Marketing Thought

Valuing Firms Through Their Customers

The basic idea of valuing a firm through its customers is an excellent one. There was a collection of works looking to do this early in the millennium. This was partly motivated by the challenges of the dot-com boom. In this boom firms had high valuations but low profit (or more likely losses). The valuation problem was simple. If a firm is seen as being valued based upon future profits what will the value be if there are no present profits to base the prediction upon? The firms did, however, have customers. Theoretically these relationships were valuable. Thus, there was great interest in valuing firms through their customers.

Valuing Customers

A 2004 article by Sunil Gupta, Don Lehmann and Jennifer Ames Stuart was an exciting early contributor to this field. The authors looked at five firms, 4 new firms and one more traditional firm. The authors use CLV as the basis of their approach. The idea is to find the value of a customer, get the number of customers, and compare this to the market value of the firm. It is an excellent idea.


There are some challenges in the piece. Most notably from my perspective I did not think they were clear about assessing the value of a customer net of acquisition cost. For current customers, as I have said many times before, acquisition costs are sunk so they simply aren’t relevant to any post-acquisition valuation. That said, the piece is very much a first draft of a good idea.

Other questions occur. They use market value of equity as a comparator — yet equity is assets minus liabilities. They concentrate on customers as assets but don’t seem to have worried about liabilities. Nor do they have decent marketing spend estimates. They assume all marketing is acquisition cost. This is a bit of a challenge (although understandable given data limitations) as they wanted to emphasis the importance of both acquisition and retention marketing. Interestingly it is possible to argue that the messiness of the data and challenge of the comparison to market value of equity may well have dampened the impact of the sunk cost problem. I think it is plausible that some of the issues cancel each other out at least a little.

Future Customers

The challenge they spent most time on was the problem of future customers. This is of particular importance for the sort of growing companies they analyzed. A lot of the firm’s value comes from expectations of growth. As such they have to spend a decent chunk of the paper explaining projections of customer numbers.

Lumping Together Current And Future Customers

In merging together current and future customers I think they made a wrong call but for the right motives. They lumped future customers in with current customers. This is partly why the sunk cost challenge is less clear than it might be. Acquisition costs for future customers are not yet sunk so you will want to consider such costs in some manner. (Just not hidden within CLV please).

Their motives were good as they wanted to show that customers are valuable. As such throwing together all the current and future customers seemed like a good idea as you get a very big number. To my mind this creates a mess though. Marketers lack credibility as a profession, (sorry but it is true). We need to not make claims others will see as exaggerated. When we start adding in future customers’ values and claiming that they already exist as a customer asset I see a potential problem. You can imagine why other disciplines would recoil and not accept the claims of marketers.

Conceptually, the value of a firm’s customer base is the sum of the lifetime values of its current and future customers.

Gupta, Lehmann, and Ames Stuart, 2004, page 7

I disagree. The value of a firm’s customer base is the value of its customers (currently). Like the value of your house is what it is now. The value of your house is not what it will be after you do the additions you are hoping to do.

Valuing Firms Through Their Customers: Your Customer Base Is Your Current Customers

You Can Still Value A Firm While Keeping Concepts Clean

To be very clear I 100% agree that growth in customers (or anything else) is likely to be important for a firm’s valuation. My point is just that we really need to separate it out. Lumping everything together into some amorphous value of customers, where it is hard to distinguish the current from assumed future, is not the way to build trust in the numbers. Why not just do a separate projection for future growth? Don’t worry, marketers can still take credit for that number as well as the value of the current customer base.

Valuing Firms Through Their Customers

As is common with this blog I find myself sounding more unhappy that I am. I believe in valuing firms through their customers. This was an important paper, indeed it is a great start. What is more, the fact that it is not perfect in my view is a commendable feature. Papers that I can’t think how to improve really annoy me.

For more on customer lifetime value see here.

Read: Sunil Gupta, Donald R. Lehmann and Jennifer Ames Stuart (2004) Valuing Customers, Journal of Market Research, XLI, Feb, 7.18

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