The Marketing Book 5th Edition

302 The Marketing Book

assets. Economic value added is the return on
intangible assets. In this example, it is esti-
mated that the brand name accounts for 70 per
cent of these residual earnings (for a method-
ology for estimating this percentage, see Per-
rier, 1997). The discount factor is estimated at 15
per cent (Haigh, 1998, pp. 20–27). The brand is
then valued at £123.5 million. This is the
contribution of the brand name to the total
value of the business. It demonstrated that past
and continuing investments in the brand have
created significant shareholder value.

Optimizing price decisions

In many ways price is the most important
element of the marketing mix. Price is the only
element of the mix that directly produces
revenue: all the others produce costs. In addi-
tion, small changes in price have bigger effects
on both sales and shareholder value than
advertising or other marketing mix changes.

There are five key principles that underlie

effective pricing:

 The optimum price is that which maximizes

shareholder value, not short-term profits or

market share.

 Pricing should be based on the value the brand

offers customers, not on what it costs to

produce.

 Since all customers are different in their needs

and the values they attach to a solution, it pays

to charge different prices to different

customers.

 Pricing has to anticipate competitors’ reactions

and their objectives in the market.

 Good pricing strategies depend upon effective

implementation for results.

Price, profits and value

Accountants frequently recommend price

increases to boost short-term profits. The effects

Table 11.3 Valuing the brand (£ million)

Base Year

12345

Sales 250.0 262.5 275.6 289.4 303.9 319.1

Operating profits (15%) 37.5 39.4 41.3 43.4 45.6 47.9

Tangible capital employed 125.0 131.3 137.8 144.7 151.9 159.5

Charge for capital @ 5% 6.3 6.6 6.9 7.2 7.6 8.0

Economic value added 31.3 32.8 34.5 36.2 38.0 39.9

Brand Value Added @ 70% 21.9 23.0 24.1 25.3 26.6 27.9

Tax (30%) 6.6 6.9 7.2 7.6 8.0 8.4

Post-tax brand earnings 15.3 16.1 16.9 17.7 18.6 19.5

Discount factor (r= 15%) 1.00 0.87 0.76 0.66 0.57 0.50

Discounted cash flow 15.3 14.0 12.8 11.7 10.6 9.7

Cumulative present value 58.8

Present value of residual 64.8

Brand value 123.5