Brand Equity and the P/V Ratio

December 5, 2016 General Flood No comments exist

Brand Equity has long been discussed and defined in different ways by so called experts. It has to do with the way the consumers or customers feel about the brand. A brand with high brand equity must be one that customers feel stronger and more positive about than its competing brands that exhibit lower brand equity. A brand with strong brand equity will exhibit higher “Top of Mind” or “Unaided” awareness. It will perform at a higher price point than its competition. While these qualities of Brand Equity are probably true and intrinsic, they do not help us to quantify Brand Equity. Long before I became a General I had to develop a quantifiable and commercial method of defining Brand Equity. After all, if we are going to sell a brand we need to agree with the buyer what it’s worth and visa versa. Brand Loyalty should not be confused with this evaluation as it is something quite different and has to do with the propensity to purchase which in turn is related to purchase frequency. Brand Loyalty is a separate notion, part of buyer behavior and will be discussed at a later date. Setting aside the esoteric and etherial qualities often discussed the General can help you to define and measure Brand Equity.
General Flood’s Brand Equity Disclosure:

BE = f{P/V x 4V} Brand Equity is a function of the Profit to Volume ratio x 4 years of Volume

The most important attribute of Brand Equity is the brands P/V or Profit to Volume ratio. This is the amount of money that falls to the bottom line when an incremental product or service is sold. Usually stated in shipping case value. This is usually defined as the Gross Margin minus other transaction costs such as commissions and shipping costs. We then multiply this P/V ratio by 4 years of volume, the last 2 actual and the next 2 expected. This allows for the fact that bigger brands are worth more than smaller brands. Future years are included to allow for the fact that the brand may be regional currently or in test. It also allows for the fact that there may be channel management opportunities. Perhaps the brand has only 64% All Commodity distribution due to weakness in the channel management strategy and the buyer can easily see improving this to 97% like their other brands in the same channel. This valuation method can bring the buyer and seller into concurrence and properly done yields the buyer a higher valuation leading to a deal. This valuation is also used to measure the payback period, the length of time for the buyer to get their money back and produce a targeted return.

We can help you to evaluate Brand Equity. Just call TopDeck Solutions and ask for General Flood.

Of course we often have to buy a company to acquire a brand. This means that in addition to the brands we need to value efficiencies, identify processes that can be improved or discontinued and understand the Culture of the company we are acquiring so that obstacles to change can be understood and planned for to ensure performance targets based on the acquisition. TopDeck Solutions has tools to help you with due diligence to identify potential in Brands, Business Processes and Culture Change. Call TopDeck Solutions and ask to speak to General Flood.



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