Old School Thinking About Brand Valuation

by James R. Gregory , March 6, 2009

I was stunned to read Wally Olins' recent article, "Brand valuation is an utterly meaningless process", denying that brand measurement and valuation isn't an important part of brand building.

I thought the days of brand value ignorance were 20 years in the past. Yet, in this article he said, "The brand valuation process ignores tempest, turbulence and volatility." Sorry, Wally, but nothing could be further from the truth. The fact is that brands are contributors to the health and vitality of corporations, in good times and in more challenging times.

The brand, however, is not more important than the underlying financial fundamentals of any company. I've seen many excellent brands destroyed in the recent economic downturn, but it is important to understand that we are going through an economic crisis, not a branding crisis.

CoreBrand tracks 1,200 brands across 49 industries. We've been quantitatively measuring and valuing these brands since 1990. What we've learned is that brand value is created in two distinct ways: revenue and reputation.. The revenue side of the brand value equation is about understanding how brand building can impact revenue, which can then be measured and valued through a discounted cash flow analysis. This is the more common method of brand measures and is used by most brand valuation firms.

We discovered a second important effect of branding which is the impact of corporate reputation on market capitalization equating to about 5-7% of the firm's value depending on many factors like the industry and the economy. This is incremental value, over and above the revenue side of the value equation. It changes constantly like the tides of the ocean. As any good mariner knows, understanding tidal charts greatly facilitates navigation in dangerous waters.

Our revenue and reputation models can work together to produce hugely meaningful and valuable measures that help companies to manage their brand, or they can be ignored in favor of Wally's method: "sticking your wet finger in the wind and shouting out a number."

I challenge Wally Olins to meet me at a venue of his choosing, online or off, to debate this issue.

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7 comments about "Old School Thinking About Brand Valuation ".

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Jeff Wyatt, March 6, 2009 at 6:39 a.m.
"... i challenge you to a duel Mr. Olins... white gloves... consider yourself slapped."
two schekels on Mr. Gregory.
Reply

Tilly Pick from Development Practice 360, LLC., March 6, 2009 at 9:33 a.m.

My sense is that Mr. Gregory's evaluaton of how much a brand contributes to a company's market capitalization may actually be conservative, certainly in a good number of cases. I also think that there's not one right or wrong way to look at the value of the brand, and it certainly is not a constant. Personally, I would never do business with someone or buy something that I don't feel somewhat good about. It would be an interesting debate

Johanna Skilling from NYU-SCPS, March 6, 2009 at 4:13 p.m.

Jeff, I see your two schekels and add three (hey, it's a tough economy). Of COURSE brands add value: otherwise, why isn't everyone buying generic cola? Jim, keep fighting the good fight!!

Howard Brodwin from Sports and Social Change, March 7, 2009 at 7:14 p.m.

Well said Jim. I totally concur with your point that "corporate reputation" and the value associated with it is directly tied into the brand. Maybe Mr. Olins should ask the folks who manage the branding for AIG, Citibank and GM what they think about brand valuation in today's economy? ;-)

Denise Yohn from Denise Lee Yohn, Inc., March 8, 2009 at 1:26 p.m.

in wally olins' original op-ed, he states, "there's only one way to establish the value of a brand and that is to see what people will pay for it" -- in doing so, he actually argues against the point the rest of his piece makes.

research has shown that analysts, investors, potential acquirers, and other corporate "customers" factor in the value of the brand when determining whether or not to "buy" the company and at what price (that is, buy its stocks or the company itself) -- as such, a brand clearly has financial value beyond price premium at the shelf.

brand valuation methods are not perfect, but they play an important role in seeing "what people will pay for it."

Carol Parish from SynthesisPlus, March 8, 2009 at 6:21 p.m.

Mr. Olins is old school indeed. In decades past, design was conducted in much more of a "trust me" environment. Today, it is our clients who beg for ways to measure and justify the substantial amount of money that they invest in corporate identity, product design, corporate social responsibility, etc. I cannot count the number of RFPs that ask for an agency's methodology for calculating the ROI of a project, whether it's a new logo, a website, or a positioning.

If they can point to companies that are recognized for brand excellence and top the charts of BrandZ, Interbrand Best Brands, Fortune Best Corporate Reputation, etc., it makes it easier for them. I don't always agree that these league tables are all that predictive or diagnostic, but they are far better than nothing.

Peter Herring from TTW Systems, March 9, 2009 at 12:49 p.m.

OK, I rarely have time to get in on these conversations, but Mr. Loin's article gave me more jaw exercise (picking it up over and over as it dropped on the table) that I have to chime in. I really thought this ridiculousness around brand value was long over. Years ago, realizing that most of my clients hadn't the foggiest notion of what a brand actually is, I developed a one page diagram that gets them to a pretty good understanding. On the bottom of the diagram is something for the bean counters: brand equity = the NPV of future earnings attributable to brand. That's pretty loose, but it's a start, getting management types off the "warm and fuzzy" brand path - as though having a brand was like being an atheist who goes to church on Sunday just in case. Has Mr. Olin not noticed the relationship of brand equity to market share - or is market share unquantifiable, too?
"The truth of the matter is that brands have no objective, absolute value" is one of the more amazing things I've read recently, and really would warrant that much of a discussion, except that this type of thinking is instrumental in demoting marketing from C level to director to manager to... Mr. Olin, The truth of the matter is that NOTHING (in the market) has an objective, absolute value. But it has a subjective value. That's what branding is about. And when you put enough actions (like buying a product, like loyalty) that are driven by subjective values, well, by golly, you can quantify it. Coke is brown sugar water that gives you cavities. Coca Cola is a name that means you can go to China and folks trust you. Their current brand valuation is worth something in the neighborhood of 30X the value of their physical plants. Will that fluctuate with "turbulence"? You bet. So do airplanes. But they still get to their destination by staying on course for the long term.