Methods used for valuing brands

A number of authors and consulting firms have proposed different methods for brand valuation. The different methods consider that a brand’s value is:

1. The market value of the company’s shares.

2. The difference between the market value and the book value of the company’s shares (market value added). Other firms quantify the brand’s value as the difference between the shares’ market value and their adjusted book value or adjusted net worth (this difference is called goodwill).

3. The difference between the market value and the book value of the company’s shares minus the management team’s managerial expertise (intellectual capital).

4. The brand’s replacement value

4.1. Present value of the historic investment in marketing and promotions.

4.2. Estimation of the advertising investment required to achieve the present level of brand recognition.

5. The difference between the value of the branded company and that of another similar company that sells unbranded products (generic products or private labels). To quantify this difference, several authors and consulting firms propose different methods:

5.1. Present value of the price premium (with respect to a private label) paid by customers for that brand

5.2. Present value of the extra volume (with respect to a private label) due to the brand

5.3. The sum of the above two values

5.4. The above sum less all differential, brand-specific expenses and investments. This is the most correct method, from a conceptual viewpoint. However, it is very difficult to reliably define the differential parameters between the branded and unbranded product, that is, the
differential price, volume, product costs, overhead expenses, investments, sales and advertising activities, etc.

5.5. The difference between the [price/sales] ratios of the branded company and the unbranded company multiplied by the company’s sales. This method is used by Damodaran to value the Kellogg’s and Coca-Cola brands.

5.6. Differential earnings (between the branded company and the unbranded company) multiplied by a multiple. As we shall see further on, this is the method used by the consulting firm Interbrand.

6. The present value of the company’s free cash flow minus the assets employed multiplied by the required return. This is the method used by the firm Houlihan Valuation Advisors.

7. The options of selling at a higher price and/or higher volume and the options of growing through new distribution channels, new countries, new products, new formats … due to the brand’s existence.

Pricing Strategies

Premium Pricing.

Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

Penetration Pricing.

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom in order to

Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.

Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.

Psychological Pricing.

This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.

Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.

Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

Value Pricing.

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Predatory pricing
(also known as destroyer pricing) is the practice of a firm selling a product at very low price with the intent of driving competitors out of the market, or create a barrier to entry into the market for potential new competitors. If the other firms cannot sustain equal or lower prices without losing money, they go out of business. The predatory pricer then has fewer competitors or even a monopoly, allowing it to raise prices above what the market would otherwise bear.
In many countries, including the United States, predatory pricing is considered anti-competitive and is illegal under antitrust laws. However, it is usually difficult to prove that a drop in prices is due to predatory pricing rather than normal competition, and predatory pricing claims are difficult to prove due to high legal hurdles designed to protect legitimate price competition.

Limit Pricing
A Limit Price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable.

Loss Leader
In marketing, a loss leader (also called a key value item in the United Kingdom) is a type of pricing strategy where an item is sold below cost in an effort to stimulate other, profitable sales. It is a kind of sales promotion.