I strongly believe that brand equity is underappreciated in many C-suites. I have commented numerous times on Twitter when companies announce plans to make gratuitous changes which erode or destroy brand equity.

All too frequently companies will tinker with distinctive brand assets—even company names—without regard for the decades of spending and effort it took to build and maintain memory associations for the assets they are scrapping.

There are numerous recent examples where companies replaced their distinctive logos with non-distinctive Helvetica logotype. In 2009, Tropicana redesigned its packaging; customers didn’t recognize the brand on the shelf and sales plummeted $30 million in two months. Despite all the talk about authenticity and storytelling, brands like Dunkin (Donuts) abandon their heritage. Instead of dropping the word Donuts from their name, I argue that the original, quirky, distinctive “dunkin donut” with the built-in handle should be a signature product, but none of their stores in my area sell it.

Unless the company has been through a scandal or quality crisis where the old brand is more of a liability than an asset, new CEOs and CMOs should resist the urge to purge valuable brand assets.

Recently I commented on a Twitter thread on brands. My comment went over like a lead balloon.

Prof. Bruce Clark: “A strong brand gives you the ability to temporarily pause brand-building.”

Paul Worthington: “Brands are like radiation; they have a half-life. The stronger the brand, the longer it takes for the equity to decay.”

Prof. Byron Sharp: “How do you measure “strong brand”? That isn’t just “big”.”

Andrew Everett: “Brand equity is real, but can’t be quantified on a balance sheet. Understanding it conceptually, but accepting the ambiguity seems better than contriving a bullshit value. Various drivers can be measured.”

Prof. Byron Sharp: “Fine for academic theorists. But today it’s best to assume the 2 big market-based intangible assets are mental & physical availability.”

John James: “Wrong. It can be quantified on financial reports. ” (tags Edgar Baum)

Edgar Baum: “Yes. Brand can be recognized on financial statements – typically ambiguously to avoid giving too much knowledge away publicly. Internal reporting of brand equity can be very robust and reflect a sum of the parts valuation depending on the strength & value by customer cohort”

Prof. Sharp’s comment is cryptic, but after thinking about it, I think he is saying that brand equity is irrelevant except for academic theorists. Instead he says focus on physical and mental availability. From his book, How Brands Grow, “mental availability / brand salience is the propensity for a brand to be noticed and/or thought of in buying situations… Mental availability is based on the network structure in buyers’ memories… Brand salience depends on a brand’s share of people’s minds, by which I mean the quantity and quality of memory links to and from a brand. Quantity refers to the number of associations a buyer has about a brand name. Quality has two aspects: strength of association and relevance of the attribute.” (pp.191-193) Honestly I think he’s splitting hairs; brand equity is basically the value of brand salience. Prof. Ambler’s discussion of brand equity (below) is consistent with this.

Edgar Baum is a brand valuation consultant. Where we are talking past each other is the distinction between managerial metrics and financial accounting.  Brand equity may be a company’s most valuable asset, but you can’t measure it directly. Management can track proxy metrics and maybe even concoct some weighted average of factors to come up with single number. This could be useful for internal purposes, to make sure things are trending in the right direction.

But how is this meaningful on a balance sheet? Are you going to write it up or down every quarter (mark to market)?  Hopefully it builds steadily, but what if you encounter a dip in customer satisfaction? What if you have a PR crisis, such as the 270 deaths linked to Firestone tires on Ford Explorers in 2000? And if you are going to report it “ambiguously” then does it serve any purpose at all on financial disclosures? All of this is moot if, as I have read, it is not allowed under GAAP or IFRS accounting rules. Besides, stock prices are based on expectations of future earnings, not book value, so it’s a pointless exercise even if a meaningful number could be calculated.

Below are some references that influence my thinking on this topic.

Prof. Mark Ritson debated representatives of top brand valuation firms Interbrand, Brand Finance, and Brand Z at a conference session called Brand Valuation: Brilliant or Bullshit. He began by noting that he believes in brand equity: he teaches it to his MBA students; he works on building and protecting it for his clients. He also believes it has a dollar value in theory.  But he compares how the three firms calculated wildly different valuations for the same brands.

