Marketing and finance have different ways of viewing the world. Brand managers believe they need to create consumer awareness and goodwill.
Meanwhile, corporate finance officers see the need to demonstrate a return on investment to their shareholders.
The conflict that results from this disconnect is present at many board meetings across the globe.
The reason for this confusion has been the practice of using two completely different terms interchangeably.
When you search online for a measurement framework, there tends to be a large volume of basic explanations, rudimentary calculators that do not disclose their methodology, and academic PDFs that do not provide practical solutions for middle-market companies.
Even worse are many of the more popular tools that "calculate" financial brand value.
These produce random score metrics that treat consumer goodwill as an asset on a balance sheet.
The goal of this research is to remove this confusion.
We give you an illustrative and straightforward way to calculate both terms with full transparency of assumptions.
You will find worked examples grounded in economic reality, along with strict decision criteria to help you determine which measurement to utilize in any scenario.
What are the major differences between brand equity and brand value?
Brand equity is a psychological and behavioral measure. It shows how consumers view, engage with, and remain loyal to a business over time.
The brand equity of a business is developed in the consumer's mind and measured through market research.
Brand Value is a financial measure. It determines how much the value of a trademark is when it is sold as a transferable intangible asset.
Brand Value defines the maximum amount acquiring companies will be prepared to pay in order to own, license, and control brand assets.
Corporate brand equity is critical to the ongoing viability of customer acquisition and retention.
Corporate brand value is the calculated value of future cash flows from those customers in the form of brand-based revenues.
You cannot take the formula designed for one metric (equity) to calculate the other (value).
The evolution of the gap between marketing and finance
Today's corporate brand valuation world is heavily influenced by digital tools and agencies that provide quick and dirty numbers.
Daily, in venture capital pitch meetings and corporate strategic planning sessions, the same scenario plays out over and over again.
A company founder must provide a credible estimate of the value of their company's name for a Series B pitch deck.
They find an article on a marketing agency's blog offering a general checklist of common customer awareness and loyalty metrics.
They take that checklist, combine the scores of each customer metric into a simple 1-100 scale, and officially call it brand value.
Brand value is NOT brand equity.
It is merely a rudimentary version of a customer equity index for a brand.
M&A teams, private equity sponsors, and institutional investors will not use a 1-100 survey score in a vacuum to evaluate whether a brand has any material value in the purchase price calculation.
Instead, the potential acquirer requires a valid and defensible source document.
This document must demonstrate to the potential seller how that survey score can be converted into lower customer acquisition costs, higher retail price premiums, or reliable future cash flows.
When you eliminate the distinctions between a customer's perception of a brand and the financial value of that brand, you inflate the acquirer’s perception of the brand equity, reject the term sheets, and develop fundamentally flawed marketing strategies.
Finance teams require GAAP- and IFRS-compliant methods. Marketing teams require daily, direction-indicating metrics.
Capital continues to be misallocated until both factions comprehend the divergent mathematical models that define their separate objectives.
Consumer-based brand equity defined
Proxy metrics exclusively support the concept of consumer-based brand equity.
There is no way to quantify a consumer's emotional attachment through direct measurement.
Therefore, data analysts rely upon the behavioral metrics of emotional attachment.
The brand equity perception engine
Fundamentally, brand equity functions as a commercial perception engine. Strong brands create immediate visibility and generate rapid positive associations.
Consequently, consumers are more likely to repeatedly purchase from a strong brand over an objectively less expensive, functionally equivalent competitor.
When times are tough economically, this emotional barrier safeguards against commodity price erosion.
Understanding brand equity components
Establishing brand equity levels requires the aggregation of multiple dimensions of data.
This includes market-based, longitudinal studies on brand tracking and consumer behavior analysis.
These are typically comprised of unprompted brand recall, prompted brand awareness, net promoter scores (NPS), perception of quality compared to category competitors, retention rates (customer loyalty), and market share dominance in certain geographies.
There is no single, universal brand equity formula.
Any software vendor claiming that a single brand equity formula exists is likely assigning arbitrary weights to standard survey questions.
Sophisticated companies develop customized scoring models specifically for their particular marketplace and selling cycles.
For example, a B2B software company will place significant weight on the metric of customer retention, while a fast-moving consumer goods manufacturer will place significant weight on the metric of unprompted retail awareness.
Financial brand value defined
Financial brand value treats the brand as a unique asset of corporate intellectual property.
What amount could be realized on the open market from a sale of your trademark, logo, and brand identity, should you liquidate your operating company tomorrow?
Financial reporting reality
While psychological equity is represented by a variety of value-related measures, financial value is only represented by actual cash.
