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 Authors and professors Sunil Gupta and Donald Lehmann make a powerful case that executives should abandon outdated business-evaluation models based on traditional financial metrics, such as cash flows.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. We highly recommend 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.

Are you spending more on your customers than they are worth? That is the question these authors attempt to answer in this book. Whether it is acquisition cost or retention cost many businesses may be spending too much on their customers. As with all investments there is a time to increase investment, a time to hold them, and a time to let them go. This is a detailed analysis of how to develop metrics for your company that help determine customer value. With increasing customers there are increasing costs. Once you have developed your metrics they show how to use that information to determine things like customer lifetime value. Once you know their lifetime value you can make effective marketing and management decisions related to your customers. You have to manage your customers in order to manage your business. Now you can determine how to best manage your customers. A practical approach to managing customers that is both effective and easy to apply while providing real results. Managing Customers as Investments is a recommended read for all marketing and customer-centric managers as well as all corporate executives.

The book's co-authors quote management guru Peter Drucker, who just passed away at the age of 95, in the opening paragraph of the acknowledgements: "Innovation and marketing are the only two valuable activities of a firm. The rest are costs." It's a predictably strong insight from the high priest of business principles and a tenet upon which Sunil Gupta and Donald R. Lehmann, both professors at the Columbia Business School in NY, base their treatise here. In fact, since the dot-com bubble burst five years ago, marketing was deemed dispensable when it came to valuating this responsibility in the eyes of Wall Street and its dominions. However, the co-authors have come to recognize the value of marketing in fortifying customer retention since it is no longer enough to view customers as intangible assets in need of periodic nurturing.

Their book specifically focuses on the issue of calculating customer equity (or as they put it, customer lifetime value) and examines what positively impacts it. According to Gupta and Lehmann, in order to calculate customer value, companies must capture three pieces of related data. First, they need to track the financial and other interactions with specific customers. Companies must then understand how profitability margins may vary over a customer lifetime with the hope that a customer becomes more profitable over time. Finally, they must track customer defection rates, which is the most difficult calculation given that most retail businesses have customers in non-contractual relationships. At the same time, it is this last factor that presents the greatest opportunity. The co-authors provide calculations that show improving customer retention by 1% improves customer value by almost 5%. Moreover, they show how retention is a virtuous cycle, i.e., the higher the current retention rate, the higher the impact of improving retention.

There are numerous tables worth examining which show how increasing the margin multiple increases the lifetime value. Here is an example - given the margin multiple for a company with a 60% retention rate and a discount rate of 10% is only 1.2, that translates into the lifetime value of a customer generating profits of $100 annually is only $120. Increasing the retention rate to 90%, however, with the same 10% discount rate, makes the multiple jump to 4.5 and consequently translates the lifetime value to be $450.

Obviously the greater the number of retained customers, the better corporate profitability will be given the collective impact on the bottom line. This is a good theoretical framework, but certainly market conditions change frequently enough to render the formula somewhat simplistic. If margins change as costs of capital and ongoing expenses change, then the formula becomes more of a guesstimate of how profitable the lifetime value will be. In fact, much of the book is plagued by such fluctuating and invariably uncontrollable factors.

While Gupta and Lehmann acknowledge the nebulous nature of their tenets, they provide a counterbalance in the form of sound business logic, specifically that companies need to start moving toward customer-based accounting and a customer-based organization. This means numbers such as customer satisfaction, churn, loyalty, same customer sales/revenue, new customer acquisitions, and acquisition, expansion, and retention costs need to be consistently and frequently assessed and displayed. Because customer equity is so vital to profitability and even stock market value, Gupta and Lehmann assert quite correctly that it is not as important to pinpoint the accuracy of these calculations as it is to start instilling these determinants of long-run profitability into mainline performance reporting.

The co-authors aren't entirely consistent in their approach as they still discuss intangible assets such as awareness and brand equity without attempting to quantify them in the same way as customer value. This may be worthy of another book entirely, but it seems like a gap to me. They also seem intent on excessively discrediting the more qualitative thinking during the dot-com period without acknowledging the lack of incentive in moving to this direction at the time. However, their point is really to show how much money customers could give you over the years, and to that degree, the book is invaluable as Gupta and Lehmann profess, it's better to be "vaguely correct" than "precisely wrong". I would agree.

Only once in a while a book comes along that open whole new areas of thinking, this is one of them.

We all know, although sometimes it seems that people forget, that any business depends on customers. What is not done very often is to look at customers as assets. Particularily it has been difficult to come up with metrics to set a customer value.

This book takes the view that a customer can be viewed as any other asset, he (or she of course) has a cost to acquire, a value (that may or may not be more than the acquisition cost), a life (that perhaps can be managed). None of these calculations are easy and simple. An illustration that the book uses is the value of a customer that buys a Toyota has a different value to the salesman getting a commission than it does to the dealer who may get service revenue and additional Toyota sales, and different yet to the Toyota corporation who may sell this customer a Lexus later on.

Valuing a corporation by the asset value of its customers is another novel approach the authors used in evaluating some of the [...] companies during their heyday. It might be considered that the value of the customer base is the only value that many companies have.

The customer value approach facilitates several courses of action that I hadn't considered. Of course there is database marketing, where the customer who bought a TV is a prospect for a DVD player. They also discuss things like growing up with the customers, changing the product offerings as the customers get older, and referral sales by one customer recommending a product to friends.

This is one of the more significant developments in marketing analysis I've seen in years.