Customer-based valuation: similarities and differences to traditional discounted cash flow models

Customer-based valuation uses information about the customer base (for example, number of customers, contribution margin per customer, retention rate) to determine the value of the firm. It thus relies on core metrics of marketing to determine a core metric of finance and accounting (equity value, also often referred to as market capitalization) and thus helps to bridge the current gap between accounting and finance on the one side and marketing on the other side. The customer-based valuation approach has become very popular among researchers in marketing (Kumar and Shah 2009; Rust et al. 2004; Schulze et al. 2012; including the 2005 JMR Paul Green Award for the pioneering paper by Gupta et al. 2004) and the underlying idea of determining customer equity is used for reporting purposes as well (Kumar and George 2007; Skiera et al. 2011; Villanueva and Hanssens 2007; Wiesel et al. 2008). In finance and accounting, however, its popularity is much lower (Persson and Ryals 2010), which might stem from the fact that the differences between the traditional discounted cash flow approach and the customer-based valuation approach have not been examined in detail. Therefore, the aim of this chapter is to examine similarities and differences of both approaches in detail and to highlight under which circumstances the two approaches are likely to lead to substantial differences.