Customer Based Corporate Valuation : Integrating The Concepts Of Customer Equity And Shareholder Value

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Customer-based corporate valuation: Integrating the concepts of customer equity and shareholder value

The purpose of this model is to calculate Customer Lifetime Value (CLV) and Customer Equity (CE) and then integrate it with the traditional valuation method and come up with a holistic corporate valuation method. The shift toward value-based management has led to an increasing demand for corporate valuation methods. It is very difficult to value companies which have very low proportion of tangible assets. These are generally internet based firms and start-ups. These companies have negative earning during their initial period.

Generally, valuation is done by using cash flows and other financial factors. The value of intangible assets is
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Components of CLV
Valuation of CLV-approach has three main components: revenue, costs and retention rate. In general, to calculate CLV projected net cash flows that a firm expects to receive from the customers (or more practically from a particular segment of customers) are adjusted to probability of occurrence and then are discounted. In reality, however, estimating these three components can be a difficult task.

Retention rate. The retention rate is the probability that an individual customer will remain loyal to the vendor for the next period, provided that the customer has bought from that vendor on each previous purchase before that. It can be inferred by using determinants of loyalty, like customer satisfaction, switching barrier, variety-seeking behaviour and attractiveness of alternatives. It is assumed that a customer who stops dealing with the vendor is totally lost.

Revenue. The second constituent “revenue” can be classified into four sub-categories: autonomous revenue, up selling revenue, cross-selling revenue, and contribution margins resulting from referral activities of existing customers (reference value (RV)). The first three sources of revenue come from direct transactions with the customer. As these activities lead to monetary sales success they are denoted as direct-monetary transactional values.

The “autonomous” revenue is not directly influenced by the company or is only affected by standard marketing measures
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