How much is a brand worth? How do you put a value on the phrase “nobody ever got fired for buying IBM” becoming received business wisdom?
That’s the tricky question that firms like Brand Finance, Millward Brown (via the Brandz report), and Interbrand seek to answer. They all begin their calculations in broadly the same way. They look at brand value as a proportion of a company’s market capitalisation. They then apply a range other analysis, normally some form of consumer-related data.
Through their analysis these firms achieve dizzyingly different valuations of brand value. In 2015, for example, Google’s brand was valued at $174bn according to Brandz, whereas Interbrand valued it at $120bn. That’s a $54bn difference. That’s huge. Brand Finance valued Google brand at $76bn, making the difference between the highest and lowest valuations more than the market capitalisation of Nike Inc. This huge variation implies that, at best, only one firm has got brand value right, more likely none have.
There is, however, a deeper problem. There are two key reasons why I believe that using market capitalisation as a starting point hampers these studies.
1. The growth of intangibles
Crudely speaking, the value of a brand is calculated from a corporation’s intangibles – a group of assets that accountants cannot put a fixed financial value on. Typically, this will include things like intellectual property (patents, trademarks, etc.), human capital and goodwill.
Over the past 30 years or so, for publicly listed firms, intangible assets have grown in both absolute value and as a proportion of a company’s value. There are many reasons for this, including the growth of service businesses (which consist mainly of human capital) and the distributed nature of supply chains (Apple, for example, doesn’t own the factory that makes iPhones, so it doesn’t have the tangible capital value of the factory sitting on its financial statements).
The growth of intangible assets has made it harder to assess brand. To properly assess the value of brand, you also have to assess the value of patents, trademarks, human capital, goodwill, and so on. Often, particularly with regard to R&D and patents, the information needed to make firm assessments of value isn’t publicly available.
Accountants recognise this. Just like marketing and communications, integration is the buzzword in financial reporting. There has been a call for, and some movement towards financial reports that disclose more (and more consistent) information about intangible assets and other things that affect a firm’s value. So-called ‘integrated reporting’ should, in theory, help brand valuation firms reach less varied conclusions.
2. Long term value vs. short term value
Brand, as every consultant will tell you, is a long term asset. It’s something to cultivate, build and invest in. It will draw customers towards you, it will differentiate you from your peers, it should outlast your factories and shops and offices.
Brands like Woolworths, stay in the public’s mind long after they have disappeared from the high street. That long-term association is something marketers regularly take advantage of. The resurrection of brands like TSB, Truman’s and Wispa are all excellent examples of brands where the product died before the brand, but the strength of the brand allowed the product to return.
If we’re all agreed on the long term value that brands create, and the need to take a long view on their care, then why are we measuring their value on metrics that receive daily scrutiny and have quarterly reporting? The financial measures upon which brand valuations are currently based are too closely linked to shareholder value that, as the current debate about corporate governance and responsible business show, is a very short term measure.
None of this is to say that the brand valuation firms are charlatans, or that they don’t do very good work. However, the variations in the numbers they come up with, coupled with the opaqueness of intangible asset values and the short termism of shareholder value means that their estimates are destined to fail.