Brand value deals with financial contribution of brands to their companies. Here, brands are corporate assets. As it goes, brand value results from many factors, including (but not limited to) both product sales and brand equity. It has often been described as a cumulative result of sales volume, equity, audience size, and the brand’s market potential.

Financial value has, to some extent, always been attached to intangible corporate assets, like patents, intellectual property, and organizational knowledge. But the practice of brand valuation hasn’t been established until the 1980s to specifically understand brands and assess their financial value. Before then, brands were considered merely as a marketing tool primarily used by consumer packaged goods companies.

While the practice of brand valuation can be considered in a variety of ways, it has been most often discussed in relation to the situation of a company’s sale. For example, Raggio and Leone (2007) regard brand valuation as a helpful tool for estimating acquisition price of a company. In this context, brand value is regarded as something intrinsic to a firm, and not something that belongs to the consumer market. Advertising executive Jeremy Bullmore similarly observed: “It is universally accepted that brands are a company’s most valued asset, yet there is not universally accepted method of measuring that value. The only time you can be sure of the value of your brand is just after you’ve sold it.”

The evolution of brand valuation has been tied to strategy of corporate growth through mergers and acquisitions that started in the 1980s. Before brand valuation took hold, the main source of companies’ business value have been their tangible assets. But, the continuously increasing gap between companies’ “book values” and their stock market valuations has put on the map the value of their intangible assets.

The practice of mergers and acquisitions that was adopted in the eighties also contributed to a sharp increase in premiums above the companies’ stock market value. Naomi Klein (2000) describes this trend of companies paying premiums for brand names as “brand value mania.” Case in point: in 1988, Phillip Morris purchased Kraft Foods for staggering six times what the company had been worth “on paper.” This dichotomy between a company’s “book value” and its brand value has best been illustrated by John Stuart, Chairman of Quaker Oats: “if this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.”

Advertising executive Jim Mullen similarly noted: “Of all the things that your company owns, brands are far and away the most important and the toughest. Founders die. Factories burn down. Machinery wears out. Inventories get depleted. Technology becomes obsolete. The brand is the only sound foundation on which business leaders can build enduring, profitable growth.”

Today, there is a widespread belief that the concept of “brand value” has a tangible impact on quantifying the contribution of brands to a company’s market value. Rita Clifton, Chair of Interbrand UK, wrote in her book “Brands and Branding”: “Well-managed brands have extraordinary economic value and are the most effective and efficient creators of sustainable wealth.” Driven by this belief, some branding consultancies have conducted studies to estimate the extent of this value contribution. For example, a study by Interbrand, conducted in association with JP Morgan, found out that, on average, brands account for more than one-third of shareholder value. Their study concludes that brands create significant value either as “consumer or corporate brands or as a combination of both.”

Regardless of their perceived importance and widespread use, brand valuation retains its particular challenges. First, there is still not a clear definition of brand value: “the market is aware of intangibles, but their specific value remains unclear and is not specifically quantified. Even today, the evaluation of profitability and performance of business focuses on indicators such as return on investment, assets or equity that exclude intangibles from the denominator. Measures of price relatives (for example, price-to-book ratio) also exclude the value of intangible assets as these are absent from accounting book values.” Then, unlike other assets like stocks, bonds, commodities, and real estate, there is no active market in brands that would provide comparable values. In this situation, branding consultancies like Interband, Landor Associates, Brand Institute, Millward Brown Optimor, and Future Brand, had developed a number of proprietary brand evaluation models.

The main challenges of brand valuations today remain their arbitrary measurements and a very few agreed upon systems and processes for evaluating brand assets. For example, in October 2008, a London-based brand-valuation consultancy Brand Finance noted in their “Brand Finance Global 500” report that, due to “the flailing economy”, brand value for the top 100 brands has declined 4.2%, or $67 billion, in between January and September 2008. At the same time, in their evaluation of this same time period, Millward Brown Optimor claimed that “in a year of global economic turmoil, the value of the top 100 brands increased by 2 percent to $2 trillion.”

In recent years, Interbrand’s rankings in particular have been more openly criticized, mostly because its notorious tardiness to include digital brands in their report. Most famously, due to the sheer size of its market, Apple brand is still not among top 10 global brands there, despite its steady sales and its status as an innovator in the areas of media and design. “Brands are inspired by Apple more than anyone else. They transformed the music business, and people are taking what they did seriously,” notes Simon Williams, Chairman of branding consultancy Sterling Group. Google is, in Interbrand’s report, ranked similarly low, as number seven. One brand consultant recently told me: “Interbrand hasn’t really taken into account how the web changes the brand management rules. For generational and cultural reasons, probably.”

Methods that Interbrand and other branding consultancies use today are based on a deep-rooted belief that a link between consumers’ purchasing behavior and the economic performance of brands is chiefly caused by brands’ communication that mediates people’s perceptions of brands. As the same brand consultant puts it, “We talk a lot about brands. We are proud of our brands. But, we consider brands in much less dynamic and much more patrimonial way than our consumers do. A brand is [still] often a synonym for advertising and image.”

Well, now, that’s the problem.

Originally published on May 19, 2010