Brand valuation: Marketing not just a cost but also an investment

Gary de Ocampo —Contributed Photo

Gary de Ocampo currently represents Brand Finance, the world’s leading independent brand valuation consultancy, in the Philippines. He retired in April 2023 after serving as the president of Kantar Philippines and the managing director of its Insights Division for 15 years.

In September 2024, he will begin his new role as president of Centre Medicale Internationale, the premier outpatient clinic in the country. In this interview, he discusses brand valuation, which is prominent in Europe and the United States, but remains a surprisingly novel concept even among many of the largest companies in the Philippines.

Question: Brand valuation is a relatively new concept in our local market. Can you explain what brand valuation entails and why it is important for businesses to consider?

Answer: Brand valuation is really fascinating. I had lunch recently with the chief marketing officer (CMO) of one of the biggest companies here in the Philippines. You won’t believe this, but she told me their chief financial officer (CFO) still thinks marketing is mostly fluff. Can you imagine—in 2024, treating marketing only as a cost rather than an investment? That’s exactly why brand valuation is important.

Think of brand valuation like figuring out how much your brand is worth in cold, hard cash. It’s similar to valuing your car or house, but we’re talking about your brand instead.

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We have been doing market research for ages, and it usually ends with some fancy brand equity metric that marketers and researchers love. However, most finance folks often don’t get it. That’s where brand valuation comes in.

It takes that extra step and calculates the value of your brand in a way that even the most number-crunchy finance pro can understand and appreciate. It’s like a bridge, connecting marketing and finance, helping everyone speak the same language of business.

This is important because it can totally change how a company sets its goals. Instead of focusing solely on those brand equity metrics, the brand value becomes the apex key performance indicator (KPI). Investors, financial analysts, creditors love this because it helps them figure out if a company is a good bet.

Brand valuation can also be a game changer in all sorts of situations. In mergers and acquisitions, it gives you a clear picture of what you’re bringing to the table. Need a loan? A strong brand valuation might help you negotiate better terms.

In managing your brand portfolio, determining and understanding each brand’s value helps in making decisions about which brand to increase or reduce investment in, or even which brand to retire.

In partnerships and licensing deals, knowing your brand’s true value ensures you’re not getting shortchanged and gives you data-driven basis for your negotiation position.

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The beauty of brand valuation is that it speaks the language of business—finance. It shows everyone, not just the marketing team, how a strong brand translates to cold, hard cash. It’s about accountability, showing how marketing efforts are driving real business performance.

In the end, it’s about bringing everyone together. Marketing, finance, leadership, employees, partners—all on the same page, working towards the same goals. It’s not just about making the brand look good; it’s about making the whole business perform better.

Brand valuation might be relatively new here, but it’s something every business should be looking into. It’s not just a marketing thing—it’s a whole business thing. And in today’s world—the age of marketing accountability—where every penny counts, brand valuation is more important than ever.

Q: What methodologies and metrics are used in determining the value of a brand? Can you provide examples of how these have been applied to well-known global brands?

A: First off, we start with good old market research where we measure how strong a brand is in its addressable market. Brand Finance calls their brand strength metric the Brand Strength Index, or BSI. It’s all about how familiar people are with the brand, how much they trust it, and how appealing it is. It’s based on heuristics or the mental shortcuts that customers use to choose brands—familiarity, loss aversion and effect (or emotional influence).

The brand strength metric as an input into brand valuation can’t be some mysterious black box formula. It needs to be transparent so it can be used in financial statements and negotiations. No hocus-pocus allowed! This is the reason why some big market research companies who try to do brand valuation cannot be accredited by International Organization for Standardization. They are tied to their respective black boxes.

Next, we use this BSI to figure out a fair royalty rate for the brand. It’s like, if someone wanted to use your brand name, what would you charge them?

Then come the revenue forecasts, usually for the next five years. We apply that royalty rate we figured out to these forecasts to get what we call “brand earnings.” We’re talking serious number-crunching here, using data from big players like Bloomberg, IMF and KPMG.

After that, we factor in taxes and use a discount rate to get the net present value. It’s like figuring out what future money is worth today.

Now, this method I just described is called the income approach. It’s the gold standard, but there are others, too. There’s the cost approach, which is like, “How much would it cost to build this brand from scratch?” And there’s the market approach, which compares your brand to similar ones that have been bought or sold.

What makes brand valuation so powerful is that it’s not just some nebulous marketing metric. It’s hardcore financial analysis. That’s why it can be such a great top-level KPI for brands.

Let me give you a couple of real-world examples. Remember when Tesla’s sales dipped in April, but their stock price went up? Byron Sharp, the most famous marketing scientist in the world today, explained it was “because a whole lot of people are betting that it’s going to make a lot of money in the future,” and “that is why company valuations tend to focus on future cash flows rather than past earnings.”

Or take Amazon in 2019. They had a pretty rough earnings report, but analysts were like, “That’s just Amazon being Amazon. Its investment will eventually pay off.” They were looking at the brand’s future potential, not just the numbers on the page.

The big takeaway here is that if marketers know their brand’s value—its future cash flow potential—they can make better decisions. They can tell if a dip in sales is just a blip or a real problem. Being armed with such understanding also helps to manage all stakeholder groups well.

Brand valuation might seem like a lot of work, but it’s a game-changer for businesses. It helps everyone from marketing to finance speak the same language and make smarter choices for the long haul.

Q: Considering the unique characteristics of our local market, what specific factors should businesses here focus on when it comes to brand valuation? Are there any common challenges or misconceptions you encounter?

A: The Philippines is sophisticated in terms of market research. Some of the best market researchers in the Asia-Pacific region and in the world are here. But here’s the funny thing—that expertise might actually be slowing us down when it comes to adopting brand valuation.

Here’s what typically happens: As soon as the senior officer hears that research is part of brand valuation, they immediately pass it on to their market research team. And look, I’m not knocking our researchers, I am a researcher myself—for more than 25 years! —but brand valuation isn’t just about market research. It’s got all these financial components that aren’t typically in a researcher’s wheelhouse.

Brand valuation needs to involve the senior leaders in the company. We’re talking CMO, CFO, the head of investor relations, corporate communication, even the CEO. As I mentioned earlier, it’s not just a marketing thing or a finance thing—it’s a whole company thing.

We also have this other misconception floating around that brand valuation is only for the big companies. That is just not true. Even small and medium enterprises can get a lot out of knowing their brand value. It’s important for investors and analysts who are looking at smaller businesses too.

And then there’s this idea that brand valuation is too complicated or expensive. It does take some investment, but think about the payoff. The insights you get can lead to way better decision-making. It’s all about changing how we think about it—it’s not some fancy extra, it’s a crucial part of business strategy.

Brand Finance has some hurdles to overcome in the Philippines, but I really believe that once more companies here start to understand what brand valuation can do for them, we’ll see a big shift. It’s not just about having a strong brand—it’s about knowing exactly what that brand is worth and how to leverage it. That’s the game changer … (Read the full interview at josiahgo.com) . —CONTRIBUTED

Josiah Go is the Chair and Chief Innovation Strategist of Mansmith and Fielders Inc. Josiah and Gary will be among the 12 speakers featured at the nationwide webinar on “How to Write a Strategic Marketing Plan” on Sept. 24-25, 2024. For details, inquire at [email protected]