April 15th 2006

Managing Customers as Investments. Gupta & Lehmann.

Managing Customers as Investments. Gupta & Lehmann. 2005. ISBN
013148950. The strategic value of customers in the long run.
So what happens when two good financial analysts take a rigorous look at
marketing? This book. If you have been wondering how to measure the
impact of marketing and marry it to traditional financial analysis,
then this is the book for you. Not an easy read, since it applies good
sound theories. Eg. So how much could you afford to spend to acquire a
customer? First how many years do customers remain with you? Then how
much on average do they spend each year on your products in that time?
Apply your customer retention rates. Then net present value all those
discounted amounts to today and you have the dollars you could spend to
acquire them now (Ie how much in sales and marketing you could spend.)
If you want to quickly value a company, multiply that net present value
of annual spend against the total number of customers and that is what
the cos value is today. This is also useful in assessing a M&A activity.
There are insights in the impact of a 1% price raise on profits (about
11% rise), the addition of a 1% increase in retention rates on profits
vs increased customer acquisition activities and so on. This is a
valuable addition to the C level library, but it implies that you do
want to do better in this area.
Good uses of real company stories here.

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