Brand Valuation: An In-Depth Look at the Royalty Relief Approach

Brand valuation is a crucial aspect of understanding the economic value that a brand contributes to its owner. Dawgen Global employs the Royalty Relief approach to calculate brand values, adhering to the industry standards set in ISO 10668. This method estimates the future revenues attributable to a brand by calculating a royalty rate for its use, ultimately determining the net economic benefit a brand owner would achieve by licensing the brand in the open market.

Here’s a detailed breakdown of the steps involved in this valuation process:

1. Calculate Brand Strength

The first step in the Royalty Relief approach is to assess the brand strength. This is done using a balanced scorecard of metrics that evaluate:

• Marketing Investment: This includes expenditures on advertising, promotions, and other brand-building activities.
• Stakeholder Equity: This measures brand perception and loyalty among customers, employees, and other key stakeholders.
• Business Performance: This assesses the financial performance attributed to the brand, such as market share, profitability, and growth rates.

The brand strength is expressed as a Brand Strength Index (BSI) score on a scale of 0 to 100.

2. Determine Royalty Range

Determining the royalty range is a critical step in the Royalty Relief approach, as it sets the foundation for calculating the appropriate royalty rate for a brand. The royalty range reflects the significance of the brand in influencing purchasing decisions within its industry. This step involves a thorough analysis of industry-specific factors and comparable licensing agreements.

Importance of Brand in Purchasing Decisions

The role of a brand in purchasing decisions varies significantly across industries. In some sectors, the brand is a primary driver of consumer choice, while in others, it plays a more limited role. Understanding this dynamic is essential for setting an accurate royalty range.

• Luxury Goods: In industries such as luxury goods, fashion, and high-end consumer products, the brand’s perception, prestige, and exclusivity are paramount. Consumers in these markets often make purchasing decisions based heavily on brand reputation, image, and emotional appeal. Consequently, the maximum royalty percentage in these sectors is typically higher, reflecting the substantial value that a strong brand can command.
• Commoditized Industries: In contrast, industries such as extractives (e.g., mining, oil, and gas), agriculture, and basic manufacturing are often characterized by commoditized products where differentiation is primarily based on price and quality rather than brand. Here, the influence of the brand on purchasing decisions is minimal, leading to lower royalty percentages.

Review of Comparable Licensing Agreements

To determine the appropriate royalty range for a specific industry, Brand Finance conducts a comprehensive review of comparable licensing agreements. This involves:

• Database Analysis: Utilizing Brand Finance’s extensive database of licensing agreements, analysts identify deals within the same industry that involve similar brand characteristics and market conditions.
• Benchmarking: By examining the royalty rates agreed upon in these comparable agreements, analysts can establish a benchmark range that reflects industry norms. This benchmarking process ensures that the royalty range is grounded in real-world data and market practices.
• Adjustment for Market Conditions: Analysts also consider current market conditions, economic factors, and trends that may influence the importance of the brand in purchasing decisions. For example, shifts in consumer preferences, technological advancements, or changes in competitive dynamics may warrant adjustments to the royalty range.

Setting the Royalty Range

The final step in determining the royalty range involves setting a minimum and maximum percentage that accurately reflects the brand’s value within the industry. This range provides a framework for applying the Brand Strength Index (BSI) score in subsequent steps. The key considerations include:

• Industry Characteristics: Understanding the fundamental characteristics of the industry, including competitive landscape, customer behavior, and brand differentiation factors.
• Historical Data: Analyzing historical data from comparable licensing agreements to identify patterns and trends in royalty rates.
• Expert Judgment: Leveraging the expertise of industry analysts and brand valuation professionals to make informed judgments about the appropriate royalty range.

By carefully determining the royalty range, Brand Finance ensures that the subsequent calculation of the royalty rate is both accurate and reflective of the brand’s true economic contribution. This step is crucial for providing a robust and reliable valuation that can guide strategic decisions and maximize brand value.

3. Calculate Royalty Rate

The BSI score is then applied to the determined royalty range to arrive at a specific royalty rate. For instance, if the royalty range in a sector is 0-5% and a brand has a BSI score of 80 out of 100, the appropriate royalty rate for the use of this brand in that sector would be 4%.

4. Determine Brand-Specific Revenues

This step involves estimating the proportion of parent company revenues that are attributable to the brand. This helps in isolating the financial contribution made by the brand itself.

5. Determine Forecast Revenues

Forecast revenues are determined using a combination of historic revenues, equity analyst forecasts, and economic growth rates. This step ensures that the future revenue projections are grounded in a robust analysis of past performance and future market conditions.

6. Apply the Royalty Rate

The determined royalty rate is then applied to the forecast revenues to derive the brand revenues. This step quantifies the economic value that the brand is expected to generate in the future.

7. Discount to Net Present Value

Finally, the post-tax brand revenues are discounted to a net present value. This involves adjusting the future brand revenues to their present value using a discount rate, which accounts for the time value of money and the risk associated with future earnings. The result of this calculation is the brand value.

Conclusion

The Royalty Relief approach provides a comprehensive and standardized method for brand valuation. By assessing brand strength, determining industry-specific royalty ranges, calculating royalty rates, and estimating future revenues, this method offers a clear and quantifiable measure of a brand’s economic value. This approach not only helps in understanding the financial contribution of a brand but also aids in strategic decision-making, investment analysis, and marketing strategy development.

For companies looking to maximize their brand’s value, understanding and applying these steps is essential. At Dawgen Global, we are committed to providing detailed and accurate brand valuation services that adhere to the highest industry standards, ensuring our clients can leverage their brand equity to achieve sustained economic benefits.

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