As noted in an earlier blog, the topic of valuing intangibles - especially brands - is doing the rounds again. Leading advocates of employing outsiders to put a value on brands argue that, without knowing the precise value of a brand, it is impossible to know that it is being maximised.
That argument falls on two grounds. Firstly, the concept of a precise value is a myth. Value, like beauty, is in the eye of the beholder: different people will put different values on the same brand (if they didn't, there would never be any buying or selling thereof). Secondly, even if it were possible to know the value of the brand, nobody knows what alternative value might have been obtained by dint of a different strategy of which there are an infinite number.
In the real world, there are decisions being taken all the time in the context of brands, such as:
- the level of investment in advertising and how the benefit will be reaped - as higher volumes or margins?
- the level of investment in product development, and the question of brand extensions.
In a rational financial management environment, these will be taken on the basis of the expected consequences in terms of incremental cash flows, discounted at the cost of capital. Note, however, that it is never a question of whether or not a positive result is anticipated, but about which combination of decisions is believed to lead to the maximisation of the value of the business.
Advertising a product that is indistinguishable from the competition is rarely viable; neither, is enhancing the product but not telling the world. Developing a product so that it outshines the competition, and spending appropriately to let customers and potential customers know about it, however, is likely to have a positive value.
David Allen's course on Strategic Financial Management shows how to manage the value of a business.
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