What’s a Brand Worth Anyhow?
NOTE: How do you determine the power and value of a brand? In the following article, I and my associate, Diana Tadzijeva, research a variety of techniques and methods to determine brand values. A two-part article with far more detailed information started in the August issue of “Intellectual Property Today” and is available on-line at www.iptoday.com.
In trademark infringement litigation, getting a judgment or agreement on brand or trademark infringement is only half the battle. The other half is attempting to determine what the damages are, and the key to trying to make that determination is the ability to calculate what the brand or trademark is worth from a marketing perspective.
The marketing valuation is far different from the accounting valuation. Accounting methods determine trademark and/or brand values based on the real value of the asset. Such calculations are relatively easy to determine because they are based on book values of the assets – the value of the brand or trademark as reflected in financial statements.
Marketing values are far more complex and require an understanding of the intellectual property valuation of the brand or trademark in the marketplace. Often there are great differences between accounting and marketing values of brands and trademarks. Such differences are often reflected by merger/acquisition transactions when one company purchases another and the value of the exchange exceeds by many times the “book value” of the assets being purchased.
In the intellectual property area, damages in trademark infringement litigation have to be tied to some marketing value – and NOT an accounting value. This is especially true when a “famous” or well-known brand is damaged or diluted.
Calculating the marketing value of a brand or trademark is often easier said than done. However, there are a variety of methods and techniques that one can use to determine that marketing value. Once such a value is determined, one can then attempt to assess damages by estimating the percentage of the brand or trademark’s that can be attribuyted to the infringement.
There are many approaches to trademark and brand valuations. The approaches presented are among the most commonly used qualitative and quantitative approaches. Following are some of the most popular techniques for determining the marketing value of the brand or trademark:
Cost-Based Approaches involve calculating the costs associated with:
- Creating the brand (market research, development of the product concept, market testing, packaging, advertising, etc.)
- Continued promotion through the product life cycle
- Product improvement over time and the insuring costs connected with the product improvement
Market-based Approaches are based on estimating the value of the brand or trademark by attempting to calculate the market price at which the brand or trademark can be sold. Also, the market value of the brand or trademark in question could be estimated through comparing the brand being valued to a substitute brand not related to the firm. Moreover, future benefits associated with owning the brand or trademark are discounted to the present value to arrive at the trademark/brand value.
Income-based approaches involve calculating the present value of future net revenues and profits attributable to the brand. If the brand has been damaged or diluted, than the difference between the present value of future cash flows between the brand or trademark undamaged or undiluted versus the estimated present values or future cash flows for the damaged or diluted brand.
The ‘Economic Use’ Approach is one of the most popular approaches of brand valuation in UK. Its major focus is on the economic return earned as a result of owning the brand and the brand’s contribution to the business both now and in the future.
The Brand Due Diligence Approach is very similar to the ‘Economic Use’ approach, but it involves valuation from a slightly different perspective. Unlike the upper mentioned method, the brand due diligence is a mixture of due diligence in legal, commercial and financial areas that is focused on an individual brand.
Relief from royalty, along with the ‘Economic Use’ method are two of the most often used IP valuation approaches in U.K. According to David Haigh, a group chief executive of Brand Finance, a company specializing in intangible asset valuation, the reason this method is used so extensively is because there are a lot of comparable licensing agreements in public domain and courts as well as tax authorities highly rely on this method.
Interbrand approach: Interbrand, a division of Omnicom, is a branding consulting firm. Founded in London in 1974 as Novamark by John Murphy, a former employee of Dunlop, Interbrand has developed into a full-service branding consultancy with 40 offices in 25 countries. Annually, Interbrand and Business Week publish “The 100 Top Brands.”
Interbrand’s approach, which is a method limited to big, high-profile brands, uses a three-year weighted average of profits after tax. The factors considered are only the ones that directly relate to the brand’s identity. Thereafter the multiplier is attached to the calculation. This multiplier takes into account seven components of brand strength as articulated by Colin Bates of Hong Kong-based Building Brands Ltd:
Brandz Study: Created by one of the world’s leading market research companies, London-based Millward Brown, the Brandz Study provides what is believed to be a highly accurate methodology. Unlike the Interbrand approach, which focuses on large brands, the Brandz methodology works for smaller, lower profile brands. It is based on the combined effects of historical financial data as well as consumer studies. The basis of this approach is something called “voltage,” which is a brand’s potential to grow its market share in the future.
The ‘Brand Equity Ten’ Approach is a qualitative approach to brand equity evaluation was developed by University of California Marketing Professor David Aaker. In “The Brand Equity Ten” Aaker identifies what he believes to be the 10 key aspects of brand performance, which illustrate the components of brand strength.