3 Main Approaches of Calculating Brand Value
Imagine yourself in a supermarket to buy some snacks and drinks. Arriving in the aisle where the snacks and drinks you want to buy are neatly arranged, you might find yourself struggling to make a decision before putting the items you want to buy into the cart.
One of the points that you take into consideration before buying these items is the brand, the identity that distinguishes one company from another that might offer similar products. Certain brands are often associated with certain qualities or meanings. Hence, brand identities have become part of our everyday culture.
Brands can also have financial values. The process of measuring the financial value of a brand is called brand valuation. In this article, we will explain about brand value, its history, how to measure it, and how to increase the brand value.
What is brand value?
Brand value is the financial or monetary worth of a brand. A brand itself is an intangible concept that refers to names, signs, and symbols that serve to signify certain products or services and distinguish them from those offered by other companies.
In the past, the success of an enterprise was measured solely by the products that it sold. However, as products became more standardized over time, companies needed something that could make their products and services stand out compared to their competitors. This is where brands come to play.
According to the Atlantic, in the 1950’s, companies selling consumer goods began their practice of brand management. They no longer simply offered the quality of the products, but they also began to build emotional bonds with their customers. This emotional value will serve as a buffer against similar functionalities offered by the same products from different companies.
If the value offered by a brand was bigger than the cost of building it, the company was likely to come ahead of others.
How to measure the financial value of a brand
Because brands have financial value, there must be a way to estimate and calculate it. Counting the valuation of a brand is not an easy task. There are many points that must be taken into account. However, in general, there are three ways to assess the value of a brand.
This method of brand valuation calculates the monetary value of a brand based on the cost spent to build it. There are three methods of calculating brand valuation based on this approach.
- Historical cost method. This method incorporates the total historical cost of making the brand as the true brand value. This method is commonly used for brands that are new, whose specific market applications and advantages are not yet identified.
- Replacement cost method. This method measures brand valuation by taking into account the expenses needed to replace a brand with a new one of equal value to the company.
- Conversion model. This approach calculates the value of a brand based on the amount of awareness that is needed to reach the modern-day level of sales.
- Customer preference model. The customer preference model of brand valuation model that compares the growth in recognition to the corresponding growth in market proportion.
The market approach of brand valuation measures the value of a brand based on similar market transactions of comparable brand rights. The maximum value is based on the maximum amount that a seller or a buyer is willing to pay, making this method commonly used when a company decides to sell their brand.
The income approach of brand valuation measures the value of a brand based on the present economic benefits that it provides over the rest of the brand’s useful life. Among the methods to measure the brand value based on the income approach is to multiply the price differential of the branded products concerning the generic products by the amount of income generated by the branded products.
Brand value and brand equity: know the difference
While brand value estimates the financial worth of a brand, brand equity is often related to the customers’ perceptions of the brand and how positive they are.
Over time, the positive perceptions from the customers can contribute to the brand value. Therefore, by building brand equity, companies can also contribute to the improvement of their brand values as they control things like brand recognition, positive associations with quality and service, or aspirational value.
A brand can have value without having brand equity. This occurs when a company spends money and invests value into developing a brand before the launching of their products.
Generally, because it concerns the perceptions of the customers that are influenced by their motivations, opinions, and behavior, brand equity is a concept that is more difficult to calculate.
As companies develop their brands that make them stand out from the competition, it is important that they also develop their brand equity that will, in turn, affect the monetary worth of their brands.
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