Top brand-management firm Interbrand has developed a model to formally estimate the dollar value of a brand. It defines brand value as the net present value of the future earnings that can be attributed to the brand alone. The firm believes marketing and financial analyses are equally important in determining the value of a brand. Its process follows five steps
1. Market Segmentation—The first step is to divide the market(s) in which the brand is sold into mutually exclusive segments that help determine variances in the brand’s different customer groups.
2. Financial Analysis—Interbrand assesses purchase price, volume, and frequency to help calculate accurate forecasts of future brand sales and revenues. Once it has established Brand Revenues, it deducts all associated operating costs to derive earnings before interest and tax (EBIT). It also deducts the appropriate taxes and a charge for the capital employed to operate the underlying business, leaving Economic Earnings, that is, the earnings attributed to the branded business.
3. Role of Branding—Interbrand next attributes a proportion of Economic Earnings to the brand in each market segment, by first identifying the various drivers of demand, then determining the degree to which the brand directly influences each. The Role of Branding assessment is based on market research, client workshops, and interviews and represents the percentage of Economic Earnings the brand generates. Multiplying the Role of Branding by Economic Earnings yields Brand Earnings.
4. Brand Strength—Interbrand then assesses the brand’s strength profile to determine the likelihood that the brand will realize forecasted Brand Earnings. This step relies on competitive bench marking and a structured evaluation of the brand’s clarity, commitment, protection, responsiveness, authenticity, relevance,
differentiation, consistency, presence, and understanding. For each segment, Interbrand applies industry and brand equity metrics to determine a risk premium for the brand. The company’s analysts derive the overall Brand Discount Rate by adding a brand-risk premium to the risk-free rate, represented by the yield
on government bonds. The Brand Discount Rate, applied to the forecasted Brand Earnings forecast, yields the net present value of the Brand Earnings. The stronger the brand, the lower the discount rate, and vice versa.
5. Brand Value Calculation—Brand Value is the net present value (NPV) of the forecasted Brand Earnings, discounted by the Brand Discount Rate. The NPV calculation comprises both the forecast period and the period beyond, reflecting the ability of brands to continue generating future earnings. Increasingly, Interbrand uses brand value assessments as a dynamic, strategic tool to identify and maximize return on brand investment across a whole host of areas.
Sources: Interbrand, the Interbrand Brand Glossary, and Interbrand’s Nik Stuck
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2. Financial Analysis—Interbrand assesses purchase price, volume, and frequency to help calculate accurate forecasts of future brand sales and revenues. Once it has established Brand Revenues, it deducts all associated operating costs to derive earnings before interest and tax (EBIT). It also deducts the appropriate taxes and a charge for the capital employed to operate the underlying business, leaving Economic Earnings, that is, the earnings attributed to the branded business.
3. Role of Branding—Interbrand next attributes a proportion of Economic Earnings to the brand in each market segment, by first identifying the various drivers of demand, then determining the degree to which the brand directly influences each. The Role of Branding assessment is based on market research, client workshops, and interviews and represents the percentage of Economic Earnings the brand generates. Multiplying the Role of Branding by Economic Earnings yields Brand Earnings.
4. Brand Strength—Interbrand then assesses the brand’s strength profile to determine the likelihood that the brand will realize forecasted Brand Earnings. This step relies on competitive bench marking and a structured evaluation of the brand’s clarity, commitment, protection, responsiveness, authenticity, relevance,
differentiation, consistency, presence, and understanding. For each segment, Interbrand applies industry and brand equity metrics to determine a risk premium for the brand. The company’s analysts derive the overall Brand Discount Rate by adding a brand-risk premium to the risk-free rate, represented by the yield
on government bonds. The Brand Discount Rate, applied to the forecasted Brand Earnings forecast, yields the net present value of the Brand Earnings. The stronger the brand, the lower the discount rate, and vice versa.
5. Brand Value Calculation—Brand Value is the net present value (NPV) of the forecasted Brand Earnings, discounted by the Brand Discount Rate. The NPV calculation comprises both the forecast period and the period beyond, reflecting the ability of brands to continue generating future earnings. Increasingly, Interbrand uses brand value assessments as a dynamic, strategic tool to identify and maximize return on brand investment across a whole host of areas.
Sources: Interbrand, the Interbrand Brand Glossary, and Interbrand’s Nik Stuck
