Management accounting: Brands valuation

Introduction

In companies in which a brand or brand portfolio is the key source of competitive advantage, it is especially crucial to collect and evaluate data to help with brand management. There are companies like General Mills, which spend roughly 33 percent of its revenue on marketing and up to $25 million per year on a single brand.  This significant level of expenditure highlights the importance of tailoring the capture and delivery of information to support brand management decisions.

Marketing specialists need information for brand management decisions. Using brand valuation information, managers can assess the effect of brand expenditures on attributes of brand equity rather than simply monitoring changes in market share. Accountants in particular can provide essential data.

Because much of the information required for brand management is quantitative, accountants should be able to help transform data collected during accounting transactions to assist marketers in decision making. The accounting profession is taking internal managerial need focus by providing information useful for making management decisions.  Management accounting is the subject promoting this focus.

One of the most effective ways for accountants to provide useful information for marketers is by conducting periodic brand valuations. Brand valuation assigns financial value to the equity created by the marketing expenditures to the name or image of a brand offering a comprehensive measure of that equity for the organization. The brand's value, as a measure of success, can help estimate the effect of management decisions such as those generating short-term expenditures and long-term benefits.

 Brand valuation allows managers to appraise the efficacy of brand expenditures in terms of the enhanced or diminished value of the brand itself. Accountants can take on a new role helping marketing managers measure performance in strongly branded companies. Marketers and accountants can work together to transform data into powerful information for supporting brand management decisions. Management accounting needs to be a separate section in the accounting department with the responsibility to provide accounting information for internal managerial decision making to promote collaboration among managers and accountants.

Accounting Information for Marketing Decisions

Several costing techniques present traditional historical financial accounting information in a context that is much more useful for making marketing decisions. These methods begin with the cost of a product or service, but tailor the financial value to provide additional information for decision makers.

Life cycle costing ignores traditional financial reporting periods and aggregates the cost of a product over the life of the item in the marketplace. Managers can evaluate the cost of providing the product over a much more relevant time frame rather than focusing on separate expenditures in each accounting year.

Target costing considers not only the actual production cost, but also estimates the long-term cost of competing in the marketplace. If the company cannot achieve the target cost in production, then it cannot offer the product at a price that is competitive and yields adequate profits. Generally, achieving the target cost involves cutting the existing production cost by improving the process.

Customer costing based on activity based costing can be used in customer profitability analysis to determine how profitable various customer segments are. It uses historical costs, but concentrates on the costs to serve each customer separately. This distinction recognizes that not all customers consume the resources of the company equally. Management is thus able to evaluate which customers are most important to the firm.

Brand valuation is another accounting technique that may be even more useful to marketing in that it extends beyond a cost focus. It is more comprehensive because it relates to outcomes and incorporates projections of future income and cash flows. Such predictive information is vital in assisting a firm with strategic brand management decisions. Moreover, brand valuation provides management with a measure that allows an appraisal of the brand relative to the other assets of the organization.

The interaction between management accountants and marketers needs to improve further.  Still accountants often have little appreciation for the type of data marketers need. Marketers may not view the accounting process as able to provide data for marketing decision making, and therefore place little demand on accountants to provide information in the desired form. The marketing profession must be alert to situations in which an accounting perspective would improve the quality of marketing decisions. Similarly, the accounting profession must continue to encourage accountants to recognize their role as providers of information designed to support management decision making.

Brand Valuation and Brand Equity

Aaker indicated that brand equity is created by a combination of brand loyalty, name awareness, perceived quality, brand associations, and any other competitive advantage created by the brand. Brand valuation quantifies the benefit of brand equity to the owner of the brand.

The process of valuing an intangible asset such as a brand requires a certain degree of estimation and subjectivity. Nonetheless, the process can be consistently applied over time to all brands managed by a company. Because of such standardized application, brand valuation can be an essential element of a brand management strategy. With standardization, the technique will gain greater respect from management and can be applied more confidently over time to evaluate evolving trends in brand values.

Through brand valuation, organizations are able to create a consistent, quantifiable value that is comparable across product lines, countries, and company units. Current brand expenditures expected to generate future benefits, such as promotions and advertising, can be reflected in the current value of the brand. Choices among alternatives can be compared according to their effect on the brand value calculation. Brand valuation is not solely a historical, cost-based measure, but also allows a means to incorporate future results.

