A summary of both articles from week 3 for the Managing Customer Experience and Value exam, RUG students.
Articles summarized:
Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing customers.
Wiesel, T., Skiera, B., & Villanueva, J. (2008). Customer equity: an integral part of financial rep...
Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing customers.
Intangible assets are for example brand, customer, and employee equity.
The customer lifetime value (CLV) is the discounted future income stream derived from acquisition,
retention, and expansion projections and their associated costs.
The discounted cash flow is used to value stable, mature business. But this doesn’t work for fast
growing firms, because of large investments for the future.
A way to measure growth firms is the number of customers. Because firms needs to acquire
customers rapidly to gain first-mover advantage and to build strong network externalities. Also the
reach (number of unique visitors) and the stickiness (site’s ability to hold customers) can explain the
firms share.
Conceptually, the value of a firm's customer base is the sum of the lifetime value of its current and
future customers.
The simpled version is the DCF approach:
t = period, m = margin, i = discount rate
Taking into account the customer retention rate:
The value of the firm's customer base is then the sum of the lifetime value of all cohorts:
But acquiring customer is a continuous process, that results in:
The cumulative number of customers Nt at any time t is given by:
The number of new customers acquired at any time is:
Costs to also take into account in determining the margin: Fulfillment costs & Salaries
Acquisition costs: Total marketing cost / number of newly acquired customers for each time period.
The analysis shows that customer value provides a good proxy for firm value. A good metric for
customer value is the starting point for better management of customers as assets.
Improved customer retention has the largest impact on customer value, followed by improved
margins, and reduced acquisition cost has the smallest impact.
- A 1% improvement in acquisition cost improves customer value by .02% to .32%
- A 1% improvement in margins, such as from cross-selling, improves customer value by 1%.
- Retention elasticity is 3–7 times margin elasticity and 10–100 times acquisition elasticity.
But 100% customer loyalty is not a good thing, it means that the prices are too low and the firm is
missing out on profits.
Companies in mature and low-risk businesses should pay even more attention to customer retention.
Because the impact of retention on customer value is significantly higher at lower discount rates.
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