The Interbrand Brand Valuation Methodology

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The Interbrand Brand Valuation Methodology

🔥 The Interbrand Group is one of the leaders in the field of brand valuation. Therefore, their brand valuation method is one of the most popular and frequently used methods for determining brand value.

Steps in the Interbrand Brand Valuation Method. Process

The Interbrand brand valuation methodology consists of three steps:

1. FINANCIAL ANALYSIS
   At the first stage, the cash flow which is generated by all intangible assets is predicted. This is conducted through identifying the revenues from products or services that are generated with the brand after deducting applicable taxes, minus a charge for the capital employed to generate the brand's revenue and margins.
   Cash flow is calculated as follows:
   Earnings IntA = Operating Profit After Tax - [Capital Employed * Risk free rate]
   Where:
   Earnings IntA: added profit of intangible assets
2. CALCULATE THE ROLE OF BRAND
   Since the above intangible earnings include the returns for ALL intangibles employed in the business, the earnings that are specifically attributable to the brand have to be be identified. In other words, the cash flows generated from intangible assets must be reduced to arrive at the role of the brand. This step measures the extent to which the purchase decision is attributable to the brand, which is calculated by determining the extent of the brand's influence on the key demand factors. (the calculation is made as a percentage).
3. CALCULATE BRAND STRENGTH
   Brand Strength measures the ability of the brand to create loyalty and, therefore, sustainable demand and profit into the future. The Net Present Value of the forecast Brand Earnings is determined based on the rate of the risk profile of brand earnings (the greater the brand's risk, the less powerful it will be). That is considered essential due to its influence on future earnings expectations, as lower brand strength due to higher its risk, will increase the risk of not achieving expected profits.
   To determine brand strength, 10 factors that influence brand strength should be evaluated. These involve internal and external factors:
   
   • Internal factors:
     
     • Clarity
     • Governance
     • Commitment
     • Responsiveness
   • External Factors:
     
     • Authenticity
     • Consistency
     • Relevance
     • Presence
     • Differentiation
     • Engagement
   By comparing the brand with other brands in the same industry, one can judge the performance of the brand and give an insightful snapshot of its strengths and weaknesses.

Disadvantages of the Interbrand Methodology

The main disadvantages of the Interbrand method of brand valuation include:

1. The method is subjective. Both the brand's share in intangible assets and the discount rate are calculated based on expert estimates. Due to the subjective nature, brand value assessed using this method is subject to significant fluctuations, even though a brand is a fairly stable asset.
2. In most cases the brand does not exist separately from the product. The consumer associates the brand not only with a certain style, expectations, and experience but also with the quality of the product and the quality of the materials from which it is made. By separating the tangible assets from the brand, the model thus reduces the brand value.

⇨ Please, share your ideas and experience with this model below. Thank you!

Reference: Kriegbaum Catharin (1998), Valuation of Brands - A Critical Comparison of Different Methods, No. 13/98.

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		0 Gandhi Heryanto Management Consultant, Indonesia
	Interbrand Valuation Methodology in the Digital Era One of the steps of the Interbrand valuation methodology is to calculate brand strength, which consists of 10 factors, as described in this article. These 10 factors, among others, rely on stakeholder interactions, legacy, and corporate identity. The brand value can change based on the innovations made by the brand owner. An example in electronics is how the Apple and Samsung brands can relatively maintain their global brands compared to Nokia and Blackberry who relatively lost their brand strength due to lack of innovation. How should this methodology be adapted to accommodate such changes?

		2 Anonymous
	Interbrand Brand Valuation There are three key components to all of Interbrand's valuations: an analysis of the financial performance of the branded products or services, the role brand plays in the purchase decision on segmentation, and, at the end of the process, the bringing together of these to calculate the financial value of the brand. 1. Segmentation Segments are typically defined by geography, business unit, product, service, or customer group. Why is segmentation important? A robust valuation requires a separate analysis of the individual parts (or segments) of a business to ensure that differences between those segments in terms of the three key components of the brand valuation (financial performance, role of brand, and brand strength) can be taken into consideration. 2. Financial Analysis Interbrand starts by forecasting the current and future revenue that is due to the branded products. They subtract operating costs (the cost of doing business) to arrive at the branded operating profit. Interbrand then apply a discount rate to the branded profit that is based on the capital a business spends, versus the money it makes. This gives them the brand's economic profit. Financial performance measures an organization's raw financial return to the investors. For this reason, it is analyzed as economic profit, a concept akin to the standard accounting measure of Economic Value Added (EVA). To determine economic profit, we remove taxes from net operating profit to get to net operating profit after tax (NOPAT). From NOPAT, a capital charge is subtracted to account for the capital used to generate the brand's revenues; this provides the economic profit for each analyzed year. For purposes of the ranking, the capital charge rate is set by the industry weighted average cost of capital (WACC). The financial performance is analyzed for a five- year forecast and for a terminal value. The terminal value represents the brand's expected performance beyond the forecast period. 3. Role of Brand Role of Brand measures the portion of the purchase decision that is attributable to the brand, relative to other factors (for example, purchase drivers like price, convenience, or product features). The Role of Brand Index ("RBI") quantifies this as a percentage. Customers rely more on brands to guide their choice when competing products or services cannot be easily compared or contrasted, and trust is deferred to the brand (e.g. computer chips), or where their needs are emotional, such as a statement about their personality (e.g. luxury brands). RBI tends to fall within a category- driven range, but there remain significant opportunities for brands to increase their influence on choice within those boundaries, or even extend the category range where the brand can change consumer behavior. RBI determinations can be derived in three ways (and are described in order of preference below): Primary research. Specifically designed research, such as choice modeling (although other techniques are available), where RBI is statistically derived Existing research plus Interbrand opinion. Existing research addressing the relative importance of purchase drivers is combined with Interbrand's opinion on the extent to which the brand influences perception of how the product or service will perform against each driver Qualitative assessment. Based on management discussions and past experience. This is used where no market research is available RBI findings are cross- checked against historical roles of brand for companies in the same industry. Finally, RBI is multiplied by the economic profit of the branded products or services to determine the earnings attributable to the brand ("brand earnings") that contribute to the valuation total. 4. Brand Strength Brand Strength measures the ability of the brand to create loyalty and, therefore, to keep generating demand and profit into the future. Brand Strength is scored on a 0 to 100 scale, where 100 is a perfect score, and is based on an evaluation across 10 key factors (see below) that Interbrand believes make a strong brand. Performance on these factors is judged relative to other world- class brands. The strength of the brand is inversely related to the level of risk associated with the brand's financial forecasts (a strong brand creates loyal customers and lowers risk, and vice versa). A formula is used to connect the Brand Strength Score to a brand- specific discount rate. The brand- specific discount rate is used to discount brand earnings back to a present value, reflecting the likelihood that the brand will be able to withstand challenges and deliver the expected earnings into the future. This is equal to brand value. Interbrand's experiences show that brands that are best placed to keep generating demand and profit into the future are those performing strongly (relative to competition) across a set of 10 factors, shown below. Four of these factors are internally driven, and reflect the fact that great brands start from within. The remaining six factors are more visible externally, acknowledging the fact that great brands change their world.