Options theory and options thinking in valuing returns on brand investments and brand extensions

Abstract

Traditional methods of marketing evaluation may underestimate the true benefits from brand marketing, unless opportunities for brand extension are included in the evaluation. However, valuing brand extension opportunities is not without difficulties. Traditional discounted cash flow (DCF) analysis may underestimate the value of brand extension, in particular the value of flexibility, such as the ability to increase or decrease brand extension investment depending on future circumstances. An approach based on real options theory is recommended and it is demonstrated how this can be used both formally, to evaluate the contribution of marketing to the success of a brand extension, and informally, to influence the thinking of brand managers.