Wednesday, October 05, 2005

Define your Brand and determine its value

Strong Brands help companies communicate why their products & services are uniquely able to satisfy customer needs"

How do you define a brand?

Defining what is constitutes a brand is not easy. A "Brand" can be defined at three different levels - each level satisfies a category of brands.

Level-1: Brand is a logo and associated visual elements.

This definition holds good from a legal point of view. The logo design, logotype, and other visual elements can be registered and are associated with the product. Eg: Intel Logo, Golden Arches of McDonald’s.

Level-2: Brand is a bundle of a logo, associated audio/visual elements, registered trademarks, and other intellectual property rights.

This is a wider view of a brand. Often a branded product includes several intangibles such as patents, business process knowledge, market knowledge etc. Intangibles such as business knowledge, market knowledge, customer relationships adds a value to the product. For example Pentium-4 processor would not be successful without the intangible assets which was used to design & build it.

Level-3: Brand represents the company or the entire organization

This holistic view of a brand includes the logo, audio/visual elements, patents, trademarks, intellectual properties, intangible knowledge and the organization: its people, culture and management. All this has to be put together to create a brand. When taken as a whole, the brand represents a specific value proposition and create strong customer relationships.
This view of a brand ties up the company, its reputation and its brands. This is correct, because if there is a damage to a brand - it will affect the company reputation also. For example, Ford Explorer fiasco affected Ford Motor company too.

Financial Impact and Value creation

It is a well accepted idea that brands play an important role in generating and sustaining financial performance of branded products. But the impact of brands on corporate performance is more subtle as the value creation by a brand is often difficult to measure.

There are several ways of measuring a brand value in dollar terms, such as Book to market value multiples, Net present value of the premiums which customers are willing to pay for a branded product over an unbranded product, price a competitor is willing to pay for a brand etc. In this article, I will refrain from discussing how the brands are valued. Instead lets take a look at how brands create value.

Value Creation
Brands create financial value in several ways which is illustrated below.

Improved Brand Equity Affects Audience Behavior Increases Financial Value
Customers Increased buying rates

Buying more quantity

Paying a premium Price
Increased Revenue
Suppliers Better terms of Business

Bigger discounts
Savings on direct costs
Employees Better/lower cost of hiring

Lower employee turnover

Improved productivity
Savings on operational costs & Overheads
Financial Reduces cost of equity

Reduces cost of debt
Better returns to Investors

Closing Thoughts

Brands create value to the shareholders. The exact dollar value of a brand cannot be easily fixed, yet companies must invest in building brands.

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