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An Explanation of Goodwill – Part I – Generating Goodwill

Goodwill is essentially customer retention.  It’s the ability of a small business to retain and keep customers coming back.  I remember from my boyhood a hardware store my mother would go to and get parts for the house.  The owner was well into his 70’s and I was a boy of 7.  This was the mid 60’s and he would come up to the young boys and extend his hand.  I would shake and when this moment was over, I had in my hand a piece of Bazooka gum.  In those days, candy, no less gum, was expensive.  So for a boy of 7 to have a piece of gum in his hand after a handshake was a gift.  The owner of the store achieved two goals in that gesture.  First, he taught a boy not to be afraid of an adult and secondly, his act of kindness reaffirmed to the customer the value his hardware store brought to the community.  My mother loved going there because she could talk to the owner about her needs and sure enough he provided a solution.  She was devoted to that hardware store.

So the closest definition of Goodwill is devotion.  Customers become devoted due to the way the small business treated them.  It was worth paying a little more or going out of your way to go to the business that treated you well.  So how does a business generate goodwill?  What is it worth?  How does a buyer of a business monetize goodwill?  Finally, how is goodwill treated for business purposes?  This is a first in a series about goodwill and covers how goodwill is generated.

How to Generate Goodwill

There is no secret here.  Goodwill is generated over time.  The customer feels as if he is the most important person in that store or business.  No one trip by a customer generates goodwill.  It takes many trips to the same business to get that feeling.  There is no single act by your staff, no one moment that does this; but there is an Ah-Hah feeling that comes from several encounters over time that causes a customer to say to himself, ‘This is the place to buy my ????’  So here are some real life examples of how some of my clients generated goodwill:

One of my clients from the past owns an RV dealership.  One of his customers came back to upgrade from a trailer to a motor home.  To give you an idea, we are talking about going from a $30,000 trailer to a $140,000 motor home.  It was obvious to the staff that the customer was going to have a difficult time maneuvering a motor home upon leaving the lot.  There was no requirement under state law to attend certain classes or have a special license.  But it was obvious based on the buyer’s size and demeanor; he was going to have a rough go of this transition.  So the general manager decided to protect the buyer, the property and in his mind the public from this guy.  He asked the customer to pick up the unit in about 5 days.  The customer was confused, why five days?  The general manager explained that he needed the time to install a special seat; the manager explained that it was an electronic seat to allow for adjustments for radius and lumbar, furthermore, he sighted some obscure manufacture regulation (it doesn’t exist) that driver’s had to be able to have a focal point at a certain point on the front windshield.  The buyer had no clue but appreciated the concern and he was OK with the wait.  In reality, the seat did this but also elevated the driver about 7 inches higher (the buyer was only 5’ 8’’ in height).  The manger had the seat installed and then had the salesman spend an extra three hours on the company’s gas taking the buyer out on the road and making sure he had control over the unit.  Once satisfied, the dealership released the unit to the buyer.  The sad part is that the driver didn’t even make a right hand turn out of the parking lot before taking out the corner of the dealership’s sign.  It was one of those funny stories told at the Christmas party each year.  Even though the customer took out the sign, the dealership repaired the unit and the sign for no charge to the customer. 

That same customer came back every 3 years to trade in his unit and buy a new one.  He was on his 3rd motor home when I left the dealership.  That’s GOODWILL!

The second example involves an electrician.  The electrician had finished the trim out on a new house, one of those upper class homes.  The homeowner calls the electrician up about 3 weeks after the closing and says that he’s missing his floor outlet in the middle of his great room.  Apparently the carpet layer just rolled the carpet right over the floor electrical outlet.  Technically, the carpet guy is supposed to cut out the part of the carpet lying over the outlet to allow the electrician to put in the brass floor electrical outlet and the escucian plate.  Well the master electrician made the mistake of sending out one of the young inexperienced electricians to find the outlet box, drill out the opening and install the outlet and the cover plate.  Well, when you take a drill with a hole saw bit, stick it into carper without first cutting the fibers with a knife, you get a picturesque wagon wheel look in carpet fibers getting pulled towards the drill bit.  My client took a picture of this and hung it on his wall in the office.  He called it the ‘What not to do’ series.  He paid for brand new carpet.  He lost about $2,000 on that job.  But he won the approval of the builder of that house.  He had every electrical job that builder could send to him over many years.  He charged about $100 more for each job to get his money back, the builder didn’t care.  To the builder, anytime his electrician will go that far out of his way to take care of the customer, that electrician was getting all his electrical work.

One of my clients is a medical doctor.  Many of his patients are diabetic and elderly.  His wife ran the office and it was not uncommon for the patients to show up without having monitored their sugar levels.  Well, I was in the back office one morning and a patient arrived early, around 7 AM.  The doctor had just arrived for his duties that day, but his wife and two staff members were always there by 6:30.  I was there early to get the paperwork done so I could leave early.  Well, this patient had some type of diabetic issue right there in the patient waiting room.  The doctor’s wife knew right away it was a sugar issue and immediately attended to the patient’s needs.  I had to help carry him back into one of the patient rooms, he easily weighed over 200 pounds.  She fed him orange juice and her nursing experience taught her to take a blood sugar reading and begin a feeding process to get his count to the correct level before her husband could see him.  She proceeded to cook him breakfast and get him at the right diabetic level before the medical visit could begin.  It turns out that this guy had been coming to see the doctor for over 3 years on a monthly basis.  He was the only patient the doctor had with the particular insurance underwriter and it cost him money to see this patient.  This patient referred so many new clients to this doctor; he had to turn people away.  The doctor’s wife explained to me that he alone was responsible for about 1/5 of the entire patient portfolio.  I was taken aback by the relationship. 

It is as if Goodwill is more love and kindness than some business principle.  It is a business concept that ultimately has some financial value to the owner.  The next article in this series identifies what goodwill is worth and how a small business owner monetizes the value.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.   If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer.

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About David J Hoare (408 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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