It can often be hard to determine what a brand is worth, and in companies where budgets are tight, it may be hard to explain the importance that a brand carries. The idea of a brand is intangible, which can make it difficult to explain the value that it brings to a company. However, there are multiple ways to calculate brand valuation.
What Is Included in a Brand's Valuation
Before calculating your brand's valuation, determine what the brand includes. You should consider the value of anything that consumers associate with your brand and image, such as your trademark, brand name, visual assets such as a logo or colors, unique marketing strategy, digital assets or licenses, and level of customer loyalty.
Brand value is an essential tool for developing your brand and forecasting the value of your business. There are multiple ways to approach the valuation of a brand, and which method you choose will depend on your business, industry, and situation.
Cost-Based Brand Valuation
Cost-based valuation is similar to saying that a home is worth the amount of money it took to build and furnish it. This method values a brand using the costs that have been incurred to build the brand since its beginning. Items you would include when evaluating costs are historical advertising, promotion expenditures, cost of campaign creation, licensing and registration costs, and cost of any trademarks. Using cost-based valuation requires you to evaluate the cost of the brand and restate the actual expenditures in current cost terms. You can use this method of brand valuation if you have just launched or if you're going through the process of re-developing your brand.
It's important to keep in mind that, while this method uses concrete costs to estimate your brand value, the final figure doesn’t necessarily represent the current value of a brand. Changes in public perception of your brand, media attention, or changes in your industry can all raise or lower your brand's value relative to the cost of building it.
Market-Based Brand Valuation
Market-based valuation is similar to researching the prices of houses in your neighborhood before you set a price for selling your home. It uses one or more points of comparison between your business and similar brands that have been sold. The points of comparison can be the specific sale of a brand, comparable company transactions, or stock market quotations. Market-based brand valuation is the amount for which a brand can be sold, and is equal to a market transaction price, bid, or offer for identical or reasonably similar brands.
Income Approach to Brand Valuation
The income approach to brand valuation is similar to looking at a house's potential earnings as a rental property and using that to estimate its current value. This method is often referred to as the “in-use” approach. To calculate the brand value, the income approach uses future net earnings that can be attributed directly to the brand to determine its current value. The brand value using this method is equal to the value of income, cash flow, or cost savings—actually or hypothetically—due to the reputation or recognition of the brand.
The Importance of Brand Valuation
Large brands, such as Apple or Google, carry billions of dollars worth of value. However, even small businesses can carry strong brand value within their industry or local market. Brand equity is one of the few assets in business that can provide a sustainable competitive advantage, but because the idea of a brand's value means different things to different people, brand valuation is not an objective concept. The different methods used to calculate brand value means companies can manipulate the value of their brand equity to work in their favor. This becomes especially important if you are considering a sale or merger, or attempting to expand with help from a loan or outside investors. To demonstrate that your brand's valuation is accurate and reliable, identify the objective of the valuation and use the appropriate method and assumptions to determine a fair value.