It is determined using standard corporate finance techniques, such as discounted cash flow, industry-standard royalty rates, and historical revenue data segregated by product line.
According to ASC 805 (Business Combinations), the accounting standard for brands, brands are classified as identifiable intangibles.
An annual impairment test must be conducted for these brands, and they must be defended to the auditors by the company.
Acquisition methodology
When a larger corporation acquires a smaller competitor, the amount paid for that competitor is frequently well above the fair market value of that business's net tangible assets (i.e., inventory, real property, and machinery).
This excess amount is reported as goodwill and intangible assets. A portion of the excess is often directly attributable to the value of the acquired company brand.
When conducting a Purchase Price Allocation (PPA), financial analysts do not rely on survey information to provide them with a number that quantifies the fair market value of the acquired brand.
Instead, they need to see hard financial data that isolates the specific percentage of total revenue generated solely from the name of the acquired brand attached to the product.
Brand equity vs. brand value examples and formulas
To understand the structural differences between the two forms, let’s break down the formulas that drive both concepts quantitatively.
The following sections will include the calculation methods, the assumptions required for calculating brand equity, and real-world examples of how to perform the calculations.
The formulas outlined here are presented using standard text editor arithmetic notations, making it easy for spreadsheet software to copy and use without needing specialized text engines.
Brand equity measurement using scoring models or proxies
Since brand equity can be evaluated at many levels, it is best to use the Weighted Brand Equity Index (BEI) method to evaluate and compare all proxy measures.
Brand equity index calculation methodology
A Brand Equity Index assigns numerical weights to various consumer metrics based on their relationship to revenues within a certain market sector or industry.
The sum total of all weights will equal one (or 100%).
The formula used to calculate the Brand Equity Index appears as follows:
Brand Equity Index = (W1 * Awareness Score) + (W2 * Quality Score) + (W3 * Loyalty Score) + (W4 * Associations Score)
Where W is the decimal weight assigned, and the Score variables indicate the normalized survey data (0−100).
Example of a step-By-step calculation for brand equity
Let's take the example of an average-priced enterprise software business.
The enterprise software Industry analyst has done research based on results from a recent quarterly brand tracking study.
For this study, the analyst has identified that within the highly technical area of B2B Enterprise software, loyalty (customer retention) and quality (perceived quality) are the two biggest drivers of purchase decisions for businesses in this sector.
Awareness, by itself, is much less important than loyalty and quality when making purchase decisions.
Weights assigned to each metric
- Weight Assigned to Awareness (W1): 0.20
- Weight Assigned to Perceived Quality (W2): 0.35
- Weight Assigned to Loyalty or Retention (W3): 0.30
- Weight Assigned to Brand Associations (W4): 0.15
Data from the survey
- Awareness Score: 60
- Quality Score: 75
- Loyalty Score: 80
- Associations Score: 65
Formula for calculation of brand equity index
To calculate the Brand Equity Index (BEI), we will take advantage of the Order of Operations (BODMAS).
Therefore, to calculate the BEI, we will use the following formula:
BEI = (0.20 * 60) + (0.35 * 75) + (0.30 * 80) + (0.15 * 65)
BEI = 12 + 26.25 + 24 + 9.75
BEI = 72
The baseline BEI for the enterprise software company is therefore 72 out of 100.
Understanding the equity score
The number 72 on its own is just a baseline for the company.
However, the true commercial value of this score will come from the ability to track changes in it over time or directly compare it with the index of a competitor.
For example, if a competitor scores 85, this gives the enterprise software company an indication that it needs to monitor and adjust specific metrics related to overall market perception and reallocate marketing expenditure accordingly.
Where equity scoring does not work
The equity scoring model relies heavily on the accuracy of the underlying survey data.
For instance, survey fatigue, biased sampling, and inconsistent brand-track question structures can lead to the artificial inflation or deflation of scores on one or more of the input variables.
Additionally, assigning a subjective weight to one input variable without any statistical validation of how much that variable contributes to the company’s sales will result in the Brand Equity Index being mathematically irrelevant.
Methods of valuing brands: Three financial models
Once a company can transition from determining how consumers perceive its brand to how much the brand is worth financially, it must move away from using a survey-based scoring system. Instead, it must rely on standard methods for valuing businesses.
Valuation professionals, tax authorities, and auditors exclusively recognize three approaches to brand value: the royalty relief method, the price premium approach, and the multi-period excess earnings method.
Of these three methods, the royalty relief method is considered to be the most widely used for merger and acquisition (M&A) transactions, trademark litigation, and corporate tax compliance. Approximately 60% of all estimates of brand value are based on the royalty relief method.
