Brand is an intangible asset to a company. But all companies do not have a unique brand valuation method. Following four brand valuation methods are commonly available to a company which they practice.
4 Different Brand Valuation Methods :
(i) Cost Method
(ii) Discounted Cash Flow Method (DCF)
(iii) Earning Multiple Method
(iv)Premium Pricing Method
(i) Cost Method:
The cost method to brand valuation assesses the value of an asset by determining its replacement cost i.e. cost of receiving equal future benefits from an alternative asset. Under this valuation approach, total of marketing, research and development (R&D) expenditure, advertising expenses associated to a brand are used as the value of the brand. Under Cost Method of brand valuation, a brand might be overvalued, e.g. when the costs surpass the benefits to be received.
(ii) Discounted Cash Flow Method (DCF):
Under Discounted Cash Flow Method, the value of a brand is equivalent to present value (PV) of future cash flows, to be derived from ownership of the brand. The future cash flows are derived by applying a discount rate, which should reflect the risk of the future cash flows. However, DCF method suffers from the following disadvantages :
(a) Quantification of brand – associated future cash flows might be complicated,
(b) Complexity in estimating the life of a brand,
(c) Assessment of appropriate discount rate for brand valuation purposes is extremely subjective.
In addition, we should note that the inputs to the usual discounted cash flow valuation include the effects of brand name. Adding a brand name premium to this value would be double counting.
(iii) Earning Multiple Method:
As per the Earning Multiple Method, an appropriate multiple is to be applied to the earnings of the brand.
So, Brand value = Applicable multiple x Brand earnings
Brand earnings are estimated on the basis of previous trend; the multiple in fact denotes the number of years the brand would be able to sustain the earnings.
This is a well-liked method among companies which want to disclose their brand value in the annual report and is also known as Inter brand model.
(iv) Premium Pricing Method:
As per the Premium Pricing Method, an appropriate multiple is to be applied to the product of Premium amount and Volume of the Product. The formula for this method is —
Brand value = (Premium Amount) × Volume × Multiple
Where the premium is an estimate of the excess profit earned over the profit earned by alike products sold is generic names; and the multiple is the number of years the product will enjoy the premium price. However, both these may be simple estimates.