It is widely agreed that a brand can be a key strategic asset for a company, but exactly how do you value it? Brands are intangibles, unlike tangibles such as factories, offices or store fronts, and this presents a challenge for conventional accounting standards.
With the recent release of ISO 20671, Brand evaluation – Principles and fundamentals, Dr Bobby J. Calder, Chair of ISO technical committee ISO/TC 289 on brand evaluation, explains how it covers the technical requirements and methods involved in measuring the strength of a brand. This standard extends the scope of ISO 10668, Brand valuation – Requirements for monetary brand valuation, that focuses primarily on the financial valuation of brands. Ultimately, ISO 20671 aims to help resolve the differences of opinion around conventional accounting treatments of a brand.
Here is where the potential struggle arises, in Dr Calder’s opinion. He believes the crux of the matter is that “finance and marketing don’t speak the same language. Marketing focuses on justifying brand expenditures and finance focuses on controlling them”. Both need to work together to treat brands, not as an expense, but as a key financial asset.
So how can these two – often at-odds – functions located in the same company move toward a common understanding of brands? Dr Bobby J. Calder shares his insights.
ISOfocus: What does “brand” mean and why is brand evaluation important?
Bobby J. Calder: Brand entails distinctive images that include names, terms, logos and/or signs to help a company distinguish itself from others in the market. The brand can be commercial or not-for-profit, but the function of all brands is to create a recognizable entity in the market that, in the mind of consumers, adds value to the product. Thus, for consumers, brands are the perceptions, benefits and experiences that they associate with a good or a service. From the point of view of the company, the main purpose of a brand is to increase cash flow through price premiums, lower costs, increased volume, or greater repeat purchase loyalty.
As an intangible asset, brands, unlike machinery, buildings or products, have no physical substance. Whereas brands can have tangible value as trademarks or customer lists, the primary value of the brand is intangible. The expected economic benefit to the company flows from association in the consumer’s mind. The challenge of how to effectively recognize and value a brand as an intangible asset is what led to the creation of ISO 20671.
In general, intangible assets such as brands are becoming more and more economically important. Though not formally recognized in GDP reports, economists find that the value of intangibles is higher than tangibles in most developed economies. And intangibles increasingly distinguish successful companies from less successful ones. This macro situation underscores the need to transcend accounting and finance traditions and treat brands as part of a company’s value creation process.
So there’s a long-standing need to bridge the divide between marketing and finance. Activities such as social media, mobile apps, sponsorships and the like certainly help build brands, but we need to understand that brands exist in the mind of the consumer. The greater the “strength” of the brand in affecting consumer buying decisions, the greater the value of the brand to the company as a financial asset. Companies need to periodically evaluate the strength of the brand and its contribution to economic returns. Based on this evaluation, better decisions can be made about investing in brand-building activities.
Why did ISO create a technical committee to address brand evaluation?
Currently, there are many marketing metrics for assessing a brand (awareness, willingness to recommend, etc.), but no shared or accepted framework for linking the value of a brand to consumers with the value it creates for the company. ISO 10668, Brand valuation – Requirements for monetary brand valuation, tackled this from a financial valuation standpoint, but it was acknowledged that this was limited in scope. It emphasized three valuation methods. The market approach values the brand against the price of a comparable brand. The income approach uses the present value of future cash flows that a company would receive when using the brand. The hybrid approach involves royalty relief through basing the royalties a company would be required to pay if it had to license the brand from another entity.
Our technical committee developed ISO 20671, Brand evaluation – Principles and fundamentals, to provide a broader framework for evaluating brands. ISO 20671 is designed to be a useful resource for companies to rationalize their treatment of brands and to be able to more accurately report on brand value to internal decision makers and external investors. Moreover, there continues to be the need for companies to reduce economic risk, so being able to identify the value of a brand is another useful tool in this regard.
ISO 20671 is the world’s first International Standard for brand evaluation. Can you explain the main principles of this standard?
Well, if ISO can do it for the quality of products such as USB cables, then why not brands? Brand evaluation standards are a logical next step for ISO. These days, marketers have many different ways of analysing and communicating about brands, and companies vary greatly in their methods. Sometimes, we marketers can be our own worst enemies by inventing our own jargon, which makes it very confusing for others within the same company, and even more so for outsiders. ISO 20671 provides clear definitions for specific terms to help eliminate this confusion and an overall framework that everyone can refer to.
The main principle is for organizations to build on this framework to begin to link the marketer’s view of brands to the internal investment and governance process, and to explore ways of reporting this information to external investors. ISO 20671 is therefore a useful starting point for companies and organizations wanting to increase their brand value. It provides a universal view of non-financial and financial measures with the intention for more specific standards to be developed in the future in conjunction with companies undertaking this process.
What future aspirations do you have for these standards?
As a concept, ISO 20671 can be applied to all companies wishing to evaluate the value of their brand more effectively. It does not need to be specific to all products, industries and services just now; it is much more important to agree on the general definitions and framework first and work on more specific guidelines later.
For me, longer-term, I believe this work could tie into many issues facing the future of business. For instance, there is an ongoing debate as to whether companies should focus exclusively on maximizing shareholder and owner value or on creating value for all stakeholders. There are good arguments on both sides. I think it is possible to approach this issue from the perspective that brands could potentially allow a company to do both. Companies can build brands that incorporate sustainability and other constructive purposes into the very idea of the brand in the consumer’s mind. Such brands would be stronger and yield higher returns to shareholders as well as returns in the form of societal capital to stakeholders.