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What is Goodwill?

Smartpedia: Goodwill refers to a voluntary favour – usually in business transactions – to which the beneficiary has no legal claim.

Goodwill – a concession without a legal claim

Whenever parties – i.e. people, companies, organisations – make agreements with each other or conclude contracts, this results in rights and obligations for the parties involved. If A buys a product from B, then A has a claim to delivery of the product free of material defects and defects of title, and B has a claim to payment of the agreed purchase price and acceptance of the product. If the principle of freedom from defects is not fulfilled, liability for defects takes effect and B may have to provide subsequent performance. Goodwill goes beyond this scenario and describes a concession or a favour to which the beneficiary has no legal claim. If, for example, a 2-year warranty was agreed in the course of the delivery and the product breaks shortly after the warranty expires, B could, for example, waive the right to charge the repair costs, although A has no claim to this.

In which direction does goodwill work?

There is a whole range of synonyms for goodwill, such as mildness, kindness, favour, concession, willingness to compromise, concession, friendliness, compliance, benevolence, decency, helpfulness, sensitivity, tact, kindness of heart or politeness. The term itself derives from the Latin expression ex gratia – out of grace¹. Indirectly, it can be deduced from the multitude of synonyms that goodwill can work in different directions:

  • Goodwill is a means of customer loyalty between manufacturer or service provider and customer.
    If a manufacturer, producer or service provider is accommodating to its customers, shows understanding and goodwill, this will usually improve the relationship between both sides and possibly bind the customers longer.
  • Goodwill is an element in referral marketing, where customers recruit potential customers.
    Satisfied customers report on the goodwill of the manufacturer or service provider in their personal or professional environment and thus become multipliers or brand ambassadors. This effect is further enhanced by social media.
  • Goodwill is a means of partner management between manufacturers or service providers and their partners.
    Even between partner companies, there are always situations in which willingness to compromise and compliance are very beneficial. Ideally, this promotes cooperation and trust, and also has a positive effect on the quality of deliveries.
  • Goodwill is a means of employee retention between employer and employee.
    In the interaction between employer and employee, too, there are often situations in which employees have no legal claim but the employer can show itself accommodating: working in a home office, additional days of leave, the possibility of time off, understanding in the case of illness of family members – there are numerous ways to show oneself as an accommodating employer. And goodwill works the other way round, too, because employees are often willing to work unpaid overtime, to be available outside of normal working hours or to take on tasks that are actually outside the scope of the agreed work performance.
  • Goodwill is a means of interpersonal cooperation between colleagues.
    Colleagues support each other, take over project tasks from each other or stand up for each other in meetings. And this is always done without any claim to it.

Tips for dealing with goodwill

There are some tips for dealing with goodwill between different parties:

  • Concessions should be used as a means with a view to the common future of the parties involved. It does not make sense, for example, to meet every customer request and every customer wish. A concession in individual cases can make sense, but often also requires a (speedy) case-by-case assessment. A manufacturer may forego invoicing a long-standing customer if there is a chance of concluding a new maintenance agreement. But if the customer has always waived the conclusion of a maintenance agreement, why should the manufacturer now be lenient?
  • Benevolence can be deliberately used as a marketing tool. For example, a Swedish furniture store was known for its accommodating exchange policy. Goods could be returned years after purchase without reason. If word of such a policy gets around among potential customers, it is certainly cheaper than any advertising campaign.
  • Being accommodating should also pay off or be worthwhile. As an organisation, always being helpful does not serve any overriding purpose. Whether it makes sense to collect dedicated key figures – e.g. a share as a ratio of goodwill costs to turnover or a value as a ratio of goodwill granted compared to sales – is something that organisations have to decide for themselves. And the establishment of a dedicated goodwill management also requires a case-by-case approach.
  • There are customers who take favours for granted. But whether it is a matter of course often depends on the industry, the market and the competition. In specific cases, it is therefore advisable to look for solutions that all parties can live with.

And last but not least: kindness is not a one-way street. Ideally, the parties involved benefit from each other at least in the medium term. In a way, one could also speak of a
win-win situation

Goodwill - a concession without a legal claim

Impulse to discuss:

Sometimes you read that concessions cannot be demanded. What do you think about that?

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[1] Ex gratia

Many companies want to retain customers for their products or services in the long term. One way of achieving this is the so-called Lock-in Effect.

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