Business Strategies: Goodwill and Brand Values (GBVs) under threat

Goodwill and Brand Values (GBVs) are used to insert into a company's balance sheet a value that a purchaser would be willing to pay for a continuing business. Its purpose, in particular in public companies, is simple: to inflate the balance sheet so that the company can use that inflated figure to raise finance in the market and, in all businesses, it is to inflate the balance sheet so that lending officers consider the business to be a better security than it would otherwise be.

Goodwill used to be easily calculated: it was four times sales or nine times profit.

But in the tech stock bubble of the late 1990s, Wall Street and rafts of accountants sold the idea that a tech company should be valued only on its "revenues" i.e. billings (not, notice, sales) and then at a rate of anything up to 20 times those billings.

The black art of calculating brand values has much in common with goodwill and for most purposes they are indistinguishable. And so it is that a company can have a massively negative balance sheet, a massively negative cashflow and yet easily raise money on the markets.

This article is not about how merchant and investment banks created the frauds and fictions that have created a series of bubbles and bursts including the latest global crisis.

It's about one narrow point: that GBVs should not be included in balance sheets.

If we look at the world today, there is little inertia in the purchasing process. In fact, it often appears that only banks have significant barriers to change for customers.

If we look at computer products and internet supplies, increasingly, these are commoditised. Frankly, it really doesn't matter that much whether your new laptop is Acer, Asus, Lenovo, HP or anything else: you will get broadly similar features, quality and price. Whether you like it or not, you will probably end up with the same operating system - and often that would be the primary differentiator if you had a choice.

The situation began to make itself clear a decade ago in the discount telephone calling-card market. As suppliers chased customers, prices fell and special offers abounded. But providers made new offers and new prices weekly or even daily. And very quickly customers got used to it: they also got used to looking at the posters shop windows and working out which card would be cheapest for them that week. And when they did that, they soon started the trend that abolished the concept of brand loyalty. And if there is no brand loyalty, then - by definition - the GBVs are fictitious.

Those who watched the growth in revenues failed to notice that much of that growth came from new customers: customers who would buy a rival product days - sometimes even hours - later. Only by providing a clearly differentiated product, with some form if disincentive to change, can any business hope to retain its customers. And it is that retention of customers that is goodwill and, through that, brand value.

The current area where this issue is most stark is in Voice over Internet Protocol or VoIP. Providers make free services available. These are cost generating not revenue generating. Moreover, they compete on selling calls connected to traditional telephone numbers at ever lower prices (e.g. unlimited calls within the USA for USD25 per month). But many of those companies also depend on ad hoc customers using their system, pre-paid. They are, in fact, the logical successors to the pre-paid phone card market.

And they face exactly the same threats. There is little inertia. A customer who is used to buying services over the internet and wants to use the phone for outgoing calls only can, simply, fund his account use up the credit and then compare multiple services for his next purchase. Changing supplier is nothing more complex than changing a few settings in a form on his computer.

And for corporations, the change is just as simple: altering settings to change supplier for the entire office is simply a matter of changing the contents of a couple of boxes in the office internet router.

The VoIP industry is already mature in many countries. Locking in customers, as the post-paid discount suppliers such as Cable and Wireless did in the UK in the mid 1990s, is the only way to ensure continuity. There's an old marketing expression: it takes 20 times the cost to gain a new customer as it does to keep an existing one. VoIP providers are constantly looking for new customers not, specifically, to grow but to replace new ones.

And as a result, the sector will see failures and consolidation as market conditions tighten.

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Nigel Morris-Cotterill heads The Anti Money Laundering Network

www.antimoneylaundering.net

the ultimate holding company for chiefofficers.net

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