Managing Customers as Investments: The Strategic Value of Customers in the Long Run

Overview

What's a customer really worth? Can you find out, without endlesslycomplex modeling? And once you know, what should you do with thatknowledge? Managing Your Customers as Investments has the answers.You'll learn simple ways to get reliable customer value information—ina form you can use. You'll discover how to use it to measure marketingeffectiveness, generate improvements throughout the entire customerrelationship lifecycle, and improve decision-making. Everyone tells youto manage your business around customers. ...

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Overview

What's a customer really worth? Can you find out, without endlesslycomplex modeling? And once you know, what should you do with thatknowledge? Managing Your Customers as Investments has the answers.You'll learn simple ways to get reliable customer value information—ina form you can use. You'll discover how to use it to measure marketingeffectiveness, generate improvements throughout the entire customerrelationship lifecycle, and improve decision-making. Everyone tells youto manage your business around customers. This book gives you the toolsto do it.

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Editorial Reviews

Soundview Executive Book Summaries
Business professors Sunil Gupta and Donald R. Lehmann recognize the difficulties in finding and explaining the tangible impact of attracting and retaining customers. In Managing Customers as Investments, they offer a set of tools that shows the correlation between a firm's customer assets and the value of the firm. They explain the triggers that drive this value, and how to better manage customers and, as a result, shareholders' wealth. They unlock the metrics and provide the tools and tips to make any company's customer-related efforts more efficient.

Customers Are Assets
Customers are the lifeblood of any organization. Without customers, a firm has no revenues, no profits, and therefore, no market value. Contrary to the commonly held view, the authors point out that creating shareholder wealth in the short run is not the main purpose of an organization. Long-run shareholder wealth is the reward for creating customer value.

The approach to linking customer and firm value discussed in Managing Customers as Investments is based on a simple premise — that customers are typically the primary source of earnings for a company. The authors write that if we can estimate the value of current and future customers, then we have a proxy for a large part of the value of a firm. If, for example, the average value of a customer to a firm is $100, and the firm has 30 million customers, then the value of its current customer base is $3 billion. If we factor in the firm's future customer acquisition rate and estimate the present value of future customers at $1 billion, then the value of its current and future customers is $4 billion. The authors write that this estimate provides a good proxy for the value of the firm.

The authors explain that this approach differs from the traditional finance approach in two key aspects. First, unlike traditional finance, this approach builds from the bottom up by assessing the value of a customer. Secondly, it treats marketing expenditures differently than traditional approaches. If you believe that customers are indeed assets that generate profits over the long run, the authors write, then marketing expenditures to acquire and retain these customers should be treated as investments, not expenses.

The Value of a Customer
The fundamental building block of the approach described in Managing Customers as Investments is the customer lifetime value (CLV), which is the present value of all current and future profits generated from a customer over the life of his or her business with a firm. This concept incorporates several aspects — the importance of not only current but also future profits, the time value of money such that $100 of profits today are worth more than $100 of profits tomorrow, and the possibility that customers may not do business with a firm forever.

To estimate CLV, the authors write that two pieces of information are required: customers' profit patterns and their defection rate. The profit pattern is the profits (margin) generated from a customer over his or her tenure with the firm. The defection rate plots the pattern of the number of customers who stop doing business with a firm over a period of time.

Creating Metrics That Matter
The authors explain that firms have historically faced enormous challenges in implementing the concept of customer lifetime value as a core business metric. This gap between theory and practice is a result of three major factors:

  • Data requirements. Consider what data are needed to estimate the lifetime value of a customer. First, in order to know a customer's tenure with a company, a firm needs to track each customer or customer cohort (a group of customers acquired simultaneously). Second, for each customer or cohort, a firm needs to know its profit pattern over time, which requires projections of future profits. Third, a firm needs to know customer retention and defection rates over time.
  • Complexity. Metrics that matter to top management must be clear, simple, forward-looking, and they must capture the big picture.
  • Illusion of precision. Estimating CLV requires a host of assumptions and subjective decisions that make it far less precise than many would like to believe.
Copyright © 2006 Soundview Executive Book Summaries


—Synopsis
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Product Details

  • ISBN-13: 9780131428959
  • Publisher: Wharton School Publishing
  • Publication date: 1/21/2005
  • Pages: 224
  • Product dimensions: 6.10 (w) x 8.90 (h) x 0.90 (d)

Meet the Author

About the Authors

SUNIL GUPTA is Meyer Feldberg Professor of Business at the Columbia Business School, Columbia University, New York. He has also taught at UCLA and the Harvard Business School; conducted seminars and consulted with companies worldwide; appeared on CNN, BBC, and PBS; and been quoted in publications, including The New York Times, The Financial Times, and The Washington Post.

Gupta's expertise is in marketing strategy, pricing, and customer management. He has published extensively on these topics. His research papers have won several awards. He serves on the editorial boards of six journals.

He is the cofounder and president of the EX Group, a strategic consulting group that specializes in customer management. He also served as an academic trustee of the Marketing Science Institute. He holds an MBA from Indian Institute of Management and a Ph.D. from Columbia University.

DONALD R. LEHMANN is George E. Warren Professor of Business at the Columbia Business School, Columbia University, New York. His research interests include modeling individual and group decision-making, empirical generalizations and meta-analysis, the introduction and adoption of new products and innovations, and measuring the value of marketing assets such as brands and customers. He has taught courses in marketing, management, and statistics at Columbia and has also taught at Cornell, Dartmouth, New York University, and the University of Pennsylvania.

Lehmann has published in and served on the editorial boards of several journals and was founding editor of Marketing Letters. His books include Market Research and Analysis, Analysis for Marketing Planning, Product Management, and Meta-Analysis in Marketing.

He served as executive director of the Marketing Science Institute and as president of the Association for Consumer Research. He is the recipient of many awards, including the 2000 Paul D. Converse award and the AMA McGraw Hill-Irwin distinguished marketing educator award. He holds an M.S.I.A. and Ph.D. from the Krannert School of Purdue University.

Gupta and Lehmann, along with Joel Steckel, are coauthors of Marketing Research.

© Copyright Pearson Education. All rights reserved.

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Table of Contents

Ch. 1 Customers are assets 1
Ch. 2 The value of a customer 13
Ch. 3 Customer-based strategy 41
Ch. 4 Customer-based valuation 79
Ch. 5 Customer-based planning 109
Ch. 6 Customer-based organization 137
App. A Estimating customer lifetime value (CLV) 167
App. B Impact of retention on share and profits 179
App. C Value of customer base 183
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Sort by: Showing 1 Customer Reviews
  • Anonymous

    Posted July 12, 2006

    Highly recommended to all marketing executives

    How much are your customers worth? If financiers and investors had bothered to ask themselves this basic question, they might have prevented the Internet bubble and other expensive corporate mistakes. Such disasters can occur when people invest in businesses with no earnings and fanciful business models. Authors and professors Sunil Gupta and Donald Lehmann make a powerful case that executives should abandon outdated business-evaluation models based on traditional financial metrics, such as cash flows. Instead, they should rely on the present and future value of their businesses¿ customers: the 'customer¿s lifetime value,' or CLV. The authors discuss these issues in understandable language and buttress their arguments with formulas that will enable marketers to implement their ideas. They also provide helpful examples that are like mini business-school case studies. We highly recommend this book to all marketing executives, as well as to executives who are financially responsible for mergers and acquisitions, or advertising. This book could change the way you do business and increase your earnings from your best customers.

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