Effective brand management requires coordination among many areas in the firm. A focus on the brand is essential from all areas, since marketing is not the only function concerned with increasing brand value. However, conveying the importance to employees of creating and maintaining brand value across the entire organization is often difficult. Accounting for brand value alerts employees to the strategic importance of the brand. An example might be posting the number of days without an accident in manufacturing facilities. Employees infer the importance of the goal of safety by the recording and prominent display of the statistic.

A management information system with an emphasis on brand valuation facilitates a regular process whereby marketing professionals can help alert corporate strategists to the critical importance of the brand. This can be done more effectively when the value of the brand can be compared to the value of the tangible assets in the organization. In many cases, the value of the brand will exceed the value of the tangible assets, thus reinforcing the need for strategic attention.

The technique of brand valuation allows a company to deliver a consistent brand image. If the entire organization understands how brand value is computed, it will be easier to prevent actions that negate each other or interfere with the overall brand strategy. A promotional campaign that dilutes the image of the brand by confusing a key consumer segment's perception of the brand's major identity can be avoided. If the overall impact of the campaign is evaluated in terms of the comprehensive value of the brand, the negative effect on a key consumer can be determined. Similar analyses are possible without brand valuation, but valuations help quantify the long-term effects.

Brand Valuation – Support to Marketing Professionals

The use of such a comprehensive measure helps marketing professionals focus on the long-term benefits associated with owning the brand. Valuing the intangible aspect of the brand fosters recognition of the brand's ability to endure and grow. The brand's importance is reinforced when marketers view the results of their decisions on the value of the brand as compared to the value of the entire company.

One of the most important implications of brand valuation for marketing professionals is the ability to "prove" over time the effects of a decision to expend funds in the short term. Because such expenditures have an immediate negative effect on income statements while the positive revenue effects span many future periods, it may be difficult to assert the necessity of the expenditure. Positive returns reflect only potential increases in sales. With traditional measures, there is no means of showing the impact of expenditure in increasing brand loyalty or positioning the brand favorably in the marketplace. Justification of the expenditure may be a particular problem when managers' performance incentives are based on short-term results. With brand valuation, the projected change in the value of the brand can be used to assess the need for the expenditure.

Changes in brand value can also be incorporated into the performance evaluation system. Indeed, brand value information alerts management to negative as well as positive results of strategic brand management decisions. Most traditional means of performance evaluation and reward are based on short-term and historically focused measures such as sales and profits. However, managers have often taken action that benefits them in receiving short-term bonuses, yet has a long-run detriment to the company in terms of the health of the brand. Thus, many evaluation and reward systems have been altered to include some assessment of long-term performance. Brand valuation is an ideal measure for countering these short-term issues and helping determine performance and rewards. Managers know that any short-term expenditure can be related to future benefits as a result of their decisions.

A long-term focus also helps with planning and budgeting decisions. Marketing professionals at all levels can be more involved in both these processes. Brand value is a more meaningful metric that provides marketers and accountants with a common focus in brand planning. The effect of a decision on brand value provides a common means for choosing among alternatives and setting priorities. It also keeps the central focus of the entire organization of paramount importance. Maximizing brand value can become a fundamental operational goal of the planning process, consistent with the corporate objective of maximizing shareholder value.

Similarly, the use of brand values supports a better way to hold managers accountable for their actions. Meeting a budgetary target in terms of conventional accounting measures of performance (revenues or expenses) can be arbitrarily manipulated. Using a long-term perspective, managers can concentrate on actions that benefit the entire organization and are reflected in the brand's value.

A short-term management focus is particularly problematic, given the high turnover in many marketing positions due to promotions and lateral assignments. Unlike conventional accounting measures, in which an annual time frame is dominant, brand valuation is a technique that outlives personnel. It has immediate transferability across people and departments. The consistent focus on brand value allows even new employees to understand their role and how their reward system matches the organization's objectives.

