Professor, Mindy Weinstein
April 9, 2013
Managing Customers as Investments
By: Sunil Gupta and Donald R. Lehmann
Sunil Gupta Meyer Feldberg is a Professor of Business at the Columbia Business School, Columbia University, New York. He has taught at UCLA and the Harvard Business School, and consulted with companies worldwide. Donald R. Lehmann is a professor of Business at Columbia Business School, Columbia University, New York. He has also taught at Cornell, Dartmouth, New York, and University of Pennsylvania.
This book shows how to correlate the value of customers and the value of a firm. It tells us how to better manage our customers and as a result, our shareholder’s wealth as well. Also, this book explains how customers are assets for a company, how to calculate the value of customers, how customer’s value can drive our marketing strategies and how the organization can or must change. Customers are the most important asset that we have as a corporation because without them we would not be able to generate revenues, profits, and therefore, no market value. This is something that we need to understand because most of the organizations try to create shareholders wealth in the short run which is not, or should not be, the main purpose of the organization. By creating customer value, we will obtain the reward of a long run shareholder’s wealth. In order to understand and link the value of the customers to the organizations, we simply need to realize that the customers are typically the primary source of earnings for the company. The authors explain that if we truly believe that customers are assets that generate profits over the long run for the organization, then marketing expenditures to gain and retain customers should be treated as investments and not as expenses. I think that viewing marketing expenditures as investments it’s a very good approach for an organization, because that will automatically create a sense of value for the whole marketing process and customers, instead of trying to avoid it in order to “save money”. The value of a consumer is categorized as CLV (customer lifetime value), which is the present value of all current and future profits created by a customer throughout the life of his or her business with the organization. This is divided in two pieces: customer’s profit patterns which are the profits generated from the customer to the firm and the defection rate, which is the number of customers who stop doing business with the firm over a period of time. These two sections help the organization get an idea of the projections for future profits based on the profit pattern of a customer over time. This says that if we are able to measure the average profit pattern per customer, we can easily have an accurate projection of what our future profit margins will look like. For example, “The average value of a customer to a firm is $100, and the firm has 30 million customers, then the value of its current customer base is $3 billion. Then if we factor in the firm’s future customer’s acquisition rate and estimate the present value of future customers at $1 billion, then the value of its current and future customers is $4 billion. This will calculate and approximate of the firm’s value.” This is a very basic tool that we can all utilize to calculate the proxy of an organization’s value based on the customer’s current and future value. Managers have been focusing more and more on customers, providing them good value and improving customer satisfaction. The authors explain how some top managers in many organizations not only track their customers, but they also structure employee rewards based on how good they are in keeping and generating customers for the corporation. This kind of customer strategy takes into consideration two sides of customer value: “The value that the firm provides to a customer” and “The value of a customer to the firm.” This means that…