The problem with brand value is really simple: no one agrees on it.
The GE brand value, for example, in 2011, was variously estimated to be worth $30.5B, $42.8B and $50.3B by different brand valuation services. That’s a difference of about $20B between the high and low estimates. It gets worse. One firm estimated that GE’s brand value was rising, while the other two calculated a declining brand value.
These are not small numbers. They’re well beyond statistically significant differences. In fact, they’re large enough to qualify as annual GDP numbers for many small countries—like Uganda. And GE isn’t the only example of the problem with brand value.
In a recent article on the issue of brand value, The Economist noted: “…arguments rage about how much brands are worth and why. Firms that value them come to starkly different conclusions.”
It’s obvious that brand valuation has a “starkly” real issue. None of the firms estimating brand value agree on the same value for a given brand. And if none of them agree on the value of brands, how can CMOs and CFOs begin to understand the brand value they’re creating with their marketing spending?
Brand Value—What Is it?
Other industries have no problem placing a common value on valuable things. For example, the stock market. There, we have buyers and sellers. While they may have different views of the future performance of the stock, they agree on one thing: the price at which the stock is currently selling.
And that price is, in essence, the present value of the perceived future earnings of the company. The irony here, of course, is that a significant amount of the value of a firm’s assets are in, you guessed it, brand value. Can you imagine a world with three different stock market exchanges, each of which quote different stock prices for the same stock?
Brand valuation should be no different. Essentially, the value of a brand is the present value of the brand and all of its intangible assets that generate future earnings for the company.
If it’s really this simple though, then why are brand valuations so different from one another?
The Need for a Standard, Validated Brand Value Model
First off, we need a model for how brand economic value is created. The model needs to have a consumer measure of “brand impact” that is increased by (or not) by marketing spend, and then how this brand impact drives economic value.
This is a really important concept. So important that an independent third party, the Marketing Accountability Standards Board (MASB), has created just this model.
MASB, in case you’re not familiar with it, is an organization charged with aligning CMOs and CFOs behind evidence based marketing measurement and methodology that demonstrates how Marketing drives real business results—including the creation of brand value. Think FASB for Marketing applied to research methods and metrics.
MASB has developed a simple model for how a consumer or customer brand strength measure creates economic value. In the schematic below, the customer brand value measure drives volume, market share, and premium pricing. These, in turn, drive cash flow. These cash flows, taken over a number of years and then discounted back to present value, create brand value.
Brand Preference—The Linchpin
The model is simple enough. But, the linchpin in this model is the customer brand strength measure since it is what drives share, volume, and price premium. Without a validated, proven connection between brand strength and key outcome measures, the measure has no real significance. What is it? Well, it could be a number of measures, but an early favorite is “brand preference.”
MASB research with member companies shows that brand preference is highly correlated with volume, share, and price premium across many brands and categories. Said simply, higher consumer brand preference yields higher volume, share, and price premium. Lower consumer brand preference yields lower volume, share, and price premium. This seems to be true across brand and categories—both fast moving consumer goods and also consumer durables.
Given this, we have a simple model: marketing and brand activities drive brand preference; brand preference causes higher volume, share and premium pricing; and these deliver greater cash flows, which can be discounted back to the present to create an evidence based brand valuation model.
Brand Valuation—Something that CMOs and CFOs Can Agree On
Creating more brand value is an axiomatic objective for Marketers. But having multiple estimates of brand value that don’t agree with one another is hardly helpful to the CMO.
MASB has created a framework for how brand marketing activities create brand value and, more importantly, demonstrated that there is a standard customer metric that works in the model across brands and industries. This is the foundation of proof that marketing creates real economic value beyond simple ROI measurement of individual marketing programs.
The next steps are up to CMOs and CFOs: to align on the brand value methodology and begin experimenting with how to best use it. Why? So they can agree on at least one thing: the value of their brands and the contribution of marketing to that value.
This article originally appeared on the Marketing Executives Networking Group blog.