Data the invisible goodwill on the balance sheet
“Our search commenced with the word ‘goodwill’. Denis stated that you can always include your client data as goodwill on a balance sheet, which has a positive effect on the valuation of a company. I stated that client data can only be included on the balance sheet when a transaction takes place — so buying or selling a company. Ultimately, we agreed that this part of the goodwill should be included on a balance sheet if you can demonstrably use client data to generate additional revenue”, states my former colleague Pim van Berkel.
Pim teaches at the Nyenrode New Business School in Amsterdam and was director of Fanalists, which provides a data-driven method which assists companies increase their value by making smarter use of data. He worked with client data on a daily basis in order to increase their sales, get their data in order and therefore increase in value.
Traditional banking is not perfect
First, let’s take a step back. What is the value of a company? What is goodwill and how does goodwill contribute to the company valuation?
Traditional bankers look at the assets that are on the balance sheet of a company. The value of these assets is, according to the traditional bankers, a guarantee to issue a loan with the same value. If a company faces problems, then all assets are sold. The company uses this to repay the loan to the bank. A traditional perspective of the classic financing on the basis of balance sheet value can be seen below.
From a visual perspective, there is a ratio, which is called ‘Loan to value’. This ratio is 75% in this example. In other words, the issued loan of 750,000 euro is issued on the basis of 75% of the total value of all possessions (that are worth 1 million in total).
This banking method is not perfect. If the value of the possessions drops (due to the economy or market conditions), there is a serious risk that loans are not fully covered by the value of the possessions. With decreasing sales and profits, the amount of cash in stock will also drop and quickly the threat of a liquidity shortage exists. Another valuation method of companies is to add up all future cash flows, converted into cash value. This is how to provide a valuation of the digital client base.
New valuation method
The long-term value of a digital ecosystem is primarily determined by the value of the client relationships: relationships between the client and the company, between mutual fans and clients. The existing and future relationships primarily determine the future revenues (also called cash flow). These future cash flows are converted into cash value at a yield requirement. This is how the so-called client capital exists. In other words; a form of goodwill, the digital assets, can be placed on the balance sheet as soon as the company is acquired.
Cohorts
The determination of the future cash flows is a complicated matter, in view of the fact that clients have a varying lifespan. Not only due to their age, but also because of the different lifespans of clients– which is partly determined by the level of interest in the product or service that a company offers. That is why it is recommended to divide groups of fans or clients into different cohorts within the future periods when determining the company valuation. It is assumed that with time, the cohorts will become larger. Below you can find an example of such cohorts, which have been converted into cash value in the formula by dividing them by the yield requirement.
New strategy
The new valuation method also requires another approach. Much more than previously, data collections and data mutations will be looked at from various systems and applications that are linked together. Auditors will get the chance to show their skills more than ever before. Data validation and the data traffic over the internal and external digital motorways will have to be assessed. It is, and remains, important whether a direct ‘cash flow’ or advantage comes from the digital strategy.
The roadmap below is a suggestion and fundamentally resembles the steps that need to be taken within data analyses. However, these steps are done once the desired information is extracted. To actually be able to calculate a return from social media, this would have to be looked at further. Data becomes richer information following analysis. This information translates itself into a cash flow with new revenue models, when a new public is reached or when new product-market combinations are possible.
This is the roadmap for a positive financial result of a digital strategy:
- Setting up and constructing an own digital ecosystem within and with existing social platforms;
- Sharing and distributing products and services;
- Collecting and saving data from multiple social platforms;
- Validating all collected data;
- Analysing and assessing market needs;
- Setting up and developing both existing as well as new revenue models;
- Monetise the new cash flows in a reliable and efficient way.
It should be clear that with online marketing via the internet ecosystem cash flows can be measured more than with offline marketing (e.g. a direct mailing). Moreover, the reach can increase even more because fans wish to share their social lives with each other. Not only the first users and fans are reached, but also their friends and their networks. This considerable expands the market potential. Also, thanks to the presence of the current software, marketing is far more transparent and measurable than previously thanks to advanced measuring instruments and models.
