There are many approaches to valuing brands and firms can choose either one of them in brand valuations depending on information availability and suitability. Approaches to value brands are described below:
This a common way of brand valuations but it has many faults such as difficulty in allocating expenses to brand (uncertainty in identifying whether expense was incurred to build the brand name or just as promoting products) and this approach does not imply the successfulness of the brand (No indication of futures sales/brand loyalty)
This is where the brand value is calculated based on the price premium that can be charged due to brand name. This is one of the commonly used practices where companies use calculate the difference between the prices of branded and unbranded goods and multiply it by the sales units made. Even though this is a commonly used approach it can undervalue the brand at times as some brand has low/modest price premium due to environmental factors. This approach ignores the aspect of future earnings and stability of earnings that can be generated from a brand.
This is where the brand is valued based on the estimated market price of the brand. In other words firm has to estimate the price at which the brand can be sold if the brand is auctioned. This approach values the brand in the perspective of the potential buyer but it ignores the current situation of the brand from the perspective of the firm and its marketing effort. Apart from that this approach is considered as a good approach if the reliable market price can be obtained.
This is where brand is valued based on the net present value of the future cash flows of the brand. Future earnings from the brand and future expenses for the brand have to be discounted and the net present value figure has to be obtained. The fault of this approach is estimates always tend to be inaccurate and predicting accurate cash flows is an impossible task.
Firm can choose any method to value their brand. But in general, brand valuation to indicate in financial statements has many issues such as: