The Interbrand Brand Valuation Methodology

Brand Valuation
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Sarah Daghman
Lecturer, Russian Federation

The Interbrand Brand Valuation Methodology

🔥NEW The Interbrand Group is one of the leaders in the field of brand valuation. Therefore, their brand valuation method is one of the most popular and frequently used methods for determining brand value.

Steps in the Interbrand Brand Valuation Method. Process

The Interbrand brand valuation methodology consists of three steps:
  1. FINANCIAL ANALYSIS
    At the first stage, the cash flow which is generated by all intangible assets is predicted. This is conducted through identifying the revenues from products or services that are generated with the brand after deducting applicable taxes, minus a charge for the capital employed to generate the brand's revenue and margins.
    Cash flow is calculated as follows:
    Earnings IntA = Operating Profit After Tax - [Capital Employed * Risk free rate]
    Where:
    Earnings IntA: added profit of intangible assets
  2. CALCULATE THE ROLE OF BRAND
    Since the above intangible earnings include the returns for ALL intangibles employed in the business, the earnings that are specifically attributable to the brand have to be be identified. In other words, the cash flows generated from intangible assets must be reduced to arrive at the role of the brand. This step measures the extent to which the purchase decision is attributable to the brand, which is calculated by determining the extent of the brand's influence on the key demand factors. (the calculation is made as a percentage).
  3. CALCULATE BRAND STRENGTH
    Brand Strength measures the ability of the brand to create loyalty and, therefore, sustainable demand and profit into the future. The Net Present Value of the forecast Brand Earnings is determined based on the rate of the risk profile of brand earnings (the greater the brand's risk, the less powerful it will be). That is considered essential due to its influence on future earnings expectations, as lower brand strength due to higher its risk, will increase the risk of not achieving expected profits.
    To determine brand strength, 10 factors that influence brand strength should be evaluated. These involve internal and external factors:
    • Internal factors:
      • Clarity
      • Governance
      • Commitment
      • Responsiveness
    • External Factors:
      • Authenticity
      • Consistency
      • Relevance
      • Presence
      • Differentiation
      • Engagement
    By comparing the brand with other brands in the same industry, one can judge the performance of the brand and give an insightful snapshot of its strengths and weaknesses.

Disadvantages of the Interbrand Methodology

The main disadvantages of the Interbrand method of brand valuation include:
  1. The method is subjective. Both the brand's share in intangible assets and the discount rate are calculated based on expert estimates. Due to the subjective nature, brand value assessed using this method is subject to significant fluctuations, even though a brand is a fairly stable asset.
  2. In most cases the brand does not exist separately from the product. The consumer associates the brand not only with a certain style, expectations, and experience but also with the quality of the product and the quality of the materials from which it is made. By separating the tangible assets from the brand, the model thus reduces the brand value.
⇨ Please, share your ideas and experience with this model below. Thank you!

Reference: Kriegbaum Catharin (1998), Valuation of Brands - A Critical Comparison of Different Methods, No. 13/98.

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