Develop new products
The current methods and techniques of (integral) company valuations must be examined. Historical figures and results from the past give increasingly less guarantees for the future. With this knowledge in mind, how can you increase your company value as much as possible? Pim van Berkel and I quickly created approximately 30 product or service categories for this.
With these product categories, companies, brands or festivals increase their sales using data. With the Fanalists company Van Berkel offers companies data insights where they can develop or sell related products. The good news: developing and optimising new revenue models are bearing fruit. The Armin van Buuren case, which is looked at in detail in a later chapter, is a clear example of the optimisation of data-driven sales that Fanalists was involved with.
Van Berkel: “It is more than just selling tickets. Consider also selling clothes, watches, perfume, magazines or subscriptions to Spotify or own music channels. If a festival organisation has its data in order, the collaboration with other companies or the development of own products can be much more focussed. Maybe the visitors of your festivals prefer Adidas shoes over those from Nike. Then Nike can opt for targeted advertising at your festival or social media channels.”
More than sending
Van Berkel believes it all starts with a simple principle: companies must do more than only sending. “Consider the popular TV programme The Voice; a TV programme that is busy sending and broadcasting. However, they do not always consider the perception of the recipient. Delve into the preferences of the target group, then you will be able to search for a sponsor for the programme in a much more focussed way. If you wish to discover new sales opportunities, start with getting to know your target group.
This image shows what Van Berkel means. This is the first sketch which he has made based on my story. Data flows from the social media channels of The Voice. This illustrates what the target group looks like. “This makes it possible to set up collaborations that pay off for the advertiser and the TV programme. Making it possible to not only sell the license to (foreign) TV channels, but to also sell on the collaborations. This increases the value of the license for The Voice. In other words: this increases the Brand Equity (the brand value), the valuation and therefore the digital assets of The Voice.”
Value of data
The fact that a company, brand or festival can generate more sales or can achieve a higher company valuation thanks to proceeding with data in a smart way, is good news. But, let´s be honest, not yet very specific. What is a Facebook Like actually worth? “For this, we have made rather rough assumptions where it becomes possible to determine the value of a fan. The value of a fan also depends on the business model of your company: if you sell subscriptions, then a client is quickly worth more — and therefore a potential client (or fan) too.”
“Above all, it concerns two other issues: is future revenue likely and have you made sufficient efforts to get to work with the data insights? “Consider for instance Strandfestival Zand, where many parents take their children: one would have to approach that differently to a hardcore dance festival. Data only pays off if used effectively. Data is not worth anything in itself. The beauty of data is that the sales department can be better served and run on the basis of the data analysis you have completed. If you do not approach those banks or insurers with the data insights in your hand, then your company valuation will not increase.”
Minutes to midnight in festival land
It makes sense that festivals are looking for a way to utilise smarter forms of marketing: there are increasingly more festivals. “With many festivals booking a major name such as Armin van Buuren, Hardwell or Afrojack. Therefore, that no longer makes your festival unique. So, how will you do it differently? By dropping the price, as often happens. That is the full extent of the creativity, unfortunately. It is relevant for new festivals in particular — a festival like Lowlands often sells out anyway — that still have to stand out. Financially it is not going well with many festival organisations, if you look at the Chamber of Commerce figures.
Van Berkel’s solution? “I would nurture an established relationship with a fan or client and maintain the relationship. There is often a cycle: a few months before the festival there is a great deal of communication, something is communicated during the festival, then soon after — but after that it goes completely quiet. While there is certainly enough to be shared. Naturally, you can tell what music was being played, the branded festival clothing that can be purchased, but why not organise a mini reunion? For example, organise an (online) brainstorm session, together with your fans. Ask them: what could be better next year? What else would you like? In this way your festival will keep distinguishing itself.”
Van Berkel concludes: “In short: you will never discover new destinations if you do not leave the port.”
- This post is a pre-read of Part 2 — Chapter 4 of my new book ‘Digital Assets’ the translation of the Dutch publication ‘Digitaal Vermogen’.
- Also read the publication ‘EDM and the Digital Domain’
