In an interesting article, the WSJ discloses that low profile IKEA recently made public its internal valuation of the IKEA brand – approximately $11 billion, which led to a scrutiny of how the world’s top brands stack up in the valuation of their brands.
The most recent valuations, conducted by Interbrand and by Millward Brown, for the world’s top brands, revealed significant variations as shown here (in $ billions):
While it would be useful to look at the reasons for the difference, at the outset it appears that there is considerable subjectivity involved. “The value of brand is both art and science,” says Allen Adamson, a managing director of Landor Associates, a branding firm owned by WPP. “It’s simple in theory but hard to pin down in reality. It’s really about how much would a consumer pay for a caramel colored soda versus how much they would pay for a Coke.” According to Michael Belch, professor of marketing at San Diego State University, assigning brand valuations is fraught with difficulty due to the use of differing models that change with market circumstances.The most striking difference is the perception difference seen in Apple Inc. (NASDAQ:AAPL). Interbrand values Apple Inc. (NASDAQ:AAPL) at only $33.5 billion compared to Millward Brown’s whopping $183 billion.
But it would be useful to learn the methodologies.
Millward Brown uses a combination of strategies and analytics to determine brand value in the following steps:
- A financial model to determine total economic value
- A brand driver model that figures out the brand’s contribution to total value
- A brand risk model that determines the brand discount rate based on its risk
The model is both current and forward-looking, and utilizes discounted cash flow, or economic use analysis of forecast financial performance.
Interbrand’s methodology looks at the valuation of a brand through three filters:
- Financial performance – determination of economic profit over a five-year forecast including terminal value
- Role of the brand – the percentage for the role of the brand is applied on the economic profit
- Brand Strength – on a 0-100 scale measures the ability of the brand to generate the expected future earnings. A proprietary algorithm generates a discount rate that calculates the present value of the brand.
It appears that the methodologies are broadly similar, but the devil is probably in the details. Assumptions and forecasts may differ widely and cause the difference see in the above table.