Misinterpreting Brand Valuation

brand valuationMost executives like to know how valuable their brand is relative to other brands. What is its ranking, and has that ranking changed during the last year or so? Positive answers to those questions lead to accolades to the CMO, and negative answers lead to embarrassed silence, at best. The problem is that the data that appears to answer that question really cannot do so. What we actually have is an illusory quantification that means little in the context of these questions. Those that use the valuation numbers and rankings in that way are making a big mistake. Those that act on them are making an even bigger one.

To simplify, the value of the brand is based in large part on two numbers: The value of the business and the percent of impact of the intangible assets attributed to the brand. When a brand controls the business of the firm as is the case for GE, Microsoft and Ford, for example, the value of the business is its market cap. But the market cap is driven by many factors other than the brand including the economy, the stock market and competitors. So if the market cap goes up by 20 percent, maybe because the stock market surged, it is unwise to think that brand building was extraordinary during that period.

The two highest valued brands in the 2013 Interbrand valuation were Apple and Google, by a big margin. It turns out that Apple and Google are number 1 and 3 in terms of market cap (Exxon Mobil being number 2). The next four brands in brand value, Coco-Cola, IBM, Microsoft and GE are numbers 16, 14, 4 and 6 in market cap. It’s no accident – just the arithmetic of the model.

The second key number is the percent of the business value attributed to the brand, which is largely based on how much impact of the intangible assets is due to the brand. This number is subjectively estimated based on knowledge of the brand’s equity, the nature of the business strategy and the power of the other intangibles. It is very difficult to estimate, given that the intangibles are critical. The estimate is probably accurate within plus or minus 20 percent.

The percentage of a business’s value attributed to its brand in not normally reported. However, there have been estimates that suggest that the value can range from below 15 percent of the value of the business to as much as 70 percent.

If you couple the uncertainty associated to the estimate of relative brand impact with the variation of the business value not due to the brand, any minor movement in brand ranking is unlikely to be caused by anything the brand did. If your brand moved from 135 to 148, it most likely means nothing. In nearly all circumstances, it is naive to give the brand credit or blame for its rise or fall in its “estimated value.” Differences between entities estimated brand value attest to this uncertainty. For example, Interbrand estimated the value of Apple to be $98 billion and Millard-Brown’s BrandZ estimate was $185 billion.

It should be noted that the actual valuation can be more complex. A brand value is obtained at the level of the product-market business unit, such as the Ford Fiesta for the U.S. market, and then aggregated over all the product markets. If a brand is a business within a firm and thus doesn’t have a stock price, such as Dove or Gillette, it has to relay on discounted future cash flows, which can be hard to estimate.

However, the basic logic does not change, there needs be an estimate of the business value and the percent of intangibles that are attributed to brands, whatever context or process is used.

The brand valuation cannot be used to evaluate a branding program, despite how much executives would like it to. But it still can be a worthwhile managerial exercise for three reasons. First, it can provide a frame of reference when developing brand-building programs and budgets. If a brand is worth $500 million, a budget of $5 million for brand building might be challenged as being too low. It may be that senior executives need to see the $500 million number to understand that point. Second, if $400 million of the brand’s value was in Europe and $100 million in the U.S., a decision to evenly split the brand-building budget may be questioned. It may not tell you how to allocate the budget, but it can provide a reference point. Third, the process can add value by getting you to think through exactly how brand is working in the strategy and what its components are. That will help you enhance the strategy and the brand building.

This article has been originally published on David Aaker’s blog.