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Valuing Customers

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Valuing Customers

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  1. All rights are reserved. Members of MSI and academic researchers may make limited copies of this presentation, electronically or in print, solely for their internal, non-commercial use. Any other use of this presentation—including reproduction for purposes other than those noted above, modification, distribution, or republication—without prior written permission of the Author is strictly prohibited. Valuing Customers Sunil Gupta Donald R. Lehmann Jennifer A. Stuart

  2. Customers as Assets “Intangible assets are hard to see and even harder to fix a precise value for. But a widening consensus is growing that the importance of (intangible) assets – from brand names and customer lists … – means that investors need to know more about them. A task force appointed by SEC will encourage companies to provide more information regarding those assets.” - New York Times, May 22, 2001

  3. Valuing High Growth Businesses • Traditional finance approach • DCF • P/E ratio • The Wall Street approach • Henry Blodget (1999) • Desmet et al. (2000) • Accounting approach • Trueman, Wong and Zhang (2001) • Demers and Lev (2001) • Our approach

  4. Customer Lifetime Value • Lifetime value of a customer • Lifetime value with constant margins Margin Multiple

  5. Model Time 0 n0 1 n0r n1 2 n0r2 n1r n2 3 n0r3 n1r2 n2r n3 4 n0r4 n1r3 n2r2 n3r n4 . . . .. .

  6. Value of Customer Base • In discrete time • In continuous time

  7. Data Source: Annual Reports, 10K and 10Q Statements

  8. Number of Customers

  9. Modeling Number of Customers • Cumulative number of customers • Number of customers acquired

  10. Parameter Estimatesfor Number of Customers (millions) Peak of customer acquisition = -/ or 15-20 quarters

  11. Quarterly Margin per Customer

  12. Acquisition Cost per Customer

  13. Value of Customers & Market Cap

  14. Changes in Value over Time Market Value Customer Value

  15. Managing Customer ValueImpact of Acquisition Cost, Margin and Retention Rate Base Case: 70% customer retention

  16. Value of Marketing and Finance ActionsImpact of Retention Rate and Discount Rate Customer Value Of Amazon ($b)

  17. Conclusions • Measuring intangible assets – customers • Customer value as a proxy for firm value • Increase in customer value for a 10% improvement in • Acquisition cost = 1% • Margins = 11% • Retention = 30% • Discount Rate = 3%

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