[MUSIC] We're going to talk about brand valuation. How can we actually put a value on this thing called brand? And what you'll notice is, there is no such thing as a value for the brand. The value has a different brand, in different contexts, and for different players in the industry. The same brand, that is. So let's think about some of the reasons I might value my brand. Since 2001 in the United States, 2005 in most of the rest of the world, we actually now have to put a value on the brand when we acquire a company. We have to think about the assets we acquired, and we have to split out, somehow saying, well, how much is this thing called brand worth? Okay, that's one reason. You might also think of valuing a brand for the taxation purposes. Think about where your brand team is, where the brand is managed. Sometimes maybe it's in a low tax environment, like Switzerland. How much value does the brand bring to the business overall? If you think about it, even though you're not paying a royalty or a license fee, how much value is it creating for the rest of the world, so that you can recognize the value creation in there for a tax, that part of the value creation, in this domain? We might also think of brand valuation when it comes to brand damage. If somebody else has damaged your brand, they've damaged your reputation, what is the amount of that damage? Or, if you are licensing your brand to a third party, they're paying royalties for example, how much should they pay? All of those are reasons for valuing a brand. But critically, you're also valuing a brand for the purpose of driving your business, for managerial decision-making. And that's not really thinking of the brand as an asset, it's thinking of the brand as a driver of your business, as a lever. And you have to understand your business model, and you have to understand where does brand provide leverage within that business model? So that you can make the right resource allocation decisions as a manager, and you can think about where you allocate your effort. So think about corporate value going back just to 1975, about 85% of corporate value were what we consider tangible assets. That's the cash your sitting on, your buildings, your machinery. Physical things you can actually own and sell. And only about 15% were intangible assets which might be brands, patents, technology, maybe some licenses you held or some contracts that you have with your customers, maybe the retailer. Now if you go forward to today, about 80% of the value of businesses are these intangible assets. And depending on which industry you're in, brand is often one of the dominant aspects of that intangible value, if not the most dominant value of that intangible. So if we think about the transaction of Proctor and Gamble when they bought Gillette. The entire transaction was worth over 50 billion. Now Goodwill, which is the part of the value I cannot account for, I'm not sure did I overpay, or these are things I don't have ownership of in the sense that I can buy and sell them, maybe like your people. You cannot, typically you don't own them and you cannot sell them. That made up about 35 billion of this. Now the next single biggest assets were brand, at 25.6 billion. These are all the various brands Gillette owns, including of course Gillette, some of the sub-brands like Venus, Duracell which was part of Gillette as well. So those brands need to be valued. And 25.6 billion, the next biggest asset were current assets at 5.7 billion, these are like cash, for example, receivables that you might have. The physical property was less than 3 billion that they owned, the machinery and the buildings. So brand has a huge value on the balance sheets and it was the largest single identifiable asset, because Goodwill is not identifiable. Now, of course, management is now looking at this, this is what they acquired. Now you might ask yourself, well, how do I value this asset? How do I know it's 25.6 billion? What exactly is this? So if you go back to some of the earlier videos we had, we talked about the value that the returns you get from brands. You might sell more, and you might sell it at a higher price. So one of the valuation approaches is what we call the income based approach, which is basically the price premium and the volume premium, maybe one or the other, and that's how we go about it. Another approach is a cost-based approach. If you're a young company you might think about, how much money did I invest in marketing to build this brand? This typically works for start-ups. If I sell them, I can value it. Or you can think about, have I licensed my brand? And what would it have cost for me to license the brand and pay royalties, and then I'm getting relief from that royalty by owning the brand. That's another way to think about it. And the final approach is when we use a market-based approach, and when we look at, have there been comparable transactions in the past? Is there some kind of a guideline, a benchmark I can adhere to? And typically we might use a combination of these approaches. So why do we see these fundamentally different approaches? Well, one is valuing the brand as it contributes to the value of the business as a whole, in all of its different ways. Whereas the brand finance one, the smaller value, the 100 billion, is valuing the Apple trademark in terms of how it is separable from the business as a whole. It's an identifiable asset that you can rent, that you can sell, you can buy. So it's quite a different approach. Let me try to visualize this in very simple ways. So fundamentally speaking, the starting point for many of these valuations