Corporations often deal with intangible assets, such as trademarks, patents, goodwill, franchise rights and brand equity. Attempting to assign a value to an intangible asset can be difficult because these assets don’t directly generate capital in the same way physical assets do. The profit-split approach helps measure the value of brand equity, while commonly assuming one of two forms.
Brand equity constitutes the value of a brand. Because a brand name generates no capital, brand equity attempts to measure how much of brand sales and company profits stem from the reputation of the brand. Valuable brand equity, such as that of Apple or Microsoft, provides a competitive edge and can allow companies to charge higher prices than competitors with less brand equity. Three factors affect brand equity, knowledge (brand awareness/relevance) distinction/brand personality, and brand loyalty among customers.
Profit Split Within Company
One form of the profit split approach to measuring brand equity takes place within the company owning a brand. This approach attempts to separate the value of the brand from the other profits earned by a company. Companies subtract all identifiable streams of revenue, such as taxable income and operating revenue, from total annual revenue and assume the difference comes from the brand itself. This profit makes up the brand equity.
Profit Split Amongst Parties
One form of the profit split approach to measuring brand equity totals all revenue generated by a brand from all parties earning capital from the brand. Parties earning revenue from a brand include the brand licensee, brand licensor and vendors, such as stores and online retailers. Each of these parties generates an estimate of profits earned due to a brand name, possibly using the other profit split method. Adding these methods gives a measure of brand equity spread among all profiting parties.
The profit split approach among parties constitutes the most commonly used method for measuring brand equity. Accountants also use the profit split approach for measuring goodwill equity, another intangible asset. Companies use the profit-split approach when measuring brand equity for potential sale. For instance, if a company wishes to buy another company’s brand, the brand carries no actual paper value. The profit split approach indicates how much a company stands to lose by selling a brand -- or how much a company gains by acquiring the brand.
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