Now that everyone has had a chance to digest BusinessWeek/Interbrand’s Best Global Brands report, I thought I’d offer some suggestions for how to use the results. There’s a risk that if someone doesn’t know what brand valuation really means or what it’s useful for, the conclusions and implications drawn from the report could be off.

And while I’m in no way an expert on brand valuation, I have spent quite a few years using the results of the BusinessWeek/Interbrand study, as well as similar rankings from Brand Finance, Millward Brown’s Optimor, and others.

This is what I’ve learned:

DO:  use brand valuation as a way of proving that brands create shareholder value. When a finance-oriented executive questions the need to invest in brand-building, relaying the reports from well-respected organizations like BusinessWeek helps.  These studies provide empirical evidence of the value to stockholders of a firm’s brand-building activities.  And their methodologies are usually very similar to the way other corporate assets are valued — that is, on the basis of how much the brand is likely to earn for the company in the future (see BusinessWeek/Interbrand’s methodology).  So brand valuation allows you to make a rational, quantitative argument for the value of brands and brand building.

DON’T:  focus on brand valuation as the sole measure of the value which brands create. Although a brand’s role in shareholder value creation is impressive, it also creates other financial value – increased sales, market share, and price premium.  And a brand’s value extends beyond numbers to:

• value for customers by simplifying and facilitating purchase decisions (see brand value creation – customer)
• value in internal business processes by optimizing product development, supply chain management, and customer relationship management – and the resources that drive each of these processes (see brand value creation – internal business process)
• value in company learning and growth by increasing an organization’s ability to change and improve (see brand value creation – learning & growth)

It’s important to remember (and measure and manage) these outcomes of brand-building in addition to shareholder value.

DO:  use brand valuation to evaluate M&A and other business strategy decisions. A brand’s value is definitely a factor when valuing an acquisition:  The folks at Coca-Cola paid $4.1BB to acquire Energy Brands, Inc. when the actual business was worth a fraction of that – why?  Because of the Vitamin Water brand.  Coke wanted access to the enhanced water and energy beverage market and what better way to get it than with a solid brand like Vitamin Water.  While brands don’t currently show up as a line item on balance sheets, the intangible value of a brand is certainly an important consideration in corporate planning moves.

DON’T:  use brand valuation to evaluate marketing efforts. Certainly marketing and promotion have a tremendous impact on the strength – and therefore, the value – of a brand.  However, there are too many variables that impact brand valuation for a direct correlation to be drawn between it and marketing effectiveness.  I’ll comment more on these variables in a moment, so the point here is simply that brand valuation is a macro, business metric that’s useful for assessing corporate value, not ROI on marketing.

Instead marketing efforts should be evaluated by marketing measurements according to how well they fulfilled marketing objectives.  For example, if a marketing campaign was launched to introduce a new product, then a consumer research study to measure awareness and trial is an appropriate evaluation.  Or if a promotion is engaged to increase retention, then analysis of CRM data would yield an appropriate assessment.

DO:  use brand valuation primarily on a category-specific basis. Steve McKee, of the book When Growth Stalls and the just-launched FindYourNerve project, best explains it:  “…while the relative value of non-competing brands is fascinating (e.g. IBM is worth more than Toyota), it’s not terribly relevant to either company. And while the absolute value of any one brand–especially those with values in the tens of billions of dollars–is stunning, the most significant measure is how one brand stacks up relative to its competitors in a given category. If a brand is losing ground while its competitors are gaining, then it has something to worry about.” (emphasis added)

DON’T:  confuse brand valuation with brand strength. Company size, distribution/penetration, amount of brand-building investment, etc. affect brand value.  In fact, BusinessWeek/Interbrand doesn’t include airline brands in their rankings because they say “it’s too hard to separate their brands’ impact on sales from factors such as routes and schedules.”  While I don’t agree with the decision to exclude airlines, it does seem to indicate that brand value is inherently linked to business size and scope. So a small company may not rate highly in the rankings despite having a strong brand.  A better measure of brand power, therefore, is the Brand Asset Valuator or other similar tool.

I hope these thoughts are helpful to you.  Feedback is always welcome.

related content:

• brand value creation – financial, part 1
• brand value creation – financial, part 2
• how strong is your brand

Why should stockholders care about a company’s brand? That’s the subject of today’s post, the 3rd in a series on the many ways a brand creates value for a company.

I’ve discussed brand value creation from the Customer perspective and from the Financial perspective of  immediate revenue generation.  I also want to describe brand-driven Financial value creation in terms of market valuation.  Specifically, does a brand impact shareholder value and how?

The market share and margin benefits produced by a strong brand (explained in my previous post) certainly impact earnings, which in turn deliver dividends or distributions for shareholders.   A strong brand also increases the market value of the business to Wall Street and investors.

The evidence

Research from Interbrand, Brand Finance, and other respected brand valuation firms, as well as academics from Columbia University Business School, Cornell University’s Johnson Graduate School of Management, and Dartmouth College, has proven the power of a brand to increase share price and stock valuations.

One particularly compelling example:  An investigation by Harvard University Business School and Boston University School of Management professors Thomas Madden, Frank Fehle, and Susan Fournier provides empirical evidence of the value to stockholders of a firm’s brand-building activities.

Examining monthly stockholder returns data for the period 1994 to 2001, they found that a portfolio of brands identified as strong (based on a well-known, widely-accepted methodology by Interbrand and used by BusinessWeek for its annual Best Global Brands report) displayed statistically- and economically-significant performance advantages such as stock returns and returns on equity versus the overall market. Commenting on the findings, Fournier wrote, “The effects of brands on shareholder values were powerful and dominant and far outweighed commonly acknowledged factors such as market share and firm size.”

The research even goes one step further, finding that firms which had developed strong brands created shareholder value with less exposure to risk.  The professors conclude that their results “support the role of the brand in reducing the volatility and vulnerability of cash flows.”

So it’s clear a strong brand makes a business robust for shareholders — but why?

The explanation

Brands produce higher market valuations due to:

• stronger customer equity (defined as the total lifetime values of all of the company’s customers) — brands are the primary conduits through which loyal customer relationships are formed, nurtured, and maintained
• development of intangibles — brands drive differentiation and perceived value to customers beyond that which a company’s tangible product or service produces
• more efficient business processes — brands optimize the 3 primary processes of any business (product development, supply chain management, and customer relationship management) and the resources that drive each (this will be discussed in more detail in my next post — I’m using the Balanced Scorecard as an organizing framework for this series and am making my way through the 4 quadrants, in case you’re wondering.)

Questions?  Comments?  Please share.