Why to measure Brand Equity?

If a company does not put a price on a brand, it would become acquisition by rivals at throw away price in the market. Brand equity is an intangible asset as much as a tangible asset; therefore a firm should estimate the brand value on the balance sheet, hence by misleading information to the stakeholders, shareholders and the public. If the true value of the brand is not reflected in the balance sheet the management would get away with murder. It is always important to show higher returns on assets than reality.

By measuring the brand value on the balance sheet we can evaluate the management’s performance by the change in the value year after year.

5 methods of measuring brand value

1.       Incremental Sales Method

Higher sales for a strong brand permit the brand to increase the price of the brand at higher prices. Price premium over its rival is a good measure of a strong brand value.

This method involves the use of the following mathematical equation

Brand Value = n₁p₁/1.r + n₂p₂/ (1.r)² +………………… + n_np_n/ (1.r)ⁿ

Where:

N = number of units sold over the years

P= price premium per unit year after year to the category of commodity it belongs to

R= discounting rate for converting the present value of future money

2.       Increased Market penetration

Sometimes brand management may not get price premium they want, it is important for the brand value to get reflected at the time of market penetration.

In this method the extra volume if sale results in unit cost reduction because of economies of sales. The brand value is accumulative of all annual savings of cost made by brands.

Brand Value = n₁c₁/1.r + n₂c₂/ (1.r)² +………………… + n_nc_n/ (1.r)ⁿ

3.       Green Field method

If we have to develop a brand of the same stretcher that of one of the existing brand we make estimate of how much time and money is required, we determine the discounted value of the present value of all future annual investment spread for the next ‘n’ number of years which will in turn become the brand value of the brand.

4.       Market Capitalization Method

Calculating brand value from the market capital owning to the brand if it is a single brand/corporate company.

Market capitalization = market shares issued by firm * market price of company share at that time

Market capitalization can be calculated any day.

5.       Brand strength multiplier method

Brand value is estimated by the formulae

Brand value = brand earnings * brand strength multiplier

Brand earnings i.e. brand related annual profits of the company