Brand Valuation by Royalty Relief Method

Top-10 Most Valuable Brands

BrandFinance released it Global Brand Value report in February 2018. Some of the highlights from the reports are –

• At US$150.8 billion in Brand Value, Amazon is the world’s most valuable brand ahead of Apple and Google in the report
• Apple’s diversification challenges are taking a toll on its Brand Value
• Technology brands rule the roost with all Top-5 brands in Brand Value table are from technology sectors
• The growth of Chinese brands has been phenomenal. Since 2008, China’s share of global brand value has increased from 3% to 15%, growing to US$911.5 billion in 2018

This posts’s focus is to de-mystify the approach adopted by BrandFinance to come to the Brand Value figures of the brands in question.

The approach, also known as ‘Relief from Royalty’ is based on a notion.

Imagine that a brand holding company (For example, Nestle) owns the brand (Maggi) and decides to license the brand to a different operating company (ABC Food Products). This means that Nestle decides, not to sell the brand Maggi itself but to license ABC Food Products to sell the brand. So, ABC Food products will be able to use all the elements related to brand Maggi and generate revenue out of the sale of Maggi.

Now, obviously in return Nestle would expect a revenue stream from ABC Food Products. This revenue stream would be called as ‘Royalty’ which ABC Food Products will pay to Nestle for using brand Maggi for its own profits. This Royalty value is notional, as the value of brand is more conceptual than actual cash-flow at that time (since the revenue will only start coming in future and that too cannot be accurately estimated).

This notional price paid by ABC Food Products (called, the operating company) to Nestle (called, the brand company) is expressed as ‘Royalty Rate’.

Since the revenue made by ABC Food Products by selling brand Maggi is going to be realized only in future, the estimated revenue stream for future must be calculated and should eventually be expressed in its present value form. This is because the value of the brand (Maggi) is to be estimated at present. To find the present value of revenue stream/cash-flow in future, the Net Present Value (NPV) method is used after estimating the future revenue stream or cash flow.

The Net Present Value (NPV), thus found based on all forecasted royalties, represents the value of the brand to the business.

Step by Step Process given by BrandFinance for calculation under Royalty Relief method.

• Obtain Brand specific Financial data
• Annual Revenue, Annual Profits and Profitability (Ex. For Maggi)

• Estimate the demand of the product category and individual Brands including your own Brand as well as the competitor Brands
• Demand Estimation for Instant Noodles, and individual demand estimation for Maggi, Sunfeast Yippi, Top-Ramen and Patanjali noodles
• Estimate the future cash-flow or revenue stream for the brand based on the financial data and category and brand demand
• Future Revenue and profits estimation for the brand
• Let’s say this comes to $ 20 bn (Absolute value, without considering the year of realization).                 

•  Establish the notional Royalty Rate for each brand
• Royalty Rate = (Brand Strength Index) x (Royalty Range)
• Brand Strength Index – A score on a scale of 1-100 based on:
• Marketing Investment – Investment towards brand building in terms of advertising etc.
• Stakeholder Equity – Brand Perception among various stakeholders including the Brand owners, marketing managers, company employees, channel partners and most importantly the customers
• Business Performance – Financial measures representing the status of the brand in terms of price strength, sales volume and trade leverage
• Hypothetically, let’s say this comes to 80.
• Royalty Range – A range of percentage value for a given industry/segment (For Ex. Instant noodles segment) which represents what is importance of a brand for a customer in that industry
• Premium and Luxury (luxury watches, expensive jewelry etc) segments have a high brand importance for customers and hence have a higher Royalty Range
• Commoditised or low-risk segments (steel, staple food products etc.) have lower brand importance due to minimum differentiation and hence lower Royalty Range
• Hypothetically, let’s say this comes to 20%.
• Hence, Royalty Rate = 80 x 20% = 16% (This is Royalty Rate that represents that this percentage of sales for the Brand comes due to its Brand Name)
• Calculate the notional future royalty income stream for each brand.
• Based on the Royalty Rate Calculated, arrive at a revenue portion which is realized due to the brand value 
• Based on Future Cashflow and Royalty Rate, this comes to  $ 3.2 bn (Check table below)

