INTERBRAND VALUATION METHOD

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GROUP 3

Interbrand brand value evaluation considers stakeholders and value creation process. In this it measures purchasing behavior, brand influence on generation of demand and also brand strength i.e. the ability of brand to create continuity of demand by creating loyal customers. It also emphasize on internal customer in creating brand which is influencing external customer.

Brand evaluation can be categorized in three areas as sown in figure below.

1) Financial Analysis2) Demand Analysis3) Competitive Analysis

Inter brand evaluation Method:

Financial Analysis

This measures the overall financial return to an organization’s investors or its “economic profit.” Economic profit is the after-tax operating profit of the brand, minus a charge for the capital used to generate the brand’s revenues and margins.

Depending on the brand, this platform may include, for example, manufacturing facilities, distribution channels, and working capital. Inter brand, therefore, allows for a fair return on this capital before determining that the brand itself is creating value for its owner.

They build a set of financial forecasts over five years for the business, starting with revenues and ending with economic profit, which then forms the foundation of the brand valuation model.

Demand Analysis:

In this step, Interbrand analyzes the brand’s value chain and identifies the position of the brand in the minds of customers. To determine the brand’s share of EVA, Interbrand examines what factors influence demand and motivate customers to purchase. These factors are weighted in terms of their bearing on demand and for each, the contributions of the specific associations with the brand are statistically calculated. The sum of these brand contributions on the demand drivers is expressed as the Role of Brand Index (RBI) which, multiplied with the EVA, yields the brand earnings.

Competitive Analysis:

The stronger a brand, the lower is its risk, and thus the more certain are future brand earnings. Interbrand assesses this risk by analyzing the strength of a brand compared with its competitors on the basis of seven factors (i.e. market, stability, brand leadership, trend, brand support, diversification, and protection). In fact, a broad range of measured attributes explains the seven factors and facilitates an all-round diagnosis of a brand’s competitive position.This step results in the Brand Strength Score (BSS).

Net Present Value Calculation: The economic value of future brand earnings is inversely correlated with the brand’s estimated risk and this risk is directly linked to brand strength. The transformation of brand strength into brand risk (or into discount rate,) is completed using an S-curve.The procedure reflects the dynamism of the market, where brands at the extreme ends of the scale react differently from brands in the middle range as regards changes in their strength. The strongest brands are discounted with the risk-free rate of the total market while average-strength brands are discounted with the industry WACC (cost of equity in the financial service industry).Discounting the forecast period (present value) and the calculation of an annuity (terminal value) results in the total value of the brand.Since this procedure focuses on value creation, it is independent of potential and probable changes in organizational structure. The total value of the brand is calculated as the sum of its segment values (sum-of-the-parts).

CHALLENGES IN USING INTERBRAND VALUATION METHOD:

Following are the observed challenges:

1. In availability of complete information of time and cost involved: Since this method, includes huge amount of information so the appropriate speculation of time cost cannot be calculated

2. Lack of transparency: The model is not fully revealed due to which it could lead to rejection by the negotiators since they are not able to trace back the event of particular indicator of calculated values through this model.

3. Input as estimations: This method involves a lot of estimations as input.4. Subjective inputs: This method involves input which is subjective in nature. This proves to be

negative as the brand strength score calculated through this method is not accurate.

5. Inaccuracy in terms of calculation: Since this method does not include various aspects such as mergers and acquisition etc therefore it does not give cent percent accurate result

6. Complex application: The application of this method proves to be complex in nature.

USAGE OF THE MODEL FOR NEW BRANDS:

Yes, this model can be used for new brands. Following are the reasons for it:

1. This model will help in comparing the present value of the brand with the future cash value of the brand. With this comparison, it will be possible to realize whether the brand can prove to be a sustainable brand or not.

2. There are a lot of factors of customer franchisee such as customer awareness, consideration etc which determine the brand strength score. For example- customer awareness can be measured through this method, by asking them their psyche behind their preference for a particular product. The brand expectations can then be measured through the purchase intention of the customers. Furthermore, suppose a company is launching a new product, the information regarding the same can be gathered by initially asking various customers whether they’ll buy the product or not and then asking them their reason behind the purchase.This data can be used by the company in understanding the customer psyche behind their purchase which will further help in calculating the brand strength score.

Net Present Value Calculation: The economic value of future brand earnings is inversely correlatedwith the brand’s estimated risk and this risk is directly linked to brand strength. The transformationof brand strength into brand risk (or into discount rate,) is completed using an S-curve.The procedure reflects the dynamism of the market, where brands at the extreme ends of thescale react differently from brands in the middle range as regards changes in their strength. Thestrongest brands are discounted with the risk-free rate of the total market while average-strengthbrands are discounted with the industry WACC (cost of equity in the financial service industry).Discounting the forecast period (present value) and the calculation of an annuity (terminal value)results in the total value of the brand.Since this procedure focuses on value creation, it is independent of potential and probablechanges in organizational structure. The total value of the brand is calculated as the sum of itssegment values (sum-of-the-parts).

Net present value of the brand segment