For decades, marketers struggled to find ways to place a monetary value on their work. How do you measure the value of a customer you consider acquiring? What does a company lose when it alienates a once-loyal customer?
Not understanding the financial value of customers makes it impossible to make a case for the ROI of customer investments, argues University of Georgia Terry College of Business marketing professor Neil Bendle. Bendle has written several academic papers on the value of customers and how marketers can show the financial impact of their work. Now, he’s brought that research together in The Customer Asset: Understanding and Managing its Value.
Bendle and coauthor Shane Wang, professor of marketing at Virginia Tech, published their book at the end of December 2023 to help marketing teams make the case for their budgets.
Where does the concept of “the customer asset” come from?
For a generation, marketers have informally referred to customers as assets and we all know that customers represent a major source of value to any firm. Yet, customers don’t fit the standard financial accounting definition of asset. Meaningful records haven’t been kept, leaving the idea of the customer asset ill-defined. We change that and outline how customers’ value can be recognized, reported, and used to improve decision-making — even if the value of the customer asset doesn’t appear on firms’ published balance sheets.
Who is this book for? Academics, practitioners, students?
The customer asset concept can be very widely applied. We discuss customer acquisition and retention, corporate valuation, and internal and external reporting. The book is deliberately written to be accessible — it avoids excessive jargon and formula, which should appeal to managers and students. Indeed, the book’s message is the financial value of a customer should be based on cash flows familiar to all businesspeople. The benefit to academics is we explain how different customer valuation ideas can be reconciled into a single approach based upon the idea that the customer represents an economic asset.
Why is measuring the value of customers different from simply calculating the value of a company’s sales?
The customer asset represents the financial value of customer relationships the company has yet to claim, whereas sales are reported about the past. Sales figures look backward; the customer asset looks forward.
The customer asset, focusing as it does on the future, encourages considering the long-term. This can justify marketing investments that are hard to justify when marketing is recorded as simply an expense. For example, financial accounting treats brand building as an expense (aimed at generating immediate sales) despite brand building’s aim to create long-term financial value, such as the long-term preference generated by Coke’s brand-building investments. The customer asset approach also shows promise for making business better for all. Assessing benefits in the future can justify sustainable business investments in financial terms as these can have a positive impact on consumer preference, which can be missed if managers aren’t taking a long-term perspective. Indeed, we are all consumers, and our approach helps justify the positive treatment of customers by highlighting the massive value customers bring. Nickle and diming customers often doesn’t make financial sense once you understand their true value and what is at risk by alienating them.
Are all customers “worth” the same amount, or is there a way to measure the devotion of a customer?
Absolutely not, customers are all worth different amounts. Ideally, valuation should be at the individual customer level. The financial value of a customer – known as CLV (Customer Lifetime Value) – is a prediction based upon the cash flows expected to be generated by the customer (suitably discounted to allow for comparison over time, given a dollar today isn’t worth the same as a dollar next year). The book explains how CLV can be estimated using simple models.
Does the ability to track customers’ buying processes online change how a company can assess the value of a customer?
We see now as the perfect time to adopt recording the customer asset. Although the customer asset can be used by any firm, better data improves predictions and makes using the customer asset more compelling. Any data that helps prediction (obviously, it must be gathered appropriately) is welcome. We are excited about the potential of artificial intelligence to help drive usage of our ideas. The customer asset is a prediction of the financial value of customers to the firm. As prediction tools become more widely used, the customer asset can be assessed in real-time. It is important to do this well, so we offer suggestions on how to avoid the black box problem (lack of ability to verify how a value is created) to gain the greatest positive benefit from the customer asset.
Can you track the value of your customers even if you’re working for a campaign or cause?
A reason to write our book is we have seen ideas related to customer valuation used by stock market investors. Unfortunately, the traditional marketing idea of CLV has been adapted for investors in ways that make it unusable for managers making decisions about customer investments. Our approach is broad enough to allow the same basic idea of the customer asset to be used by investors and managers. This same broadness allows other marketers to use the idea. A not-for-profit marketer can use the related idea of Donor Lifetime Value to assess fundraising performance.