                                         

Estimated Future Cash-flows in $ bn with and without Royalty Rates

• Discount this future Royalty stream to arrive at a Net Present Value (NPV)
• NPV is calculated based on the discounted rate (assumed 6%). In this case, the NPV is calculated $ 2.38 bn

• This is adjudged as the Brand Value of the brand, in our example, for  Maggi.
• Brand Value of Maggi comes to $ 2.38 bn (Based on hypothetical figures taken for Future Sales, Royalty Range and Brand Strength Index, for understanding purpose only)

Clearly, Royalty Relief technique is not only one of the easier techniques for Brand Valuation, it is also a good estimate of brand value since it takes into consideration, the brand’s strength, its financial performance, competitor standing and also its future revenue estimates. Brand strength also brings in the factors like how much the company is spending on the brand building efforts, what is the equity or engagement of the stakeholders with the brand and the actual business performance.

While, this approach does not take into consideration the influence of competitor brands in the future sales and the effectiveness of the marketing spends for brand building, which may have an adverse effect on the calculation of Brand Value, Royalty Relief is still, a simple to understand as well as implement method, to calculate Brand Value for any given brand.

Cheers,

Amazon - An Innovation Powerhouse!

An annoying interstitial ad forced me to post it on my facebook page as a sign of protest. It is funny how social network makes you feel as if you are actually powerful. I will save a detailed note on this psychological e-phenomenon for future, but I must say that the ad did what it was supposed to do. Discounting the fact that I didn’t end up buying the colourful bagpacks, the ad did manage to attract my attention. It also made me promote it (unwittingly!) to my 500+ internet buddies on facebook.

 

The brand that was advertising vociferously on my daily news website was Amazon. Huh.

Amazon is everywhere these days. It has slowly and steadily, and with a lot of patience and innovation, built a strong-fundamental based business model in India. Many were wondering for the first few months after Amazon made its way into India about Amazon's quiet game plan. The firework that one would expect from the big daddy of online retail was far from visible.

All this while, Amazon was investing in the foundation stone of this to-be e-tailing giant of India. This has helped Amazon India to build for itself an environment and capability to roll out mind-boggling innovative ideas that has kept its customers delighted and rivals on toes so far.

Amazon demonstrated aptly the approach to build a business in a new market by challenging set rivals and even beat them on their own turf. The long experience in its home country and deep pockets though adds to its advantage, none should be taken away from Amazon for being super agile and incessantly innovative.

I wrote some time back on Amazon’s bipolar approach on improving its delivery performance to enhance customer delight. At one end, Amazon had started experimenting parcel deliveries through drones while on other hand, in India it sealed an alliance with India Post to help it deliver parcels in far-flung areas.

Very recently, Amazon introduced a fresh gust of innovative ideas that varies from category expansion to new services and from vendor empanelment to channel expansion.

Back in US, Amazon turned heads last week by inking a $ 300mn-three years deal with HBO to let Amazon Prime members watch old HBO shows. Within no time after giving its customer the HBO delight, it announced launch of the prima-pantry service for its prime members. The service allowed the prime members to shop from more than 2,000 products to fill a four-cubic foot box with up to 45 pounds of goods. The package can then be shipped at very nominal cost to the customers.

These simple innovations have not only added to the product lines it can sell but have also created benchmark for serviceability and customer responsiveness in this rapidly growing industry.

Here in India, Amazon has opened up a bottle of innovations which, with the gush these innovations are ejecting, seems to have been there ‘under-construction’ for some time now.

After collaborating with India post to deliver its parcels in 19,000 pin-codes across country through its Colosseum -like network of 140,000 Post-offices, Amazon has put into action its plan to make it easy for sellers.