Managing a complex brands which have multiple product categories under the brand umbrella, can be simplified with brand valuation. Strategies among separate product managers can be coordinated by considering the combined effects on brand value for management of the separate product segments. Instead of focusing on short-term cost minimization or revenue maximization, a more holistic view of the brand can result from product managers taking a more integrated approach in maintaining or maximizing the value of the brand. Such a system can ensure that each product manager's efforts at building value for the entire brand is identified and rewarded. Product managers may be more likely to undertake such activities if there is a way to identify and recognize their efforts without making an individual product segment bear the entire cost. By calculating brand value, product managers are also acutely aware that their individual actions can affect the entire brand.

It is sometimes difficult to compare the performance of managers of different products or in different geographic segments; brand valuation allows the use of a comparable measure. The measure of brand value is less subjective and more consistent when evaluating among alternative performances. Procter & Gamble is perhaps the best example of a company faced with this difficulty in owning and managing a host of strong brands. P&G uses brand valuation to assist in determining a fair price to charge sometimes as many as 50 subsidiaries for using the brand or the technology associated with it. The brand value helps determine intercompany transfer prices. Identifying realistic and appropriate transfer prices is important for the evaluation of subsidiary managers as well as for international taxation issues when the subsidiaries are located overseas.

Brand valuation can also aid managers involved in budget allocation decision making. Marketing spending could be allocated according to the relative value of the brand in the portfolio. The process of determining the strength of the brand used in the valuation could also yield valuable information for this spending allocation. For example, the appraisal of brand strength might reveal particular areas of vulnerability for the brand that might warrant a focused marketing campaign and thus create additional implications for the allocation of the budget. This highlights how brand valuation might improve the process of determining how the marketing budget should be allocated in order to achieve the greatest return.

Methods of Brand Valuation

The various methods of brand valuation can be placed into four categories: (1) cost-based approaches; (2) market-based approaches; (3) income-based approaches; and (4) formulary approaches incorporating future benefits or comparative advantages.

Cost-based Approaches

This method considers the costs involved in creating the brand through the stages of research and development of the product concept, market testing, continued promotion during commercialization, and product improvements over time. Historically based, this approach is the valuation technique that complies with standard accounting practice for valuating assets. It is also the most conservative method of valuation and provides little future-oriented information that is useful in the brand management process. However, this technique fails to capture value-added through the application of effective strategic brand management activities and processes.

Market-based Approaches

This valuation method is a much more externally focused approach. It is based on an estimation of the amount for which a brand can be sold. This method requires being able to determine a market value. In the absence of an actual market for most brands, this can be a difficult estimation challenge. To circumvent this problem, proxies are created based upon how the financial markets estimate the value associated with the brand.

One way to determine the financial market effects is to separate tangible assets from intangible assets. The market value created by the intangibles can be inferred once the entire value of the firm is determined. The consultants Trademark and Licensing Associates create a similar estimation by comparing the brand being valued to the performance of another substitute brand that is unrelated to the firm. The method is much more realistic if a similar brand exists in the marketplace for comparison purposes.

Income-based Approaches

The valuation process involves determining future net revenues directly attributable to the brand and then discounting to the present value using an appropriate discount rate.

Several methods may be used to determine net revenue. One method compares the brand's price premium to a generic product--one that exists in the marketplace without benefit of marketing investment and name ownership. A second method estimates the annual royalties associated with the brand, as in a licensing agreement. This approach to valuation is generally more applicable to brands competing in international markets. An alternative approach relies on the strength of brand name recognition to estimate revenue. The branded product is then compared to a generic product to estimate volume.

Formula Approaches

These approaches consider multiple criteria in arriving at a brand value. The consulting firm Interbrand and Financial World magazine use similar methods that are based on an income approach.

Interbrand developed its formula approach in the context of external financial reporting, but indicates that the approach to valuation is also very suitable for internal management purposes. The Interbrand approach uses a three-year weighted average of profits after tax as an indicator of brand profitability. In calculating brand profitability, Interbrand strives to consider only factors that relate directly to the brand's identity. This is often difficult because the company may not consider specific functions as separate from the brand. For example, much of a brand's success might be attributable to the distribution system, which supports the brand but is likely not a key element of its identity. Once brand profitability is determined, a multiplier is attached to the calculation. The multiplier is created from an evaluation of brand strength based on seven factors, which are weighted according to Interbrand's guidelines.

Leadership: This is the ability of the brand to function as a market leader and secure the benefits associated with holding a dominant market share.

