Replacement Cost- Method for evaluating Brand Equity

Consider a brand, say Colgate. How much would it cost to create a brand with similar turnover, profitability, distribution reach, brand loyalty, etc. This cost is its brand equity.



To begin with, measuring each of the above costs is not very easy. Colgate has a turnover of over Rs.7000 million, a gross profit figure of Rs.150 chores, reaches at least 7 lakh retailers directly (many times this number indirectly) and finally is probably the most popular brand in the country.

Promotional expenses on launch alone cost close to 7 Crores today for a national brand. Add to this the production, distribution and marketing overheads. A simple calcu lation can demonstrate this figure. Consider the example of another brand, Close-Up. Close-Up has been in existence for some time now. Say Rs.200 crores was spent cumulatively on production and marketing over the years to achieve the present turnover. To this, add the amount for the brand loyalty and distribution equity it commands. Let us add another 50 crores to take care of that. In other words, the brand value of Close-up is 255 crores.

Replacement cost = (Launch cost + production and administrative costs incurred over the years + brand premium acquired over the years due to brand loyalty, distribution, etc.)

First, procedurally this is not very simple. Of course, it is better than historical cost because it considers today’s costs. But this suffers again from the same setbacks as the previous method. What is the guarantee that if a brand is created at the cost be Rs.255 crores today it will obtain a market share of about 17% as Close-up did? This indeed is the million dollar question.

Present costs (as in replacement cost method) are as bad indicators as past ones (as in historical cost method) as far as evaluating brand equity is concerned.

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