is the value of the branded business. What is the Apple enterprise worth as a whole? That's a 300-some billion figure I gave you before, okay? Now, what we have to think about is, well, these are sort of these Russian dolls that you might have seen. I just don't have a Russian doll at hand. Inside of this business value you can think about, well, how much of this overall value is being created by the brand? So if we think about that ,they're saying, well, and I'll go into more depth on this, well it contributes both to the price and the volume of my products and services. But it also, as we discussed before, helps me attract better people for less. I have some productivity gains. Maybe it allows me better terms with my suppliers. Maybe I have a license to operate in territories based on my relationship with the government or regulators. So the value of the brand to the business can happen in many, many different ways across different parts of the enterprise. Now that in some ways, is the Millward Brown approach. What the brand finance approach does, is look at the value of the trademark itself. Not in terms of how the trademark generates value for the business, but what if I took it and I said here, you can license this. You can put the Apple name, if you're maybe AT&T or T-Mobile in Germany, these are mobile operators. And you can use the Apple name in your marketing, in your promotions. I'm giving you an exclusive license, now you have to pay me a certain amount for that. And of course many businesses make a lot of money by licensing their brand. So technically speaking, the value of the trademark is not just the absolute value maybe the Apple brand brings to another product, but you're sharing that value. You're not going to pay a royalty to the absolute amount of added value. You're going to kind of divide the difference. You're going to pay a royalty at a slightly lower rate. So even here, we're not capturing the total value of the trademark that it brings to maybe your customers, we're only capturing part of that, because they're not paying for the whole amount. So let me summarize, which I think is most important for the purposes of this MOOC, is really about managing the brand, and understanding where the brand provides value to manage the enterprise. Which is kind of the Millward Brown approach, if you will. What's nice about the Millward Brown approach, because it's based on a metric, what we talked about the customer-based brand equity. We understood, where is the value coming from? How many people are aware of our brand? How highly do they think of it? How loyal are my customers? Right, you can start to understand some of the drivers of brand value, and you can then start making some managerial decisions about where you need to invest your resources. We rarely are in the situation where we're selling our brands, where we're licensing them, so it's a much less common valuation approach where the accountants are quite strict about what aspects you can value, namely, those that you can separate from the business. Whereas the value of the brand brings us in many different places, and to do that, you have to understand the business as a whole. Let's start with a simple, simple aspect here. Let's take the profit function of a business. Now, very simple terms, and I know I'm simplifying it here. But the profits you make are, the volume of products you sell multiplied by the margin, which is the price minus the variable costs. So, the variable costs are those costs that you incur every time you sell one unit of the product, okay? So, it's the margin times the volume, and then you have to subtract out the fixed costs, the costs that don't change over a certain planning cycle, like your building, the rent you pay, for example. Those costs don't change based on how many customers you sell to. We could also split those costs out, of course, into marketing and non-marketing costs. And if you think about that profit equation, we can think about, well where does brand drive value? And we can do this across our portfolio of products and services. Which ones of these, is it a volume driver, because of maybe the awareness levels? Where is the brand gaining us a price premium? Where on the cost side, is it reducing costs such as with our employees? Or hiring better employees and we have higher productivity, okay? That's when you start unraveling the value of the brand, and of course you can take that to all kinds of external stakeholders, which might be your suppliers, companies you might partner with. Apple has an incredibly strong brand, which allows them, which makes them attractive to other partners, maybe in the mobile telephoning space, like the operators of AT&T and T-Mobile that were willing to pay large premiums, even a percentage of their own revenues, in order to have an exclusive deal with Apple. So you need to understand fundamentally, what is my business model? Where does brand provide value in that business model? Over what period of time does it provide that value? You discount it to the present, and that's really when you start understanding the power of brand. And a metaphor I shared early is, if you think about brand that way, it is not the icing on the cake, where it's a separate product feature. It's really a key ingredient, maybe like the yeast that makes your cake expand in the first place, where it's integral to the whole business. Now, because it's integral to the whole business, it also means I cannot separate it out. And that's why the value of the brand is fundamentally different than the valuation I can put on the trademark at the end of the day. [MUSIC]