Royalty relief methodology
The essence of the Royalty Relief Methodology is to create a fictitious situation.
What if the operating company was not allowed to have its brand name, forcing it to license the brand name from another party that owns it?
In determining the brand's value, the monetary value of owning the brand is determined based on the hypothetical royalty amount the operating company would have to pay to an outside company if it were to license the brand name temporarily while it built up its own.
Formula for calculating the royalty relief method
To accomplish this calculation, analysts will utilize a discounted cash flow model adjusted for royalty savings.
Cash Flow for the Year = Revenue * Royalty Rate * (1 - Tax Rate)
Present Value (PV) = Cash Flow for the Year / (1 + Discount Rate)^Year
Total Brand Value = PV Year 1 + PV Year 2 + PV Year 3 + ... + PV Terminal Year
Royalty relief example – Step by step
Let's assume a fast-moving consumer goods (FMCG) manufacturing company has developed an organic snack product that is sold as a premium brand.
It is considering a proposed acquisition of the product by another company after three years of projections.
The company has engaged an independent consulting firm to develop the valuation of the brand for these three years of forecasts.
The basis for preliminary assumptions
- Revenue Year 1: $20,000,000
- Revenue Year 2: $22,000,000
- Revenue Year 3: $25,000,000
- Royalty Rate: 4% (0.04) based on a review of various industry intellectual property databases.
- Tax Rate: 25% (0.25)
- Discount Rate: 12% (0.12 WACC, or Weighted Average Cost of Capital)
Cash flow for year 1
Year 1 Savings = (20,000,000 * 0.04) * (1 - 0.25) = $600,000
PV Year 1 = 600,000 / (1 + 0.12)^1 = $535,714
Cash flow for year 2
Year 2 Savings = (22,000,000 * 0.04) * (1 - 0.25) = $660,000
PV Year 2 = 660,000 / (1 + 0.12)^2 = $526,148
Cash flow for year 3
Year 3 Savings = (25,000,000 * 0.04) * (1 - 0.25) = $750,000
PV Year 3 = 750,000 / (1 + 0.12)^3 = $533,835
Overall valuation
In order to establish a three-year baseline for the brand, one must sum the present values together.
Total Brand Value = 535,714 + 526,148 + 533,835 = $1,595,697
(Important: To complete a corporate valuation, cash flow should also be calculated into "forever" via a terminal value, but the above breakdown provides the specific mechanical arithmetic for this scenario).
Areas of friction for royalty relief
The entire model is highly dependent on the royalty rate selected.
A move from four percent to five percent, for example, drastically shifts the overall valuation, costing millions in perceived value.
The valuation analyst must obtain strong, defensible data (royalty rate) from either patent or trademark databases (i.e., ktMINE, RoyaltyStat, etc.) in order to substantiate the royalty rate used when presenting to the board or regulatory body during due diligence.
The price premium methodology
Other than pricing by specialty distributors, there are various ways to price products.
The price premium method is used to establish a product’s premium because the only true premium to the retailer is directly related to a difference between the brand and a competitor's products.
The calculations for the price premium method derive the dollar amount attributed to the brand (difference in retail price) for each unit sold.
This is multiplied by the number of units sold over a period of time (future projection) to determine the dollar amount associated with the brand.
Price premium formula
Premium Revenue = (Branded Price - Generic Price) * Volume
Yearly Cash Flow = Premium Revenue * (1 - Tax Rate)
Present Value (PV) = Yearly Cash Flow / (1 + Discount Rate)^Year
Example of pricing using price premium method
A specific consumer electronics manufacturer has developed and marketed a proprietary smart speaker (both retail product and hardware) where all the hardware components are considered to be a commodity.
Determine the assumptions
- Branded Price: $150
- Generic Price: $100
- Volume Year 1: 100,000 Units
- Tax Rate: 20% (0.20)
- Discount Rate: 10% (0.10)
Pricing calculation
Premium Revenue = (150 - 100) * 100,000 = $5,000,000
Year 1 Cash Flow = 5,000,000 * (1 - 0.20) = $4,000,000
PV Year 1 = 4,000,000 / (1 + 0.10)^1 = $3,636,363
Weaknesses of price premium method
This pricing approach is limited to pricing done in retail industries that offer a true generic equivalent.
The price premium method will not work in highly commoditized B2B software, high-fashion luxury, or technology industries where the underlying features of the products can vary greatly between competitors.
If a product has a functional advantage over another product, one cannot assume that the additional price premium is a result of the premium associated solely with the brand name.
