WOM, Advertising and Brand Valuation

The debate between advertising and WOM can also be connected to the methods used by operators to valuate firms’ intangibles and especially ...

The debate between advertising and WOM can also be connected to the methods used by operators to valuate firms’ intangibles and especially brands, for accounting purposes or in case of acquisition.

In 1991, Itami and Rohel suggested that successful corporate strategies depended significantly on the foundation of invisible assets–resources such as technical know-how, brand name, and customer base (Itami and Rohel 1991). Through the analysis of intangible market-based assets it is possible to achieve a better understanding of business performance, reconciling short-and long-term performance as well as bridging marketing and shareholder value (Christodoulides and De Chernatony 2010).



Brand equity has been a popular topic within marketing research. Studies of some scholars like Aaker, Farquhar, and Keller are well known. Raggio and Leone (2007) distinguish between brand equity and brand value. The first is conceived as an intrapersonal construct that moderates the impact of marketing activities while brand value is defined as the sale or replacement value of a brand.

Keller and Lehmann (2003) underline that “the value of a brand ultimately resides with customers”. They assume that the brand value creation process begins when the firm invests in marketing activities that influence the customer “mindset” with respect to the brand—what consumers know and feel about the brand.” This affects how the brand performs in the marketplace and is ultimately valued by the financial community. Then, the Brand value chain comprehends four value stages: Marketing Program Investment, Customer Mindset, Brand Performance, Shareholder Value.

Coming to the valuation methods commonly used for assessing the value of brands and their classification, Salinas and Ambler (2009) observe that “Classification is complicated by specialist firms seeking to differentiate methodologies (‘proprietary models’) for their own marketing purposes. Much of this differentiation is little more than re-labelling”.

However, in general terms it is possible to recognize three brand valuation approaches (Cravens and Guilding 1999; Guatri and Bini 2005):
1] cost-based approaches, grounded on the cost historically incurred by the firm or on the cost estimated to recreate, replace, or reproduce an asset of similar utility;
2] market-based approaches, prices expected to be realized if the brand were sold in an open market;
3] income approaches, based on estimating the expected future, after-tax profit (or net cash flows) attributable to the brand, then discounting it to a present value using an appropriate interest rate.

In the present note we will briefly discuss the first type of approach as it is particularly affected by the changes occurring in the communication and marketing environment.

The cost-based methods determine the value of a brand by considering the costs incurred in creating and developing the brand itself. The costs to be contemplated are the actual historical figures associated with acquiring, building, or maintaining the brand. These methods are supposed to be considered the most conservative and they comply with the standard accounting practice for valuing assets (Seetharaman et al. 2001). Thus, they are often well thought by accountants. However, the reliability of these methods may be only apparent. First, understanding and choosing the costs to be taken into account is widely an arbitrary choice. Furthermore, when the historical (and actual) costs are considered, the problem of the grade of efficiency and effectiveness of advertising and other marketing initiatives carried on by the firm arises. Also, the time horizon used for choosing the costs might be a problem in the case of mature (old) brands. However, it is important to observe and remark that in many cases the value of the brand may be founded only (or mainly) on the performance of the branded products, which drives customer satisfaction and WOM.

Crucial questions emerge even when the road of valuing the reproduction costs of the brand is chosen. Also in this case arbitrary decisions and assumptions must be made: promotional and media mix, budget requested, time duration, sector and market environment (and competitors’ conducts), economic cycle dynamic, etc. The advent of social media, that reduces the role of advertising expenses, makes this kind of evaluative decisions even more complicated and risky. In conclusion, we believe that the profound transformation that is characterizing communication
matters will significantly affect experts’ approaches toward brand valuations, making appraisals more difficult and requesting a sound accounting and marketing knowledge in the valuator’s professional profile.

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