1. Lecture 14 Brand Equity

2. Lecture Plan Brand Equity Measuring Brand Equity Example
How to calculate Brand Value

3. Brand Equity
Definition
Brand Equity is a set of brand assets and liabilities linked to a brand, its name and symbol, that add to the value provided by a product or service to a firm and/or to that firm’s customers.
Assets and liabilities underlying brand equity must be linked to the name and/or symbol of the brand.

4. Brand Equity: Why it matters
Greater loyalty
Less vulnerability to competitive marketing actions
Less vulnerability to marketing crises
More inelastic consumer response to price increases
Possible licensing opportunities
Additional brand extension opportunities
Larger margins: on average, prices of strongest brands are 19% higher than weakest brands in category
Outcomes
Simplifies choice process
Enhances confidence in choice
Reduces perceived risk – recognition of consistency of quality
Provides emotional benefits – signal of status, taste, or affiliation
Benefits
Research
Identify the effectiveness of individual brand assets
Identify the barriers to achieving a brand’s full potential
Identify consumer relationships with the brand
Identify the status of the brand in a competitive context

5. BrandZ Top 100 Brands
2011
2014

6. Forbes top 20 List #1 Apple $154.1 B #2 Google $82.5 B #3 Microsoft#4
Coca-Cola
$58.5 B #5
Facebook
$52.6 B #6
Toyota
$42.1 B #7
IBM
$41.4 B #8
Disney
$39.5 B #9
McDonald's
$39.1 B
#10 GE
$36.7 B
#11
Samsung
$36.1 B
#12
Amazon
$35.2 B
#13
AT&T
$32.6 B
#14
BMW
$28.8 B
#15
Cisco
$28.4 B
#16
Oracle
$28 B
#17
Intel
$27.7 B
#18
NIKE
$27.5 B
#19
Louis Vuitton
$27.3 B
#20
Mercedes-Benz
$26 B
Forbes top 20 List

7. Interbrand 2016

8. One approach to Brand valuation calculation
A systematic approach to brand valuation was jointly developed by Interbrand and the London Business School in The method was partially revised in 1993.
Since then, Interbrand has evaluated some 3500 brands for nearly 400 companies.

9. One approach to Brand valuation calculation
The purpose of evaluations of brand equity:
Evaluations for financial transactions in connection with mergers & acquisitions, internal licensing and fiscal issues.
Evaluations to optimize brand investments, advertising expenditures, monitor an manage future changes in brand value.

10. Brand Equity/Value create cost synergies,
Brand value is defined as the NPV of future earnings generated by the brand alone. One approach (Interbrand) is based on the following three economic functions:
create cost synergies,
generate demand for the products and services, and
secure future demand and thus reduce operative and financial risks.

11. Calculating Brand Equity
The method employed to evaluate brands comprises five steps:
Segmentation,
Financial analysis,
Demand analysis,
Brand strength analysis,
Calculation of the net present value of brand earnings.

13. Segmentation
Consumers’ purchasing behavior and attitudes towards brands differ from one market sector to another.
The value of a brand can only be determined precisely through the separate assessment of individual segments that represent a certain customer group.

14. Financial Analysis
Start with an assessment of the company's value and then determine the value contributed by the brand.
Isolate brand earnings from other forms of income is to determine the Economic Value Added (EVA)
which tells whether a company is able to generate returns that exceed the costs of capital employed.
The analysis is based on a five-year forecast of future revenues.

15. Demand Analysis
Analyze the brand’s value chain and identify the position of the brand in the minds of customers.
To determine the brand’s share of EVA:
Evaluate the factors that influence demand and motivate customers to purchase.
These factors are weighted in terms of their bearing on demand
The sum of these brand contributions on the demand drivers is expressed as the Role of Brand Index (RBI)
RBI multiplied with the EVA, yields the brand earnings.

16. Demand Analysis

17. Brand Strength Analysis
The stronger a brand, the lower is its risk, and thus the more certain are future brand earnings.
Assess the competitive position and infer the risk by analyzing the strength of a brand compared with its competitors on the basis of seven factors
market,
stability,
brand leadership,
trend,
brand support,
diversification,
protection
This step results in the Brand Strength Score (BSS).

18. Brand Strength Score

19. Net Present Value Calculation
The economic value of future brand earnings is inversely correlated with the brand’s estimated risk
This risk is directly linked to brand strength.
The procedure reflects the dynamism of the market: extreme ends of the scale brands react differently from brands in the middle range.

20. Net Present Value Calculation

21. Net Present Value Calculation
Strongest brands are discounted with the risk-free rate of the total market while average-strength brands are discounted with the industry WACC (cost of equity in the financial service industry).
Discounting the forecast period (present value) and the calculation of an annuity (terminal value) results in the total value of the brand.
The transformation of brand strength into brand risk (or into discount rate) is completed using an S-curve.

22. Total Brand Equity
Since this procedure focuses on value creation, it is independent of potential and probable changes in organizational structure.
The total value of the brand is calculated as the sum of its segment values (sum-of-the-parts).

23. Example: Dell

24. Example Let’s Calculate Brand equity of DELL INC.
This will be just a rough approximation since we will be making some assumptions along the way

25. Example Similar to the one in HW4-turned-in-class-excercise
Critical assumptions:
Assume that we are T-5 years from the latest available financial statement. E.g. If the latest financial statement is in assume we are in year 2004.
Normal analysis requires forecasting 5 years in advance.
We will assume that the actual financial performance for the years 2005, 2006, 2007, 2008, and 2009 (obtained from financial statements) is the forecast as of 2004.

26. Example
Assume that Brand Strength analysis revealed that the appropriate discount rate is 9%
Just above WACC = 10%
Role of Brand Index (RBI) = 40%
Get the financial data from:
Click on “COMPANY FINANCIALS”

27. Mergent Online STEPS: Click on “COMPANY FINANCIALS”
ANNUALS + BALANCE SHEET will be default
From here you need to take TOTAL CURRENT ASSETS (in this case it is line 12) of data for 5 years.
Can be different line for other companies.
Next, switch to ANNUALS + INCOME STATEMENT
From here you need to take NET INCOME (LOSS) (in this case it is line 11 from the bottom) of data for 5 years
These 2 sets of numbers should be enough to calculate brand equity.
(choose only if net income>0)

28. DELL