Goodwill: the convergence of finance and marketing

The vision has changed from one where only tangible assets had value to one where companies now believe that their most important asset is their brands, which are intangible. These intangible assets account for 61 per cent of the value of Kellogg’s, 57 per cent of Sara Lee and52 per cent of General Mills. This explains the paradox that even though a company is making a loss it is bought for a very high price because of its well-known brands.

Before1980, if the value of the brand had been included in the company’s earnings, it would have been bought for a penny. Nowadays brand value is determined independently of the firm’s net value and thus can sometimes be hidden by the poor financial results of the company. The net income of a company is the sum of all the financial effects, be they positive or negative, and thus includes the effect of the brand.

The reason why Apple lost money in 1996 was not because its brand was weak, but because its strategy was bad. Therefore it is not simply because a company is making a loss that its brand is not adding value. Just as the managers of Ebel-Jellinek, an American-Swiss group, said when they bought the Look brand: the company is making a loss but the brand hasn’t lost its potential. Balance sheets reflect bad management decisions in the past, whereas the brand is a potential source of future profits. This potential will become actual profit only if it can meet aviable economic equation.

It is important to realize that in accounting and finance, goodwill is in fact the difference between the price paid and the book value of the company. This difference is brought about by the psychological goodwill of consumers,distributors and all the actors in the channels:that is to say, favorable attitudes and predisposition.Thus, a close relationship exists between financial and marketing analyses of brands. Accounting goodwill is the monetary value of the psychological goodwill that the brand has created over time through communication investment and consistent focus on product satisfaction, both of which help build the reputation of the name.

Brand financial valuation,

Rank Brand Value (US$ billion)
1 Goggle 66,434
2 GE 61,880
3 Microsoft 54,951
4 Coca Cola 44,134
5 China Mobile 41,214
6 Marlboro 39,166
7 Wal-Mart 36,880
8 Citi 33,706
9 IBM 33,572
10 Toyota 33,427
11 McDonald’s 33,138
12 Nokia 31,670
13 Bank of America 28,767
14 BMW 25,751
15 Hewlett-Packard 24,987
16 Apple 24,728
17 UPS 24,580

What exactly are the effects of this customer and distributor goodwill?:

  • The favourable attitude of distributors that list some products of the brand because of their rotation system. In fact retailer may lose customers if it does not stock products of a well-known brand that by definition is present everywhere. That is to say, certain customers will go else whereto look for the brand. This goodwill ensures the presence of the brand at the point of sale.
  • The support of wholesalers and resellers in the market for slow-moving or industrial goods. This is especially true when they are seen as being an exclusive brand with which they are able to associate themselves in the eyes of their customers.
  • The desire of consumers or end-users to buy the product. It is their favourable attitude and in certain cases the attachment or even loyalty to the brand that is the key to future sales. Brand loyalty may be reduced to minimum as the price difference between the brand and its competitors increases but attachment to the brand does not vanish so fast; it resists time.

The brand is a focal point for all the positive and negative impressions created by the buyer over time as he or she comes into contact with the brand’s products, distribution channel,personnel and communication. On top of this, by concentrating all its marketing effort on a single name, the latter acquires an aura of exclusivity. The brand continues to be, at least in the short term, a byword for quality even after the patent has expired. The life of the patent is extended thanks to the brand, thus explaining the importance of brands in the pharmaceutical or the chemical industry.

Brands are stored in clients’ memories, so they exert a lasting influence. Because of this,they are seen as an asset from an accounting point of view: their economic effects extend far beyond the mere consumption of theproduct.In order to understand in what way a strong brand (having acquired distribution, awareness and image) is a generator of growth and profitability it is first necessary to understand the functions that it performs with the consumers themselves, and which are the source of their valuable goodwill.

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