Linking Customer and Financial Metrics to Shareholder Value: The Leverage Effect in Customer-Based Valuation

Abstract

Customers are the most important assets of most companies, such that customer equity has been used as a proxy for shareholder value. However, linking customer metrics to shareholder value without considering debt and non-operating assets ignores their effects on relative changes in customer equity and leads to biased estimates. In developing a new theoretical framework for customer-based valuation, grounded in valuation theory, this article links the value of all customers to shareholder value and introduces a new leverage effect that can translate percentage changes in customer equity into shareholder value. The average leverage effect in more than 2000 companies across ten years is 1.55, which indicates that a 10% increase in customer equity is amplified to a 15.5% increase in shareholder value. This research also compares the influence of customer and financial metrics on shareholder value. The findings challenge previous notions about the dominant effect of the retention rate and underline the importance of predicting the number of future acquired customers for a company.