Relationshipping Drives Corporate Value

One of the key measures that influences your company’s stock price is Earnings Per Share (EPS), which is reported quarterly.?There are many ways that EPS can be massaged in the short run.?Recently stock buybacks have been a huge way to increase EPS.?Another short-term move is to run strong discount promotions to boost sales.?But what business school modeling experts and Wall Street are exploring these days is the long run fundamental value of having a customer base built based on long term customer value (LTV) which drives corporate value.?

As a public company CEO, I paid the price for boosting sales with a product and promotion to gain new customers that proved to not be sticky. The combination of promotion and product deficiency did not generate LTV customers. So sales went up, and the stock went up for a while, and shareholders were briefly happy. The first quarter that sales stalled because of customer defection, the stock headed back down. Do not go down this path with your team as the short-term gains will not prove worth it.

Customer connectivity and big data are changing how the C-suite needs to look at corporate valuation.?Naturally, it makes sense that the value of your company depends on people buying your products and services.?It also makes sense that a stronger and more strategic bond with customers makes for greater company value.?But before this age of micro-moment digital connectivity and the resulting big data flows, there were no solid, reliable, current measures of the customer/brand relationship that allowed for accurate, up-to-date customer valuation, much less for rolling up those customer measures into an estimate of the overall valuation of a company.

Today, the first steps in this direction have been taken.?A small group of prescient financial analysts have been developing algorithms that rely on publicly disclosed customer metrics, which do a better job of predicting corporate value than do recorded financial measures such as EPS from the last quarter and all the financial data going into it.

The new connected customer measures require a change in perspective by the C-suite and frankly all investment businesses putting capital in enterprises: the budgets directed to bonding customers to the enterprise must now be managed with understanding of their impact on corporate value.?My charge is to spend the rest of my career helping the C-suite utilize an approach to running companies that connects the dots between Relationshipping and corporate value.

At the 2018 DRUM Agency Fast Track Summit in Atlanta, Dan McCarthy, Assistant Professor of Marketing at Emory University’s Goizueta School of Business, introduced attendees to his work on customer-based corporate valuation (CBCV).

Dan is a member of a pioneering group of quantitative modelers using customer metrics to develop enterprise valuation algorithms that go beyond the standard discounted cash flow (DCF) valuation methods.?He joined three other accomplished executives in this field to form Theta Equity Partners.?The enterprise now serves some 25 clients in the financial services sector (think private equity, hedge funds and venture capital firms), as well as public companies and consulting firms.

Dan presented one of the early analyses that raised a lot of interest in Theta - a study on Wayfair, Inc. (NYSE: W).?At the time Theta models implied that the stock was overvalued.?This conclusion was waved off by most within the investment community, but there were a couple of hedge funds following the work that shorted the stock.?When the next earnings period revealed the softness that Theta predicted, the stock went down.?Not only did the funds who shorted do well, the event helped put Dan and Theta on the map.

It happens all the time that C-suites pump the current quarter sales by pushing deals that are taken advantage of by un-sticky customers, then only to have them leave in the next quarter causing earnings to stall or fall.?If the C-suite wants to build lasting corporate value they must focus on and invest in new customers based on Lifetime Customer Value (LTV) thereby building a base of quality customers.

My charge is to spend the rest of my career helping the C-suite utilize an approach that connects the dots between customer base quality and corporate value. This begins with optimizing customer engagement budgets based on LTV.

?If you and your company are doing a good job at Optimizing your budgets and building LTV, we’d love to hear from you and share your ideas with other marketers. If you’re struggling, we’d like to help.?????