Valuing customers

This paper considers the metric of customer lifetime value as a way of placing an expected future value on a company's customers. This approach looks at the fundamental contribution a customer makes to a company's profits. The basic concept is useful in its own right, but it also allows an analogue between a customer and the equity of the company to be drawn. This allows the customer to be considered as a revenue-producing asset. Financial engineering tools, such as portfolio and options theory, then become natural means to analyse the customer's value further. In particular, the uncertainty in the future profits created by a customer can be shown to create an added dimension to the value a customer brings to the business. The results from these analyses can be used to guide customer relationship strategy. Better decisions on the levels of investments in customers and customer services, and their timings, can also be made.