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Brand EquityBrand Equity is a set of brand assets andliabilities linked to a brand, its name and symbol,that add to the value provided by a product orservice to a firm and/or to that firm

s customers.

Assets and liabilities underlying brand equity mustbe linked to the name and/or symbol of the brand.

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Brand Equity

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Benefits of Brands to Consumers

Simplifies choice processEnhances confidence in choiceReduces perceived risk recognition ofconsistency of qualityProvides emotional benefits signal of status,taste, or affiliation

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Brand EquityResearch Objectives

Identify the effectiveness of individual brand assetsIdentify the barriers to achieving a brand

s fullpotential

Identify consumer relationships with the brandIdentify the status of the brand in a competitivecontext

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Business Week Top 10 Brand Equity2008 2007 Brand Value(MMs)

% ValueD

Country

1 1 Coca-Cola 66,667 2 U.S.2 3 IBM 59,031 3 U.S.3 2 Microsoft 59,007 1 U.S.

4 4 GE 53,086 3 U.S.5 5 Nokia 35,942 7 Finland6 6 Toyota 34,050 6 Japan7 7 Intel 31,261 1 U.S.8 8 McDonald's 31,049 6 U.S.9 9 Disney 29,251 0 U.S.

10 20 Google 25,590 43 U.S.

http://bwnt.businessweek.com/interactive_reports/global_brand_2008/http://resolver.library.cornell.edu/misc/4472138http://resolver.library.cornell.edu/misc/4472138http://resolver.library.cornell.edu/misc/4472138http://resolver.library.cornell.edu/misc/4472138http://bwnt.businessweek.com/interactive_reports/global_brand_2008/

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# Brand Brand Value % Brand Value2011 ($M) Chang e 2011

vs. 2010

1 153,285 84%

2 111,498 -2%

3 100,849 17%

4 81,016 23%

5 78,243 2%

6 * 73,752 8%

7 69,916 N/A

8 67,522 18%

9 57,326 9%

10 50,318 12%

BrandZ Top 100 Brands 2011

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Interbrand 20112011 Ranking of the Top 100 Brands Print

RankPrevious

RankBrand Region/Country Sector Brand Value ($m)

Change inBrand Value

1 1 United States Beverages 71,861 2%

2 2 United States Business Services 69,905 8%

3 3 United States Computer Software 59,087 -3%

4 4 United States Internet Services 55,317 27%

5 5 United States Diversified 42,808 0%

6 6 United States Restaurants 35,593 6%

7 7 United States Electronics 35,217 10%

8 17 United States Electronics 33,492 58%

9 9 United States Media 29,018 1%

10 10 United States Electronics 28,479 6%

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A systematic approach to brand valuation was jointlydeveloped by Interbrand and the London BusinessSchool in 1988. The method was partially revised in1993.

Since then, Interbrand has evaluated some 3500 brandsfor nearly 400 companies.

One approach to Brand valuationcalculation

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The purpose of evaluations of brand equity:

1. Evaluations for financial transactions inconnection with mergers & acquisitions, internallicensing and fiscal issues.

2. Evaluations to optimize brand investments,advertising expenditures, monitor an managefuture changes in brand value.

One approach to Brand valuationcalculation

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Brand value is defined as the NPV of future earningsgenerated by the brand alone. One approach(Interbrand) is based on the following three economicfunctions:

1. the brand

s function to create cost synergies,2. the brand

s function to generate demand for theproducts and services, and

3. the brand

s function to secure future demand andthus reduce operative and financial risks.

Brand Equity/Value

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The method employed to evaluate brands comprisesfive steps:1. Segmentation,2. Financial analysis,3. Demand analysis,4. Brand strength analysis,5. Calculation of the net present value of brand

earnings.

Calculating Brand Equity

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Consumers purchasing behavior and attitudestowards brands differ from one market sector toanother.

The value of a brand can only be determinedprecisely through the separate assessment ofindividual segments that represent ahomogenous customer group.

Segmentation

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Analyze the brand

s value chain and identify the positionof the brand in the minds of customers.To determine the brand

s share of EVA:

Evaluate the factors that influence demand and motivatecustomers to purchase.

These factors are weighted in terms of their bearing on demand

The sum of these brand contributions on the demand drivers is

expressed as the Role of Brand Index (RBI)

RBI multiplied with the EVA, yields the brand earnings.

Demand Analysis

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Demand Analysis

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The stronger a brand, the lower is its risk, and thus themore certain are future brand earnings.

Assess the competitive position and infer the risk byanalyzing the strength of a brand compared with its

competitors on the basis of seven factorsmarket,stability,brand leadership,trend,brand support,diversification,protection

This step results in the Brand Strength Score (BSS).

Brand Strength Analysis

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Brand Strength Score

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Strongest brands are discounted with the risk-free rate of the totalmarket while average-strength brands are discounted with theindustry WACC (cost of equity in the financial service industry).

Discounting the forecast period (present value) and the calculation ofan annuity (terminal value) results in the total value of the brand.

The transformation of brand strength into brand risk (or into discountrate) is completed using an S-curve.

Net Present Value Calculation

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Net Present Value Calculation

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Let

s Calculate Brand equity of DELL INC.

This will be just a rough approximation since wewill be making some assumptions along the way

Example

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Similar to the one in HW4Critical assumptions:

Assume that we are T-5 years from the latestavailable financial statement. E.g. If the latestfinancial statement is in 2008 assume we are inyear 2003.Normal analysis requires forecasting 5 years inadvance.

We will assume that the actual financial performance for theyears 2004, 2005, 2006, 2007, and 2008 (obtained fromfinancial statements) is the forecast as of 2003.

Example

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Click on COMPANY FINANCIALS

ANNUALS + BALANCE SHEET will be default

From here you need to take TOTAL CURRENT ASSETS(in this case it is line 13) of data for 5 years.

Can be different line for other companies.

Next, switch to ANNUALS + INCOME STATEMENT

From here you need to take NET INCOME (LOSS) (in thiscase it is line 13 from the bottom) of data for 5 years

These 2 sets of numbers should be enough to calculatebrand equity.

Mergent Online STEPS:

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2005 2006 2007 2008 2009Total assets $16,897,000 $17,794,000 $19,939,000 $19,880,000 $20,151,000

WACC 10% $1,689,700 $1,779,400 $1,993,900 $1,988,000 $2,015,100

Net income $3,043,000 $3,602,000 $2,583,000 $2,947,000 $2,478,000

Economic Value Added EVA) $1,353,300 $1,822,600 $589,100 $959,000 $462,900RBI (Brand Earnings) = 40% of EVA $541,320 $729,040 $235,640 $383,600 $185,160

Discount rate 9%Discount factor 1.09 1.1881 1.295029 1.41158161 1.538623955

Discounted Earnings $496,624 $613,618 $181,957 $271,752 $120,341

Value until the year 2009 $1,684,293

Net present value of the Brand $3,403,454

Value of the DELL brand: ~ 3.4 billion dollars

DELL FINANCIALS (in '000 of $)

Terminal value (growth rate=2%) = (Discountedearnings in 2009)/(discount rate - growth rate) $1,719,161

DELL