Amazon, this week launched two initiatives for sellers to facilitate an accelerated and hassle-free experience. The US-based firm launched the Self Service Registration (SSR) and Amazon Easy Ship for sellers. Amazon SSR enables sellers irrespective of their size, location and size of catalogue, to self-register on the Amazon marketplace and start selling within a day without any third party intervention, making the process quick, easy and transparent.

With Amazon Easy Ship, the seller has to pack the shipment and confirm to Amazon that they are ready to ship. Amazon Logistics collects the shipment and ensures that the product is delivered to customers in 2-4 days.

Jeff Bezos is known to be the driving force of Amazon's
customer first culture and a true admirer of innovation at work

These two services have taken the e-commerce game to a different level in India. A response from the bigger rivals(so far!) Flipkart and Snapdeal is soon expected as the e-commerce industry matures in terms of technology and operational set-up.

The big question is, how Amazon has been able to pop-out one innovation after other, even faster than the TV soaps’ episode run?

The answer is fairly simple – Getting the basic rights and employing Long-term thinking in a new market.

Amazon didn’t rush to lure customers as soon as it entered in Indian market. Instead, it took its time in getting the fundamentals right. It built the logistics network, warehouses and built up a large selection of products that is now bringing in customers for them.

In a recent interview, Amit Deshpande GM of Amazon India said that its strong back-end infrastructure is helping it scale up fast. He further added on that when they decide on areas of focus, they always work backwards from the customer. Selection, delivery experience, logistics, payments and website experience are areas they are super-focused on.

Amazon has been scintillating in terms of its growth, and more importantly in its systematic business approach in terms of all modules of a business organization – Strategy, Marketing, Supply chain, Human Resource development and above all, Innovation.

Truely, Amazon is an innovation powerhouse!

Amazon @ Seamless Innovation

Amazon’s Octocopter project swept many people e off their feet. It looked like future had arrived. Whether the project and idea is safe and more importantly legal in countries where Amazon would want to take this concept is a topic for a different day, but how revolutionary the idea is in terms of exceeding customer expectations in terms of delivery and service, we will take that into consideration for now. 

   

Marketing is not just about building a brand. It is also about creating a brand promise, communicating this promise to customers and most importantly, fulfilling that promise, time and over again.At a time when there is intense competition between companies to grab a share of consumer consumption, arriving at a brand promise and consistently delivering it is a critical factor for success of any brand and company.

Reliable, quick and hassle-free home-delivery is one such promise that is being made by a lot of companies these days. These companies are from sectors like e-commerce, food-chains, courier & logistics and many more.

With benchmarks for customer service and satisfaction rising due to the availability of alternatives and higher purchasing power, run of the mill ideas for marketing and customer services have started to feel the heat. Whether a company wants to grab its TG's attention or want to delight its customers through its service, innovation has become a game changer.Innovation has become a major factor to differentiate between ordinary and brilliant companies and brand.

Amazon is one such company which has always been know for its innovative approach towards its business.  The recent initiatives taken by Amazon testifies this. One is the much hyped experiment about using drones to deliver products to customers. But the other one is much local and much more viable option which many of us would not have imagined.

When a company demonstrates its futuristic delivery idea, how many of us would imagine that the same company is also roping in an organization tagged as old and slow – India Post, for the same objective- delivery! .  This is a classic example of seamless innovation. This is also something, which most of the organizations have not been able to achieve. When a company goes for all-tech futuristic innovations, it is almost impossible to have eyes open to more traditional avenues to innovate. Amazon did that.

The end objective in both the cases is same but the TG of course changes. The drone delivery would be for achieving quick delivery times and the India post collaboration is to achieve high penetration for the company in terms of customer reach. Not to forget the drone experiment was not done in India or for Indian market though, but the extent of pro-activeness and the efforts to achieve customer delight  is remarkable in the Jeff Bezos led company.

Also, one should note that Amazon's drone delivery experiment is not the first one since Dominoz has done this experiment in June this year already.

   

 But what makes Amazon special is the bandwidth of innovation it allows its employees and teams across globe to create value for their customer. This organizational culture not just enriches its employees with learning but also benefits its customers. Truly inspiring!

Cheers,