Recently, Evaly - a venture that has come under intense financial scrutiny - claimed that it has a brand value of Tk422 crore. In recent history, we have observed CEOs trying to get away from financial regulators, as well as disgruntled investors, citing a large brand value, especially when they have little liquid assets and a huge liability.
The question arises, how does brand value work? Is it a hoax or a cover for white-collar criminals or does brand value really mean something in finance? If it does, how do you measure it and does Evaly really have a large brand value?
Simply put, brand value is the sale value of a brand name. The founder and CEO of Amazon, Jeff Bezos said, "Your brand value is what other people say about you when you aren't in the room".
Much like owner's equity, this is a 'goodwill' term used on the right-hand side of the balance sheet. Though the term brand value is rather vague and quite difficult to describe, there are some ways you can measure it.
For starters, one has to come up with brand equity first before measuring its brand value. Brand equity is the commercial value derived from the consumers' perception of the brand.
Brand equity can be measured based on qualitative data. But to put it in accounting terms, it must be transformed into a quantitative form. It is difficult to convert qualitative data into quantitative. But it's not impossible.
Generally, quantitative analysis measures total revenue, profit, loss, and cost of goods sold etc. and prepares financial statements like balance sheets based on these calculations. On the other hand, qualitative data associated with brand value will incorporate more abstract variables like consumer satisfaction, customer awareness, brand perception, loyalty, sense of responsibility etc.
So how do you incorporate these qualitative terms in quantitative analysis in the balance sheet? What are the determinants of high brand value? Here are several different accounting methods, each of which shows why companies cannot have a positive brand value with large margins of losses.
Equity valuation method
According to the equity valuation method, a company could measure its investment in advertising to get more customers to earn more profit or to save on their future launch of newer products. Since such investments bring in more customers, garner consumer confidence and ameliorate brand perception, they could be included in equity valuation.
Unfortunately, Evaly exhibits an overwhelming margin of losses against a considerably large investment in advertising. Hence, its claims are not consistent with the equity valuation method. It ideally should represent a negative brand value simply because the brand value is something utilised to generate more profit, not loss.
Excess Earning Method
Excess earning is another method to measure brand equity based on intangible returns. This method sums up all the returns on every single tangible asset and financial asset. After that, the total value of assets is deducted from the total return of the company. The subtracted amount is entered as the brand value. But here's the catch:
Since companies like Evaly are showing negative returns over tangible and financial assets, it's not possible to add any value to the brand.
According to Interbrand, a prominent global brand consultancy, there are three important factors to consider before measuring brand value:
- Brand's Financial Performance: Profit generated by using the brand name. Like; Apple is selling an iPhone at $999, which costs $450. People are paying more for a reliable quality product. When it comes to Evaly, they are selling goods at overwhelmingly cheap rates with very little return in the name of promotions that resulted in a large sum of liabilities.
- Influence on customers: Capacity to control customers' decisions over positively buying goods or services. Trust is more important than the discount. People who are looking for discounted products might not be your loyal customers when you will stop offering goods at a lower price. Customers may have lost their faith entirely in Evaly after the central bank ceased to allow any transactions made to the company before delivering its products. On top of that, its CEO and Chairman were arrested.
- Strength of the brand: This is more specific about reducing risk and creating loyal customers. By delaying orders, Evaly has increased its risk and liabilities. Finally, Evaly has ruined its brand image by not refunding the money of the customers. It's not only a breach of loyalty but also a crime.
The previous methods dealt with investment, returns and consumer trust. We can also measure brand value using costs.
If we want to value a brand value based on its cost, there are ways to place their costs to the brand value. I am going to talk about two different methods here.
According to this method, the value is counted after assuming the total costs and investment that will be needed to replace the brand with a new brand of equal value. With repeated allegations of mismanagement and fraud as well as thorough media scrutiny, Evaly currently has a very low replacement cost. Hence, it cannot have a large and positive brand value as it claimed.
Historical Cost Method
According to this method, brand equity equals the total expenses on fostering a positive brand perception such as promotional cost, advertising cost, registration costs. The total value can be announced as the sale value of a brand and maybe incorporated on the right-hand side of the balance sheet.
This is probably the only method in which they could ignore the returns on expenses on a particular sector and simply claim that they have a certain amount of brand value. Unfortunately, this is a rather simplistic method of measuring brand value as it entirely ignores the return on investment.
Brand value is not simply the total cost of promotions and advertisements. It's more emotional rather than mathematical.
Nowadays, startups are a trendy thing to try. But we must keep in mind that startups like PayPal, Amazon, Alibaba, Facebook, or Apple have never tried any shortcut method to reach their vision. It was a slow and steady journey and they were honest with their customers by avoiding any sort of fraud.
Bangladeshi startups should aspire to do the same.
Md Riyajul Karim Is an Entrepreneur and Business Consultant.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.