Customers as assets

Abstract

Customers are important intangible assets of a firm that should be valued and managed. Although researchers and practitioners have recently emphasized customer relationships and customer lifetime value, these concepts have had limited impact on the business and investment community for two main reasons: (a) they require extensive data and complex modeling, and (b) researchers have not shown a strong link between customer and firm value. We address these two issues in this article. First, we show how one can use publicly available information and a simple formula to estimate the lifetime value of a customer for a publicly traded firm. We illustrate this with several examples and case studies. Second, we provide a link between customer and firm value. We then show how this link provides guidelines for strategic decisions such as mergers and acquisitions as well as for assessing the value of a firm even when the traditional financial approaches (e.g., price–earnings ratio) fail.