Curious about how brand partnerships are valued or estimated. Who pays what in an exchange and how is this determined. For example AT&T paying Apple for iPhone exclusivity? You would think Apple should pay AT&T for distribution, no? Or GoDaddy and Microsoft Office 365? Would like to understand this as we consider partnerships with various companies.
Let’s start by referencing and highlighting the 2 examples you cited –
1. AT&T paying Apple for iPhone exclusivity Was fraught with uncertainties. Initially, it was not a given that the iPhone would be a success. Apple and AT&T entered into a 5 year initial agreement of exclusivity to leverage AT&T network to distribute the iPhones. AT&T was at the time one of the more powerful brands while Apple was just turning the corner from computers and staking its future on mobile devises. This particular branding partnership ended up in court for several reasons. (See Endgadget – Confirmed: Apple and AT&T signed five-year iPhone exclusivity deal -- but is it still valid?)
In early 2005, Steve Jobs was poised to convince AT&T to buy into an exclusive deal to distribute and service the first iPhone. But Jobs failed. And it took Apple until 2006 -- when Jobs delegated the deal to Eddy Cue, and Erfan Ahmed -- before AT&T and Apple could begin to agree on the terms of their deal. Apple needed help to find a wireless provider that would support the first iPhone with voice and data network access. (See Forbes – Project Vogue: Inside Apple's iPhone Deal With ATT)
2. GoDaddy and Microsoft Office 365 Microsoft today (Jan 13, 2014) announced a partnership with GoDaddy that aims to bring Office 365 to more small businesses. Moving to a subscription model for Office was a major step for Microsoft, and so far it looks like it has paid off. By last November, the service had already signed up over 2 million paying users. GoDaddy says it currently has about 12 million small business customers, so this partnership could potentially increase Microsoft’s reach for Office 365 by quite a bit. (See Techcrunch – Microsoft Partners With GoDaddy To Bring Office 365 To More Small Businesses)
Some insights from both the AT&T/Apple & GoDaddy/Microsoft partnerships:
1. They are very complicated – needs to align respective business strategies, processes & teams in order to make it happen. Products, legal, marketing, support, finance, reporting, disclosures, etc, must be understood and mapped to each partnership
2. Usually requires synergism between the partnerships
3. The companies involved are general in complimentary categories – a. Customers b. Product or service c. Markets 4. Requires extensive research to – a. Make sound business case b. Requires in-depth business planning c. Understand the objectives of each party d. Understand what each party wants to achieve e. Understand what each party is committing to and delivering
How to Value Brand Partnerships
Valuing these partnerships is a complicated business exercise but it can be done. What to understand when valuing brand partnerships –
The value of the brand partnerships are seldom specific dollar value. Instead, the value is a potential estimated value of revenues. This is because the variables that go into calculating the value can fluctuate during the lifecycle of the partnership.
Since the variables do oscillate over time, it is advisable that the actual value of the partnership be pegged to some business KPI (key performance indicators)
As in life, often the value of the partnership is in the eye of the beholder. In other words, since most business metrics, IP, processes, product pipeline, assets, liabilities, etc are internal and held very closely and not known to the outside world except for publicly disclosed information, it is highly probable that only each side of the partnership truly knows its own value and therefore what it is willing to ask/give to the brand partnership.
It is also important to keep in mind that there could be some negative aspects to brand partnerships. If one brand has a negative perception or is embroiled in a scandal during the duration of the partnership, the spillover is likely to also affect the other brand. So plan for this.
There are 3 core considerations for valuing brand partnerships –
1. Strategic 2. Financial 3. Risks
Strategic Value This option of valuingbrand partnerships is more esoteric and usually include
Leveraging/extending brand equity
Gaining access to key brand assets
Investing in future value of the brand
Enhancing competitive advantage
While strategic value is more obscure and not less clear with regards to actual capital, it does however offer the following advantages –
Gain significant market share
Immediate competitive advantage
It does lead to future financial benefits
Increased brand influence and awareness
New markets access and opportunities
Financial Value Again, financial valuation of a brand partnership is an estimate of the financial potential of the partnership. It is revenue positive, more obvious and includes the following –
Actual recurring revenue derived duration of the partnership
Increased in customer value
Surge in transaction value or frequency, and
Operational cost savings
Of the 2 options, offering a clear financial valuation of the brand partnership makes it more appealing to potential partners because the partners can easily see a path towards increased revenue through the partnership.
Potential Risks Both options for valuing a brand partnership are not completely devoid of risks. Research and due diligence should include researching and understand potential risks inherent in business partnerships.
The business case for a potential brand partnership should also take into account the risk factors including –
Reputation of prospective partner issues
Opportunity costs of financial, products and service level commitments
Value of the Payments In short, there are multiple ways of determining (there are consultants who specialize in this) whichpartner gets paid what amount. The payments are calculated after the above listed factors are understood and accounted for.
The payments can be in the following formats –
Single or multiple Upfront payments or commitment to pay based on deliverables
Percentage of monthly or annual recurring revenues