The Multi-Period Excess Earnings Method (MPEEM)
Analysts often use the multi-period excess earnings method, which is an Income Approach method used for highly complex businesses that derive their revenue primarily from their brand.
The MPEEM method begins with calculating the total cash flow that the business receives and then deducting from it the "contributory asset charges."
These are the returns that would have been required for working capital, fixed assets, and intangible assets, such as customer lists and patented technologies.
The remaining cash flow, termed "excess earnings," is entirely attributable to the brand.
Excess earnings formulas
To determine excess earnings, the following formula is used:
Excess Earnings = Total Operating Cash Flow - (Return on Working Capital + Return on Fixed Assets + Return on Other Intangibles)
To calculate the brand value, the following formula is used:
Brand Value = Sum (Excess Earnings / (1 + Discount Rate)^Year)
Because of the unprecedented level of financial analytical rigor required to isolate the actual required return on a fleet of delivery trucks (fixed assets) in order to determine what value can be attributed to the logo painted on them, this method is not commonly used.
It is generally reserved for formal purchase price allocations, which are typically associated with large-scale corporate buyouts.
Bridging the gap between marketing equity and financial value
Strategically thinking of marketing equity and financial value as completely separate corporate silos is a tragic miscalculation.
The underlying principles that support the different formulas are, in fact, closely intertwined.
Consumer perception provides the raw material, while the financial analysis process provides the means to quantify the value derived from that material.
The risk multiplier
In financial analysis models, a brand with a high level of equity will, in effect, mitigate the risk of those financial assets.
When constructing a Discounted Cash Flow (DCF) model, a company’s treasury department must apply a discount rate (the company’s Weighted Average Cost of Capital, or WACC) to account for risk in determining whether or not future cash flows will actually occur.
A brand that has superior equity measures (as demonstrated by superior loyalty measures) and high consumer awareness and recall will yield significantly less uncertainty regarding future cash flows than brands with lesser equity.
This lower level of uncertainty, or predictability, leads to a lower level of risk. From a mathematical standpoint, this creates a lower discount rate, and therefore maximizes the present value of the brand asset.
Reducing customer acquisition costs
Brand equity boosts unit economics as a result of generating unprompted brand awareness in a defined market space.
Therefore, Marketing teams at a given organization can be forced to spend significantly less on performance advertising at the top of the sales funnel because of this awareness factor.
This shift reduces Customer Acquisition Cost (CAC), driving up profit margins dramatically.
As such, those increased margins provide absolutely more free cash flow that can be attributed back to the brand, resulting in a higher valuation under both Royalty Relief and Income Approach methodologies.
Therefore, Brand Equity provides the efficiency with which the Brand Valuation is conducted.
Data sources & calculation needs
Your calculation is only as credible as the underlying data that you enter into your spreadsheet or text editor.
Most internal attempts by an organization to value its brand come to an incomplete halt when opposing parties realize they do not have the infrastructure in place to assemble the required inputs.
What you need for your equity metrics
It is impossible to take Equity Metrics directly from typical financial accounting software.
Collecting such data requires a systematic, outward-facing market research infrastructure.
Longitudinal brand tracking studies
There must be statistically significant longitudinal tracking measures conducted quarterly and/or semi-annually, measuring "Prompted & Unprompted Recall."
At all times, the same defined demographic must have been tracked so as not to allow significant "data pollution" to occur.
The act of changing survey questions from year to year creates an entirely new baseline.
Quantitative social listening data
Sentiment analysis, obtained via API through the various social media platforms, is used to obtain a "brand associations" weighting for the equity index.
This information is also used to provide an instantaneous unstructured pulse of the brand between structured, formalized survey periods.
First-party retention analytics
The data used to calculate churn rates for repeat purchases and calculate customer lifetime value is derived from the customer relationship management (CRM) system.
This data represents objective evidence of customer behavior that supports the subjective opinion expressed in the customer surveys.
When there is a high churn rate in the CRM data but customers claim to love a brand on a survey, then the survey is flawed.
What to look for in valuation models
Financial models require the data to be rigorous and auditable.
Therefore, the data must be able to withstand forensic due diligence by an external accounting firm, like a big four firm.
Isolation of revenue by brand
Management must separate the revenue associated only with the branded product or services.
For example, if the manufacturer has several sub-brands and/or produces both private label and branded products, revenue from both the private label and branded retail sales must be separated in the general ledger before applying the royalty rate.
Database of comparable royalties
Paid Intellectual Property databases are necessary to find comparable licensing agreements.