2015 Brand valuations

Apple Coca-Cola Visa
Interbrand $170B $78B $7B
Brand Finance $128B $36B $9B
Brand Z $247B $84B $92B
$119B $48B $85B (which is 15x Visa’s 2014 net income)

“It is wrong to suppose that if you can’t measure it, you can’t manage it—a costly myth.”   — W. Edwards Deming, The New Economics, p.35 second edition (p.26 third edition).

“Everything that the customer experiences, hard and soft, real and perceived, is part of the brand.” — Peter Fisk, The Brand Challenge, p.61

Tim Ambler brings a great perspective on the topic. Now retired, he was a CPA and a marketing professor at London Business School. Here are some passages from his book Marketing and the Bottom Line:

“To an accountant, brand equity is the accumulated intangible asset from past marketing that has not yet been taken into profit. The metaphor mostly used here that of the reservoir behind the dam, which absorbs  the benefits of marketing and may be drawn upon to a greater or lesser degree according to the demand for short-term profits. If it is allowed to dry out, however, it may become permanently dysfunctional.” (p.2)

“It is subjective. Brands are rarely sold, and purposes change valuations anyway. Value for insurance is not the same as value for sale, for example. The choice of methodology is subjective.” (p.46)

“Unsurprisingly, the International Accounting Standards Committee has found it difficult to harmonize intangible asset accounting standards. Its Secretary-General, Sir Bryran Carsberg, recently stated that ‘we do not account for intangibles very well and perhaps cannot do so under traditional accounting.’” (p.47)

“The difficulty with brand equity is that it cannot be measured directly. We cannot look inside people’s heads and count the brand synapses (memories)…. So we have to use proxies of three kinds: inputs, intermediate measures, and behavior.” (p.53)

Marketing, then, is first and foremost the building of brand equity. Do that right and profits will take care of themselves. Brand equity is not something apart from but central to business decision making… Measuring brand equity and performance also gives marketing, finance and other managers a shared language to debate their brands’ strategies and positioning, together with the drivers of success in the market.” (p.54)

“Brand equity may not feature on the balance sheet but it is an asset in exactly that sense: it is the storehouse of future profits that result from past marketing activities.” (p.55)

Brooke Wasserman wrote UConn Honors Scholar Thesis titled Valuation of Intangible Assets: Should Brand Equity Be Accounted for on the Balance Sheet?  (Spring 5-1-2015).

“Internally created intangible assets are not recognized as assets under US GAAP.”

“A brand recorded on the books of an acquirer are kept at historical costs – the cost for which the brand was purchase”

“Unfortunately, GAAP does not currently permit companies to report increases in brand value once brands have been acquired and booked at initial costs.”

“The same rules as GAAP generally apply under IFRS.”

“Brand value is not currently recorded on the balance sheet or in any financial statements. It is left to financial analysts, marketers and economists to assess.”

“In general, it may be said that little if any weight should be given to the figures at which intangible assets appear on the balance sheet. Such intangibles may have a very large value indeed, but it is the income account and not the balance sheet that offers the power to this value. In other words, it is the earning power of these intangibles, rather than their balance sheet valuation, that really counts.” — Benjamin Graham, The Interpretation of Financial Statements, p.23.

“A company’s intangible assets include anything that has value but that you can’t touch or spend: employees’ skills, customer lists, proprietary knowledge, patents, brand names, reputation, strategic strengths, and so on. Most of these are not found on the balance sheet unless an acquiring company pays for them and records them as goodwill. The exception is intellectual property, such as patents and copyrights. This can be shown on the balance sheet and amortized over its useful life… Moral: the market value of a company almost never matches its equity or book value.” — Karen Berman and Joe Knight, Financial Intelligence, p.100, p.110.

It is worth noting that goodwill and brand equity are not the same thing. “When a business is acquired, it is common for the buyer to pay more than the market value of the business’ identifiable assets and liabilities. The amount that is paid in excess is known as goodwill.” That excess would account for acquired intangibles like brands.

The purpose of goodwill is essentially to make the balance sheet balance when recording an acquisition.

Goodwill = P-(A-L), where: P = Purchase price of the target company, A = Fair market value of assets, L = Fair market value of liabilities… The amount the acquiring company pays for the target company over the target’s net assets at fair value usually accounts for the value of the target’s goodwill. If the acquiring company pays less than the target’s book value, it gains negative goodwill, meaning that it purchased the company at a bargain in a distress sale.”


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