This seminar paper gives an overview on the literature of measuring customer value. A lot of companies have a very low book to market value e.g. Apple (0.15), Microsoft (0.14), Amazon (0.04!) and Facebook (0.14) as of December 2017. Though according to US-GAAP and IFRS annual reports should provide investors and prospect investors with decision useful information the balance sheet lacks certain intangible assets that are obviously driving the value of the firm. That are for example brand equity, organizational capital and customer equity. Such assets became more important so that not only for researchers but also for practitioners and standard setters there is an incentive to identify possibilities to measure such assets reliably to make better investment decisions or, for the latter, to increase the decision usefulness of the information provided in the annual reports.
There is an increasing number of SBE (subscription based enterprises) or at least SB offerings which leads to an increasing number of balance sheets that do not sufficiently reflect the value of the firm. For a long time the value of customers was just a marketing issue and not in the focus of accounting researchers but due to the development described above it is getting into focus of accounting literature in the past decades (Gleaves, Burton, Kitshoff, Bates, & Whittington, 2008, pp. 827–832). There are several approaches to value customers, but they have in common that first the value of a single customer is derived the so called CLV (customer lifetime value), sometimes also referred to as CV (customer value). To value the customer base of a firm all CLVs are aggregate to derive the so-called CE (customer equity). The value a customer has for a firm is the sum of all discounted future contribution margins the firm can obtain from him (Berger & Nasr, 1998, pp. 18–19). Therefore, I first look at the eligibility of customer value as an asset. Afterwards I compare different approaches to derive the CLV then the approaches to derive the CE. Next, I analyze the literature concerning the link between performance and customer and show a possible calculation on the example of Netflix.
Table of Contents
1. Introduction
2. Customers as an asset?
3. The value of a single customer: the customer lifetime value
3.1 Definitions and boundaries
3.2 Components of customer value
4. The value of all customers: the customer equity
4.1 Definitions and boundaries
4.2 Measurement
5. Link between customer equity and profitability
6. A case study on customer based valuation: Netflix
Research Objectives and Themes
This seminar paper explores the literature surrounding customer-based valuation, aiming to assess the eligibility of customer value as an intangible asset and demonstrate how various models can be applied to derive this value in practice.
- Theoretical examination of customer value as an intangible asset.
- Comparative analysis of methodologies for calculating Customer Lifetime Value (CLV).
- Evaluation of models determining aggregate Customer Equity (CE).
- Investigation into the empirical correlation between customer equity and firm profitability.
- Practical application of valuation models using Netflix as a case study.
Excerpt from the book
1. Introduction
This seminar paper gives an overview on the literature of measuring customer value. A lot of companies have a very low book to market value e.g. Apple (0.15), Microsoft (0.14), Amazon (0.04!) and Facebook (0.14) as of December 2017. Though according to US-GAAP and IFRS annual reports should provide investors and prospect investors with decision useful information the balance sheet lacks certain intangible assets that are obviously driving the value of the firm (Baruch Lev, p. 299). That are for example brand equity (Aaker, 1996), organizational capital (Lev, Radhakrishnan, & Zhang Weining, 2009) and customer equity (Bonacchi, Kolev, & Lev, 2015). Such assets became more important so that not only for researchers but also for practitioners and standard setters there is an incentive to identify possibilities to measure such assets reliably to make better investment decisions or, for the latter, to increase the decision usefulness of the information provided in the annual reports.
There is an increasing number of SBE (subscription based enterprises) or at least SB offerings which leads to an increasing number of balance sheets that do not sufficiently reflect the value of the firm. For a long time the value of customers was just a marketing issue and not in the focus of accounting researchers but due to the development described above it is getting into focus of accounting literature in the past decades (Gleaves, Burton, Kitshoff, Bates, & Whittington, 2008, pp. 827–832).
Summary of Chapters
1. Introduction: This chapter highlights the discrepancy between book and market value for many companies and establishes customer value as a critical, yet often unrecorded, intangible asset.
2. Customers as an asset?: This section evaluates whether customers meet the IASB definition of an asset, discussing both the potential for future economic benefits and the difficulties in recognition due to lack of property rights.
3. The value of a single customer: the customer lifetime value: This chapter defines the Customer Lifetime Value (CLV) and provides a comparative overview of several calculation models, ranging from basic structural approaches to complex referral and hybrid models.
4. The value of all customers: the customer equity: This section addresses the aggregation of individual customer values into Customer Equity (CE), discussing different measurement techniques and the inclusion or exclusion of future customer contributions.
5. Link between customer equity and profitability: This chapter analyzes empirical evidence regarding the correlation between customer equity, shareholder value, and operational profitability.
6. A case study on customer based valuation: Netflix: This chapter applies the previously discussed theoretical models to the real-world example of Netflix, calculating its customer equity based on available 10-K filing data.
Keywords
Customer Lifetime Value, CLV, Customer Equity, CE, Intangible Assets, Subscription Based Enterprises, Customer Valuation, Financial Metrics, Shareholder Value, Retention Rate, Customer Referral Value, Profitability, Netflix, Accounting Standards.
Frequently Asked Questions
What is the core focus of this seminar paper?
The paper provides a literature overview on how to measure customer value, specifically examining how it functions as an intangible asset for companies.
What are the primary themes discussed?
The study centers on the definition of customer value, methodologies for calculating Customer Lifetime Value (CLV) and Customer Equity (CE), and the relationship between these metrics and financial performance.
What is the main research goal?
The goal is to determine if customer value can be treated as an asset and to illustrate how practitioners can measure it using specific, established valuation models.
Which scientific methods are employed?
The paper utilizes a literature review of existing marketing and accounting research combined with a case study analysis of Netflix to demonstrate practical valuation application.
What topics are covered in the main section?
The main part covers the theoretical eligibility of customers as assets, a detailed comparison of six CLV models, the aggregation into CE, and the link to firm-level profitability.
Which keywords best characterize the work?
Key terms include Customer Lifetime Value (CLV), Customer Equity (CE), Intangible Assets, Customer Valuation, and Subscription Based Enterprises.
Why did the author choose Netflix for the case study?
Netflix was selected because it operates as a subscription-based enterprise and publicly discloses the necessary metrics in its 10-K filings, making it ideal for a practical application of the models.
What is the difference between the valuation approaches of Bonacchi et al. and Bauer & Hammerschmidt?
Bonacchi et al. simplify the calculation by focusing only on current customers, whereas Bauer & Hammerschmidt propose a more holistic approach that also accounts for future customers.
How does the disclosure of metrics affect the valuation process?
The author notes that because the disclosure of metrics like retention or churn rate is voluntary rather than mandatory, companies failing to report this data cannot be valued using these methods.
- Arbeit zitieren
- Tim Ulbricht (Autor:in), 2018, Measuring the value of strategic resources. A literature overview of customers value, München, GRIN Verlag, https://www.hausarbeiten.de/document/415736
