Articles / Recommended Reading / Relationship / Theory / Value

Valuing Customers

Valuing Customers
Sunil Gupta, Donald R. Lehmann, Jennifer Ames Stuart

September 2001
Published online by


It is increasingly apparent that the financial value of a firm depends on intangible assets (e.g., brands, customers, employees, knowledge) that are not on the balance sheet. In this paper we focus on the most critical aspect of a firm – its customers. Specifically, we demonstrate how valuing customers makes it feasible to value high growth firms with negative earnings.

We begin by defining the value of a customer to a firm as the expected sum of discounted future earnings, which is based on key assumptions concerning retention rate and profit margin. The value of all customers is determined by the acquisition rate and cost of acquiring new customers. We demonstrate this method by using publicly available data for four Internet firms – Amazon, Ameritrade, Ebay and E*Trade. The results show a close relation between customer value and current market value for 3 companies. We find that Ebay is either overvalued or has a high option value that is not captured in our model. Our method also proves to be more stable over time than actual market capitalization. The results suggest that linking of marketing concepts to shareholder value is both possible and insightful.

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