draw of the brand.
Ultimately, Moynihan goes on to say that he feels the “general approach to trying to link the brand activation to purchase activity and revenues is the right approach.”
Take Your Brand Knowledge to the Next Level
Brand valuation relates to the economic significance of your brand’s tangible and intangible assets to your firm’s financial position.
By using the correct brand valuation method in the right circumstance, you can get the most accurate estimate of your brand’s worth—keeping in mind that you may fall short of fully accounting for intangible assets in even the most comprehensive assessments. This is often because the true value of a brand is, in many ways, far more than the sum of its parts.
Are you interested in:
- Advocating for investing in branding?
- Understanding vicious and virtuous investment cycles?
- Tracking return on investment in branding?
- Determining strategic brand acquisitions?
- De-investing in brands?
You can learn about these concepts by taking an online marketing course, such as Creating Brand Value. Through interactive learning exercises and in-depth case studies featuring experienced marketing executives representing some of the top companies worldwide, you can gain the practical knowledge to take your career to the next level.
Are you interested in deepening your brand value knowledge? Explore Creating Brand Value—one of our marketing courses—and download our interactive online learning success guide to discover the benefits of online programs and how to prepare for one.
