In spite of the fact that a brand is an intangible asset, it can be worth more than a company’s buildings, equipment, land and cash put together.
In a recent Interbrand Best 100 Global Brands, the number one emerged in the form of Steve Jobs’ legacy to the world of technology. Apple beat all- comers with its brand valued at £63billion. But just how valid are the astronomical valuations that are being ascribed to the world’s household brand names?
The calculations are carried out by Interbrand, whose brand valuation methodology was the first to be certified as compliant with the ISO 10668 international standard for brand valuation. But rather than get into the accounting technicalities of demand analysis, economic profit and the role of Brand Index, it’s far more interesting to investigate how brands have become so valuable. The simple explanation is that strong brands add value by creating functional and emotional barriers.
On the functional side the customer can quickly recognise and select the product that best meets their needs and with a familiar brand there’s also the reassurance of quality and source of origin. On the emotional side brands have an equally important role to play. They have an aspirational quality “I am successful because I drive a BMW”. They convey positive associations “I have excellent taste and the means to express it, because I wear Gucci”. And they fulfil self-expressive needs “I wear Nike trainers because I have a winning attitude”
Strong brands can also extend successfully into related areas, they can even extend into quite unconnected categories. For example, Murjani International sold more than $200 million dollars worth of Coca Cola branded clothing in its first year of producing branded wear for the Cola conglomerate.
Sometimes brands can even appear to defy the laws of gravity.
“In a commodity business an increase in price leads to a proportionate decrease in demand. However in a branded business, demand varies in irrational ways. As price rises the volume of demand from brand loyal customers often decreases less than proportionately with the increase in price”. Connecting brand value, “Brand Equity” and brand economics, Brand Finance, 2013
A dramatic shift in the understanding of brand value came about in the 1980’s, with the continuous increase in the gap between companies’ book value and their stock market valuations. More recently studies have tried to evaluate the contribution that brands make to shareholder value.
A study by Interbrand in association with JP Morgan concluded that on average brands account for more than one third of shareholder value. There are of course examples where the brand value eclipses the value of traditional assets; the McDonalds’ brand accounts for more than 70% of shareholder value.
John Akasie wrote the following in an article in Forbes magazine: “It’s about brands and brand building and consumer relationships… Decapitalised, brand owning companies can earn huge returns on their capital and grow faster, unencumbered by factories and masses of manual workers. Those are the things that the stock market rewards with high price/earnings.”
It’s possible to argue that, in general, the majority of business value is derived from intangibles and it’s the case that management attention to these assets has increased substantially. The brand is a “special intangible,” the most important asset in many businesses because of the economic impact that brands have.
They influence the choices of customers, employees, investors and government authorities. In a world of abundant choices such influence is crucial for commercial success.