Stability: Brands that retain their image and consumer loyalty over long periods of time are more valuable than brands without such stability.

 

Market: Brands in certain product markets are more valuable than brands in other markets because of their ability to generate greater sales volume in a more stable environment with greater barriers to entry from competitors.

Internationality: Brands that are international in scope possess the potential to expand the brand and are more valuable than regional or national brands.

Trend: This is the ability of the brand to remain current in the perception of consumers.

Support: Brands that have been consistently managed and supported by the organization over time are much more valuable than brands that have functioned without any organizational investment.

Protection: This factor relates to the legal issues associated with the brand. Brands that are protected by registered trademarks are more valuable in that the organization has the legal right to protect the brand.

Financial World arrives at a valuation by estimating the operating profit attributable to a brand and then comparing it to an unbranded product. The resulting premium associated with the brand is adjusted for taxes, and then multiplied by the above seven-item factor using Interbrand's assessment of brand strength.

Aaker's "Brand Equity Ten" concentrates on five categories of measures to establish a comprehensive assessment of brand equity. Specific measures of price premium, satisfaction or loyalty, perceived quality, and leadership or popularity add a customer focus to the valuation methods. Other customer-oriented measures include perceived value, brand personality, organizational associations, and brand awareness. External measures of market share and market price and distribution coverage complete the set of criteria.

Overall, the superiority of the formulary approaches lies in the comprehensive nature of these measures. The formulary valuation process allows for the most comprehensive assessment of all areas that have the potential to affect the ability of the brand to generate value for its owner.

Brand valuation appears to be the most promising technique capable of illustrating the importance of the brand to managers while also bridging the different orientations between marketers and accountants. Since the value of the brand can be expressed in monetary terms, all decision makers have a common point of reference. The measure of brand value may include subjective elements, but the lack of such a measure means that the importance of intangible assets may be overlooked. The use of brand valuation can help foster a recognition of a common goal for individuals in pursuing strategic objectives. Each discipline can contribute a substantial amount of expertise to the brand valuation process. This joint contribution can then assist the organization with brand management.

This article is inspired by the paper - Karen S. Cravens and Chris Guilding, Strategic Brand Valuation: A Cross Functional Perspective,” Business Horizons, 00076813, Jul/Aug99, Vol. 42, Issue 4

For Further Reading

David A. Aaker, Building Strong Brands (New York: Free Press, 1996).

David A. Aaker, Managing Brand Equity (New York: Free Press, 1991).

P. Barwise, Accounting for Brands (London: London Business School and the Institute of Chartered Accountants in England and Wales, 1989.)

Stephen J. Garone, Managing Reputation with Image and Brands (New York: The Conference Board, 1998).

Chris Guilding and Richard Pike, "Brand Valuation: A Model and Empirical Study of Organizational Implications," Accounting and Business Research, Summer 1994, pp. 241-253.

Irene M. Herremans and J.K. Ryans, Jr., "The Case for Better Measurement and Reporting of Marketing Performance," Business Horizons, September-October 1995, pp. 51-60.

Charles T. Horngren, Gary L. Sundem and William O. Stratton, Introduction to Management Accounting (New Jersey: Prentice Hall, 1999).

Jean-Noel Kapferer, Strategic Brand Management (New York: Free Press, 1992).

Kevin Lane Keller, Strategic Brand Management (Upper Saddle River, NJ: Prentice-Hall, 1998).

Carol J. Simon and Mary W. Sullivan, "Measurement and Determinants of Brand Equity: A Financial Approach," Marketing Science, 12, 1 (1993): 28-52.

Stanley F. Slater and John C. Narver, "Market Orientation, Customer Value, and Superior Performance," Business Horizons, March-April 1994, pp. 22-28.

Rajendra K. Srivastava, Tasadduq A. Shervani, and Liam Fahey, "Market-based Assets and Shareholder Value: A Framework for Analysis," Journal of Marketing, January 1998, pp. 19-32.

P. Stobart, "Alternative Methods of Brand Valuation," in J. Murphy (ed.), Brand Valuation (London: Business Books Ltd, 1991): 23-31.

Brand valuation: A chapter
http://www.marketingritson.com/documents/week1brandvaluation.pdf

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