You cannot estimate a royalty rate based on your gut feeling.
You have to back up the royalty rate with measurable data to support the royalty rate you will use in your valuation.
Cost of capital inputs must be accurately assessed
The discount rate must be updated using the current risk-free rate, the equity risk premium, and the company's individual beta values.
Usually, this will require information directly from the corporate finance department, since it will be deemed invalid if the model uses an arbitrary 10% discount rate.
The danger of simplified online calculators
Simplified calculators available on the internet pose a great risk to the digital marketing community.
There are many pages on the web where people can go to calculate a company’s worth (brand valuation) in exchange for an email address.
One significant problem for companies that operate within the digital marketing ecosystem is the growing number of black box calculators being created and made available to users.
These calculators typically require users to input three pieces of data.
These include annual revenue, a generalized industry of the company, and a subjective score given to the company based on a user’s perception of the strength of its brand, rated from 1 to 10.
These calculators use unknown formulas to provide a brand evaluation that can be in the millions of dollars.
These calculators create a huge risk for decision-makers in companies.
In addition, these calculators do not explain how the valuation is reached (i.e., what metrics, weights, and benchmark data are used).
This creates confusion for users in the way that brand equity and brand value are defined, and the language used to describe them is often interchangeable.
Therefore, a subjective score given for Marketing based on a consumer’s perception of the strength of a company’s brand is being confused with the actual value of an asset recorded on a company’s balance sheet.
Using these types of calculators for M&A discussions, justifying budgets, and creating pitch decks for potential investors will forfeit any validity for an executive.
To create a meaningful Financial Valuation, the mathematical methodologies must be available to the public, along with an explanation of any assumptions made and limitations of the selected model.
Final consideration: Which metric should I use?
Ultimately, the criteria professionals will weigh the most will come down to one main question:
“What is the value of brand equity, and which metric has the highest credibility based on the target audience to whom I am trying to convince to purchase an increased amount of marketing services?”
If a Brand manager is attempting to justify a marketing budget increase to a skeptical CEO, their only focus should be on Consumer-Based Brand Equity (CBBE).
In order to substantiate the correlation between an increased Brand Equity Index, decreased Customer Acquisition Costs, and increased cohort retention, the major focus should be on consumer perception and momentum in the marketplace.
If a founder is selling and/or an external consultant is creating a report for a client that values the financial brand value (FBV), the report must completely differ from survey scores.
These reports must abandon the usage of survey scores completely.
They must contain quantifiable financial numbers using the royalty relief or Price Premium Approach, based upon audited corporate finance principles.
When a company measures Brand equity, it is to manage its operations. When it measures Brand value, it is because it needs to sell that business.
Frequently Asked Questions (FAQs)
1.) Can brand equity be present without brand value generated from it?
Yes, brand equity can exist and be very strong without being monetized.
An example would be: an organization may have a very large awareness base, a loyal customer base, and a positive image.
However, because there is no cash flow or price premium associated with it, this company doesn’t have financial brand value.
Some examples of brand equity without a financial brand value would be non-profits, a historical brand that has failed, or an open-source code (OS) project that is popular but has no means to measure, value, or monetize it.
2.) How often does the corporate entity need to recalculate these metrics?
Brand Equity is an operational metric that should continuously be monitored. Most enterprise companies conduct quarterly surveys to track their Brand equity.
This allows them to adjust their marketing campaigns and messaging based on changing consumer sentiment.
Brand Value is a bit more complicated to calculate and is usually done once a year for financial reporting and impairment testing purposes.
Alternatively, a company may calculate Brand Value on an ad hoc basis prior to a sale, financing, or strategic change.
3.) Can you legally defend these formulas during a sale or acquisition?
Yes, royalty relief and multi-period excess earnings methods of valuing intangibles are legally and completely defensible under the Global Accounting Frameworks (e.g., ASC 805, IFRS 3).
However, this legal defensibility is heavily reliant upon the ability to audit the inputs into the formula, specifically the source and methodology for determining the royalty rate and discount rate.
Brand equity indices are typically not legally defensible in the context of financial and tax reporting because they are often subjective and contain psychological factors that are not financially quantifiable.
4.) Why do so many online calculators provide such different values for the same company?
The reason for the vast differences in values is that there is no structural standardization to the various web-based calculators.
Each calculator uses a different approach for calculating Brand Value, whether it be through revenue multiples or a more speculative algorithmic weight for social media follower counts.
Since there is no way to disclose the inputs and methodology used to derive the output values, the calculations are not a reflection of the economic reality of the business.
Instead, the outputs reflect the software developer's arbitrary biases.