Putting a Price on Reputation

Many companies account for marketing and CSR as expenditures, rather than investments. The vast majority of leading firms seem to agree that the benefits of these activities far outweigh the costs. But, arriving at the exact value of those benefits is not so simple. Brand equity can loosely be defined as the level of consumer brand awareness and the type of images consumers associate with a brand.   A consistent brand image is essential to prevent brand diffusion. Internally, financial analysts often value brand as the amount of incoming cash flow that can be attributed to the brand, while accountants see it as the perpetuity value of licensing revenue.  The real trick is that all employees – purchasing marketing, accounting and finance managers – must be on board with the same notion of brand valuation as an intangible asset in order to properly understand and improve a company’s reputation.

Interbrand, a London based firm, is changing the way corporations value their brand. Interbrand uses highly specialized economic valuation techniques.  They first identify all the segments of brand. For example, when valuing Nike they look at tennis, football, and golf as unique brand elements because they appeal to various customer demographics.  Then, they analyze the company’s cash flows to determine what percentage of earnings can actually be attributed to each brand, thus deriving “brand specific earnings.” Interbrand triangulates this approach by evaluating the brand’s strength in relation to its rivals on seven dimensions – market growth, stability, leadership, trend, support, diversification, protection.  Taking an even deeper look, they calculate the net present value of future earnings and predict the amount of brand risk based on the future stream of cash flows.

So here’s the tree-huggable part.  If your company is polluting the environment or mistreating its factory workers, your brand risk is higher, and your valuation, therefore, is lower. Brand owners are accountable for the performance of their branded products as well as the ethical practices associated with the production of those goods or services.  Given the linkages between brand value, sales, and share price, the potential brand detriment of acting unethically is much greater than any savings that could be realized.  To put it in perspective, Coca-Cola’s brand is the world leader, valued at $68 billion in 2009, a 3% increase from its 2008 value. A 5% drop in sales could result in a loss of brand value exceeding $4 billion.

Critics of branding claim that brands stifle competition and hurt capitalism by allowing inefficient monopolies and restricting consumer choice.  A contrasting argument is that brands create economic and social value by improving product performance, increasing competition, and pressuring brand owners to act responsibly.  Either way, it is clear that companies must protect their brands from dillusion by decreasing risk.  Companies that abide by the “do no harm” principles are actively guarding their brands. But, what about companies that go above and beyond the baseline by using organic materials or supporting community development? Are there certain CSR related activities that increase brand value more than others?