Customer-Based Valuation

With the growth of subscription (streaming, publications, enterprise software) and user-based transaction (eCommerce) or advertising (social media) oriented businesses, the usage and understanding of customer lifetime value and customer acquisition cost is becoming more commonplace.

They tend to be used internally in the company to make capital allocation decisions (marketing) and externally to make financing decisions (should we invest in the business based on the unit economics?).

However, one aspect that is still relatively underutilized internally and externally is taking a customer-driven approach to value creation and valuation, which I’ll cover in this piece.

This piece was partially inspired by the number of DMs I got with questions in response to this tweet, and the recent Mauboussin essay on this topic, which I highly recommend (along with the other resources below), which goes into this in more detail.

In the past, I’ve also written about how the income statements of some businesses don’t reflect true profitability because of intangible assets and investments in growing the user base where there is an initial cost upfront but the benefit occurs over time, which ties in well with this post.

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