The economic relevance of strong brands

The brand value is key within the shareholder value concept, since a strong brand is able to increase future cash flows (eg cross- and up-selling), and accelerates the generation of cash flow (eg faster adaptation of new products, product trials).

A strong brand also reduces the risks of generating cash flow in the future and increases the residual value of a company.

Relevance

The relevance of brand equity first became obvious during the “Brand Accounting debates” in the phase of extensive mergers and acquisitions of the 1980s in Europe. At this time, company values were often higher than their book value or profitability of the acquired companies. “Prior to 1980, companies wished to buy a producer of chocolate or pasta; after 1980 they wanted to buy KitKat or Buitoni.” [Kapferer, Strategic Brand Management, 1998, p.23].

The systematic quantification of a brand's equity is key in determining the “true” value of a company. Since nowadays it seems to be a lucrative business for advertising and brand agencies, consulting firms, and research houses, a huge variety of brand equity evaluation models exist in the market. These differ mainly in terms of their underlying assumptions and methods.

Generally, all brand validation models can be classified into three major groups: Qualitative models, aiming at the validation of the brand strength, quantitative models, focusing on the financial brand value, and combined(qualitative-quantitative) models, combining “the best of two worlds”.

While the qualitative brand value aims at building a strong brand in the consumers' hearts and minds, the quantitative (financial) brand equity focuses on the economic effect a brand has on the company and the financial markets. These models have been developed and professionalised over the years from purely evaluative, simple-structured cost-oriented models (“how much can I spend for building up a brand?) to complex, holistic-integrated value-based models (“how strong is the brand and what are the key components of it?).

Depending on which brand valuation model is used, the brand value calculated can differ significantly. It is crucial to choose an integrated model which combines behavioural-qualitative aspects with a financial perspective. New models are even able to quantify the future potentials of brands to create value.

Take into consideration

But the intended application of a brand valuation also needs to be taken into consideration and determines the choice of an adequate valuation model. Will the brand value be used by the company internally (eg for value-based brand management) or externally (eg for activating the brand value on the balance-sheet)? If used internally, the evaluation of the qualitative brand strength might be sufficient, whereas the calculation of a financial (monetary) brand value is inevitable for financial accounting purposes.

A company's success and corporate value depends significantly on the extent to which it builds up brand values and successfully develops brand strategies. The business performance and market position is often determined by the strengths of the company's current brand portfolio. Therefore, brand equity management should no longer be seen as purely a marketing function, but as an integrated part of the total management process with a strong marketing-finance interface. It needs to be elevated to a vital part of a (value-based) business strategy and should be on every top management agenda.