How to Calculate the Value of a Brand? The Price Premium Method

How to Calculate the Value of a Brand? The Price Premium Method

Brands and brand valuation are of primal importance for marketing purposes and for increasing the profits and market value for the company owning the brands. They allow strategic brand management and financial transactions. There are several direct and indirect methods for measuring the value of a company's brand. Below I would like to discuss one of the most frequently used methods with you: The Price Premium method.

The Price Premium Method

It is normally assumed that a "branded product" generates an additional (perceived) benefit for consumers, for which they are willing to pay (a little) extra. As a result the product with the brand can be sold for more than a similar "non-branded product".
The brand adds value to the product. This added value can be measured with the Price Premium Method. To determine the brand value in this way you must follow these steps:

Choose a "branded product" and a similar "non–branded" product;
Define the price difference between them;
Deduct brand-induced costs (the costs of creating and promoting the "branded product");
Multiply the result by the estimated sales volume over the entire life cycle of the brand;
You get the brand value.

The brand value consequently is the profit that is earned (only) because of the brand. It is the additional profit of a corporation that sells branded products in comparison to the profit of a corporation that sells no-names.
In the case where branded and non-branded products are sold at the same price, the brand value can be determined based on the difference in sales of these products in monetary terms.

Pitfalls and Disadvantages of the Price Premium Method

Even though this method seems to be reasonable as well as fairly easy to use, there are several problems involved with it. The main drawback of this method is the difficulty of finding a "non-branded analog". The scope of 2 brands are often not the same. Also it is not so easy to determine the difference in prices, because they vary due to variations in different regions, seasonal fluctuations, promotions, and other factors. Another issue is that only present additional profits are taken into account, whereas the future profit potential is not considered at all.

⇨ If you have any further information about applying this method in practice, please share it below!

Source: Washington Macias, Katia L. Rodriguez (2018), "Brand Valuation by Price Premium: Theoretical Explanation and Practical Application Using Conjoint Analysis", Knowledge Management №17(3), pp.13-27.

Sarah Daghman
Lecturer, Russian Federation

Methods to Evaluate the Brand Value

@Meheresh: As you mentioned there are many methods to calculate the value of a brand such as:

The Interbrand Brand Valuation Methodology
The Economic Method
This method allows you to define the economic benefits that a brand brings. It is based on the assessment of the brand's contribution to the business over the past few years, taking into account the market stability of the enterprise.
Factors involved in the value creation process are market share; demand growth rates; price premium; promotional costs; costs of entering the market; distribution channels; creditworthiness; risks; and protection from competition.
The brand strategy should encourage the development of these indicators in order to accelerate cash flows and their stability, increase the long-term value of intangible assets, reduce the share of brand promotion costs in brand value, and increase customer retention rates, etc.
The Total Cost-based Method:
Here, the brand value is presented as the aggregate of marketing costs for the brand over the entire life cycle of the brand. This method includes calculating all the costs of creating and promoting a brand: research and development costs, artistic design and packaging, legal registration and protection, advertising investments, promotion, and public relations costs.
The advantage of this method is that it is sufficient to simply calculate all costs. The disadvantage is that the resulting estimate can only be used within the company, and this price does not matter to the market, since the costs do not always coincide with the price of the product. You can invest millions in research and development, advertising and promotion, and the brand may not appear, since there are a lot of subjective factors (the media was selected incorrectly, inexpressive creativity, the target audience was incorrectly defined , etc.). Using this method can therefore lead to underestimation of brands that caused relatively low costs. In addition, this method focuses on the input of brands, whereas the value of the brand lies in the output, the expected future returns. for example, the value of intellectual property lies in its use, not in the costs associated with it. Therefore, the cost method is the least effective in measuring brand value.
The Comparative Assessment Method
According to this method, the value of a brand is estimated based on information of the comparable brands sales in the market. The complexity of this method lies in the fact that such transactions do not occur so often and information about them is not always available.

In summary, every method presented here involves several problems. No one seems to produce an adequate measure that meets all requirements for use in brand controlling. However, a combination of some methods might deliver an adequate way to determine brand power and brand value which is also suitable for the controlling of brands.