How Your Product Portfolio Builds Valuable Brands
Monday, April 6, 2020
By Brian Buss, CFA, Nevium Intellectual Property Consultants
While building and protecting proprietary technology is an activity all tech companies undertake, companies that succeed in trademarking multiple products also build valuable brands in the process. What many technology leaders don't realize is that their brands actually contribute to profits and with the right investment, can even increase them. Yet maximizing the value and benefit of brands requires knowing how and how much they're driving revenue and profits.
Over the years, the tech companies that have survived in competitive markets have become household names, with brand assets that contribute to their financial performance and valuation. These companies often have two types of valuable brands—their corporate brand name and their product brands—both contributing to performance and value in different ways at different times in the company's evolution. Tech entrepreneurs, managers, and investors gain valuable insight from a brand valuation that quantifies the financial contribution and impact on overall business valuation made by each type of brand asset.
Brand Valuation Basics
Brand assets can include names, symbols, signs, logos, domain names, designs, or any other feature that customers associate distinctly with your business or with your products. Brand value, according to the Marketing Accountability Standards Board, is a key measure of how much your marketing investments will contribute to financial performance.1
A brand valuation exercise can identify the types of economic benefits brand assets provide for the company, such as creating a barrier for competitors to enter the market, achieving optimal pricing, increasing sales and profit margins, or producing income in the form of licensing agreements and market extensions. Also, brand valuation can help answer other strategic questions, including:
- Is our brand doing better than our competitor's brand? Why?
- What benefits might be achieved if we were to position the company's brand as socially responsible?
- Will our investment in branding activities yield a return? If so, how much?
There are three approaches to brand valuation: cost, market, and income. The cost approach measures the cost to replace previous investments and resulting brand awareness but does not address more strategic questions. The market approach reviews valuation indications from transactions involving similar assets but best serves as a benchmark rather than an indication of the financial contribution made by a company's own brands. The income approach quantifies the present value of future economic benefits received from ownership of a brand/business, addressing the key questions asked by many entrepreneurs, managers, and investors. A key component of the income approach is quantifying the portion of expected profits that will be contributed by each of the corporate brand and product brands.
The Link Between Brand Assets and Profitability
As the income approach to brand valuation will best address strategic questions for tech entrepreneurs, the key to an informative brand valuation exercise is to quantify the portion of future profits contributed specifically by corporate and product brands using profit apportionment, which is the process of calculating the portion of financial performance derived from the use of an asset. This profit apportionment exercise involves:
- Identifying the key assets and resources the company will use to design, develop, market, sell, and distribute its products and services. This step involves a review of operations and the balance sheet to identify what assets and resources exist and which will be relied upon, including all tangible and intangible assets, technology assets, trade secrets, and key relationships. This step alone often provides a useful understanding of the company's key assets.
- Forecasting future financial performance for each source of revenue. Most tech companies will develop a portfolio of products and services, each with different growth expectations and levels of financial performance (different margins and investment requirements). As each revenue source may rely on brand assets in different ways, the brand valuation exercise incorporates a forecast of financial performance at the product level. This step can provide a more detailed outlook for the company's future performance than business-level forecasting.
- Assessing and quantifying the contribution of the identified key assets to the performance of each revenue source. This step involves addressing a collection of questions developed to identify the relative contribution made by each asset to each revenue source. For brand valuation, the apportionment process determines the portion of financial performance derived from use of brands, with an emphasis on drivers of product demand, product marketing, comparable offerings, financial performance, and the contribution of other assets.
Unlike the cost and market valuation approaches, the income approach looks at the present value of future benefits and actually breaks out the profit that can be attributed to both types of the company's brand assets. In the tech industry, where corporate brands are often phased out after a company is acquired and product brands may have short lifespans, this approach is superior for its specificity and its ability to address key strategic questions.
After completing the profit apportionment exercise, the brand owner has collected a great deal of information about the company, its revenue sources, and brand contribution, including product line relative performance, website analytics, social media analysis, brand score, key asset identification and more. These analyses can prove as informative as the actual dollar amount valuation.
The Role of the Product Lifecycle
There are several factors unique to undertaking a brand valuation exercise for technology companies, and most of them involve the timing considerations inherent to the product lifecycle. Brand assets are mostly intangible assets. Intangible assets and the products that use them have lifespans, and while a company can expect perpetual growth, it cannot expect the same of its brand assets. Brands often contribute to financial performance differently throughout the product lifecycle and many brands will be phased out over time.
The corporate brand may outlive product brands and other intangibles such as patents and intellectual properties (IP). So, in conducting profit apportionment for brand valuation, it's important to consider the relationship between the product and the overall business, and how brand assets interact with other IP and proprietary resources, as well as understand how product performance will grow, peak, and decline. Developing a reasonable outlook for product lifecycles and the duration of brand use will factor greatly in the apportionment exercise and the valuation calculations.
Contribution of IP Over Time
Consider the common example of companies with multiple product brands. Some product brands incorporate the corporate brand (e.g., Apple Watch and Apple TV) while other products do not (e.g., iPad and iPhone). Customers, stakeholders, and business partners recognize the company name, while many product brands change and evolve over time. Each of the corporate and product brands contribute to product-level financial performance, but some products benefit from the contribution made by an additional association with the corporate brand. Brand use will evolve over time, and a brand valuation needs to consider how and when the brand assets will contribute to financial performance.
A brand valuation provides information to evaluate many strategic decisions. For many tech companies, their brands will be a value driver for many years, but brand investments need to complement technology development, innovation, and product creation. A brand valuation study can help identify the brand assets driving revenue as well as forecast when value will peak, as well as the relative contribution of technology and brand IP, helping tech company managers achieve economic benefits from all the IP in their portfolios.
Brian Buss provides intellectual property valuations for clients in a wide range of industries. Brian graduated from Claremont McKenna College and earned an MBA from San Diego State University. Brian is a Chartered Financial Analyst (CFA) and Certified Patent Valuation Analyst (CPVA). Prior to launching the intellectual property firm Nevium, Brian worked at San Diego-based consulting firms, a technology start-up, Westpac Institutional Bank, and the Financial Advisory Services group of Deloitte & Touche in both New Zealand and San Francisco.
1 Marketing Accountability Standards Board (www.themasb.org), Brand Investment & Valuation (BIV) What is Known and More, August 2013.