How to Calculate the Value of a Brand? The Price Premium Method
Brands and
brand valuation are of primal importance for marketing purposes and for increasing the profits and market value for the company owning the brands. They allow strategic brand management and financial transactions. There are several direct and indirect methods for measuring the value of a company's brand. Below I would like to discuss one of the most frequently used methods with you: The Price Premium method.
The Price Premium Method
It is normally assumed that a "branded product" generates an additional (perceived) benefit for consumers, for which they are willing to pay (a little) extra. As a result the product with the brand can be sold for more than a similar "non-branded product".
The brand adds value to the product. This added value can be measured with the Price Premium Method. To determine the brand value in this way you must follow these steps:
- Choose a "branded product" and a similar "non–branded" product;
- Define the price difference between them;
- Deduct brand-induced costs (the costs of creating and promoting the "branded product");
- Multiply the result by the estimated sales volume over the entire life cycle of the brand;
- You get the brand value.
The brand value consequently is the profit that is earned (only) because of the brand. It is the additional profit of a corporation that sells branded products in comparison to the profit of a corporation that sells no-names.
In the case where branded and non-branded products are sold at the same price, the brand value can be determined based on the difference in sales of these products in monetary terms.
Pitfalls and Disadvantages of the Price Premium Method
Even though this method seems to be reasonable as well as fairly easy to use, there are several problems involved with it. The main drawback of this method is the difficulty of finding a "non-branded analog". The scope of 2 brands are often not the same. Also it is not so easy to determine the difference in prices, because they vary due to variations in different regions, seasonal fluctuations, promotions, and other factors. Another issue is that only present additional profits are taken into account, whereas the future profit potential is not considered at all.
⇨ If you have any further information about applying this method in practice, please share it below!
Source: Washington Macias, Katia L. Rodriguez (2018), "Brand Valuation by Price Premium: Theoretical Explanation and Practical Application Using Conjoint Analysis", Knowledge Management №17(3), pp.13-27.
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