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Managing Customers as Investments

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Managing Customers as Investments

The Strategic Value of Customers in the Long Run

Wharton School Publishing,

15 min read
10 take-aways
Audio & text

What's inside?

Some customers may actually be costing you money. Learn to calculate which ones are worth finding and keeping.

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Editorial Rating

9

Qualities

  • Innovative
  • Applicable

Recommendation

How much are your customers worth? If financiers and investors had bothered to ask themselves this basic question, they might have prevented the Internet bubble and other expensive corporate mistakes. Such disasters can occur when people invest in businesses with no earnings and fanciful business models. Authors and professors Sunil Gupta and Donald Lehmann make a powerful case that executives should abandon outdated business-evaluation models based on traditional financial metrics, such as cash flows. Instead, they should rely on the present and future value of their businesses’ customers: the „customer’s lifetime value,“ or CLV. The authors discuss these issues in understandable language and buttress their arguments with formulas that will enable marketers to implement their ideas. They also provide helpful examples that are like mini business-school case studies. getAbstract highly recommends this book to all marketing executives, as well as to executives who are financially responsible for mergers and acquisitions, or advertising. This book could change the way you do business and increase your earnings from your best customers.

Summary

Evaluate Your Customers

Companies recognize that they should pay attention to their customers. In a 2002 Economist poll, 65% of senior executives planned to focus on their customers in the next three years, while 18% said they would concentrate on shareholders. Other studies found that many executives believe that quality customer relations are a major factor in their companies’ long-term financial success, including increased share prices.

Companies in the United States now spend about $250 billion per year on advertising. Yet marketing executives often cannot explain whether these expenditures make good business sense. Because they usually cannot cite a specific price for customer acquisition, they often resort to short-term promotions or cost-reduction programs – even though such efforts cannot provide a clear connection between the company and the value of the customers.

In one infamous example, in 1992, the British division of the Hoover vacuum-cleaner company conducted a sales promotion in which customers who bought £100 worth of Hoover products received two free airplane tickets. The response was tremendous, so Hoover expanded the promotion. Eventually...

About the Authors

Sunil Gupta and Donald R. Lehmann are professors at the Columbia Business School. Gupta leads seminars and consults on marketing strategy, pricing and customer management. Lehmann’s other books include Analysis for Marketing Planning, Product Management and Meta-Analysis in Marketing. He is the founding editor of the journal Marketing Letters.

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