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ZIBSForum:
Roger Sinclair
on "Viewing Brands as Assets"
reported by Sarah Banick

It's time for brands to be recognized as the assets, and in today's era of accounting reform, marketers have never had a better chance to increase their status in the boardroom.

CMOs need to make a financially literate argument that their initiatives improve the value of the brand, says Roger Sinclair, Ph.D, a leading expert on brand valuation and brand equity practice worldwide.

Dr. Sinclair is a visiting professor at the University of the Witwatersrand, South Africa's leading research institute, after a long career as both an academic and an advertising man. Through his own methodology, BrandMetrics, he has been involved in the valuation of more than 300 brands. He recently spoke at a ZIBSForum hosted by the Zyman Institute of Brand Science at Emory University.

Marketers have long remained reactive to more influential financial executives. All managers make the argument that their function improves the value of corporate property; but Sinclair believes that marketers too often expect executives to understand their position. Instead, marketers should promote their abilities in terms financial executives understand.

One of the largest hurdles marketers face is language, says Sinclair. "We are the guardians of an asset. What we do with marketing is to defend an asset. And the language of assets is the language of finance."

The latest accounting standards bring brand equity closer to the balance sheet. In July of 2001 the United States' Financial Accounting Standards Board issued FAS 141 which, among other things, specified that companies must recognize the component costs of acquired goodwill when a merger takes place.

"You must value intangible assets and account for them in the books as part of what you paid for that company," says Sinclair. "It's a massive move." Shortly thereafter rest of the world, led by the IASB (International Accounting Standards Board), followed suit.

It's not just the accountants. Analysts, as well, are emphasizing the brand value. "We say that marketing creates the income and everything else is the cost. The income comes from customers, and why do you have customers? Because of brand equity," says Sinclair.

Even corporate governance recognizes the need for brand valuation. Both Sarbanes-Oxley and its British equivalent, Operating & Financial Review, now require companies to report non-financial indicators in the narrative part of the annual report.

"In many companies today, the brand represents shareholder value," says Sinclair. Especially in the U.S., a "litigious society," trademarks are protected as carefully as invested income.

But Sinclair believes the common metrics the financial community uses to evaluate brands as assets won't do. These include such approaches as historic cost, replacement cost, and income capitalization. Among intangible valuers, Relief from Royalty is the most popular, although Sinclair insists, "Relief from Royalty is highly suspect," due to the subjective nature of its assumptions.

As his doctoral thesis, Sinclair developed BrandMetrics. "The basic principles are that brands are long lived assets" they tend to appreciate in value over time, instead of depreciating like most other assets except for land. "They contribute to economic profit," he says. BrandMetrics uses customer based brand equity as the driver of value growth, and mediates brand profitability by categories and the economic environment.


Brandmetrics: the model

As part of their model, Sinclair and his colleagues isolate the brand portion of economic value. This is done by identifying an exhaustive list of possible resources, reducing these to core drivers of economic profit , and evaluating the interplay of brand equity with those resources. In more than 300 cases, the leading drivers of economic profit remain remarkably consistent, including supply chain management, brand name, control of costs, consistent production, brand loyalty, margin management, human resources, customer relations, and pricing.

The resulting portion of economic profit attributable to the brand's equity remains stable across industries, with more stable businesses such as energy companies at the low end (45 to 50 percent), and highly branded media titles at the high end (80-90 percent).

Sinclair's BrandMetrics provides marketers with a very real number to take to the board room: a brand value. The system also can be tweaked to project a brand value into the future; thereby helping marketers determine where and when to expand their efforts; similar to how financial investments control the value of an asset.

"A brand is a resource acquired by an enterprise which generates future economic benefits." says Sinclair. "It's an asset in the same way that a building is an asset or a machine is an asset."

He even has an answer for those who still refuse to accept his reasoning: "Have you heard of a company called Arthur Anderson?"


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Linking Consumer-Based Brand Equity to Market Performance: An Integrated Approach to Brand Equity Management Ben Kartono, Vithala R. Rao

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Customer Equity: An Integral Part of Financial Reporting? Thorsten Wiesel, Bernd Skiera, Julian Villanueva

Linking Customer Metrics to Shareholder Value for Firms with Contractual Relationships Thorsten Wiesel, Bernd Skiera

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