Faculty of Economics and Business Administration Publications Database

Customer Lifetime and Customer Equity Models for External Using Company-Reported Summary Data

Authors:
Wiesel, Thorsten
Villanueva, Julian
Source:
Volume: 25
Number: 1
Pages: 20 - 22
Month: February
ISSN-Print: 1094-9968
Link External Source: Online Version
Year: 2011
Abstract: Firm value depends on future cash flows, and almost all positive cash flows ultimately can be traced back to customers (Srivastava, Shervani, and Fahey 1998). Thus, an increasing number of managers realize that the ultimate measure of their firms'' value is customer equity (CE), which is the sum of the customer lifetime values (CLV) of their firm''s customers (Hanssens, Rust, and Srivastava 2009). Research has provided widespread evidence of the link between customer equity and the value of the firm (e.g., Gupta et al., 2004, Kumar and Shah, 2009, Libai et al., 2009 and Rust et al., 2004). In our own research (Wiesel, Skiera, and Villanueva 2008), we claim that firms should report forward-looking customer metrics to the financial community. We propose a means to report CE that enables investors—the “consumers” of financial reports—to monitor firms'' performance with respect to the value of their current customers. In his article, Pfeifer (2011) examines how to best use company-reported summary data to estimate the CLV of a firm''s current customers. Thereby, he discusses some of the underlying assumptions and ways to calibrate our proposed CLV/CE model. We applaud him for all his effort in order to discuss and enhance CLV/CE models using company-reported summary data. That is, models can potentially be used by stakeholders who do not have access to internal company databases (e.g., investors). As such, he contributes to a more accurate evaluation of a firm''s customer base based on externally available data and continues his previous efforts on better evaluating the value of a firm''s customer base (e.g., Farris and Pfeifer 2004). Subsequently, we aim to (a) provide a few thoughts on Pfeifer''s criticism of our approach, (b) add to the discussion about building complete models using company-recorded summary data, and (c) broaden the discussion with respect to the use of marketing metrics and approaches within the financial community.
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