1/ The moment I encountered the ideas of Peter Fader and Dan McCarthy we immediately clicked. Dan said recently: "Customer based corporate valuation is the intersection of marketing, finance and statistics." I've been working on these issues since the 1980s in cable and cellular.
2/ The premise behind Customer-Based Corporate Valuation is simple.Recognizing that every dollar of revenue comes from a customer who makes a purchase, CBCV usrs accounting principles to make projections from the bottom up instead of from the top down. hbr.org/2020/01/the-lo…
3/ The two components of a customer’s value are: how much you spend to bring them in the door (CAC) and the value you get after they are acquired (post acquisition value of the customer or PAV). "If you take PAV and subtract CAC, that's lifetime value." retailgeek.com/jason-scot-sho…
4/ "CBCV allows marketers to communicate the value they’re creating, in a way finance people respect and understand." "CMOs are a lot more accountable and everyone is obsessing over right things like the customer retention curve."
5/ "Finance can see the analogy of CBCV to project finance - you spend money on a project, you have payback periods, net present value of the project and internal rate of return. If you replace project with customer, they say 'that makes sense - the customer is my project.'"
6/ "If you just wanted to maximize the CLV of your business you should go after this super tiny market with a few super good customers in it. But there’s so few of them that you are leaving money on the table. What we want to maximize kind of like P times Q."
7/ "The profit margin used in CBCV calculations should be the fully-loaded effective variable profit margin, factoring in costs like fulfillment expenses and merchant processing fees which often are not included in cost of goods sold and instead are operating expenses."
8/ "Chopping up a revenue bar into acquisition cohorts and showing that over time allows you to see how much revenue a company is getting from customers in future years."
If a business isn't doing customer cohort analysis, what exactly are they doing that's more important?
If a business isn't doing customer cohort analysis, what exactly are they doing that's more important?
9/ In the mobile business in the 1980s and early 1990s you *never* stopped thinking about generating and managing cash. The way you tracked value creation was to use a bottoms-up customer-based valuation. That's where I created the Five Horses idea. abovethecrowd.com/2012/09/04/the…
10/ Since cash was a life or death fact of my daily business life for many years I was naturally attracted to the ideas of Michael Mauboussin, Warren Buffett, Charlie Munger and Jeff Bezos. My focus on cash and not earnings all traces back to John Malone: 25iq.com/2014/11/02/a-d…
11/ “It’s not about earnings, it’s about wealth creation and levered cash-flow growth. I used to go to shareholder meetings and someone would ask about earnings, and I’d say, ‘I think you’re in the wrong meeting.’ That’s the wrong metric."
John Malone
John Malone
12/ "It’s not purely a function of current period CLV. I wish it was that easy, but it’s not."
"Dirt under finger nails" from creating many models of many businesses in a range of markets helps you get better at making projections. Mean reversion and base rates are important.
"Dirt under finger nails" from creating many models of many businesses in a range of markets helps you get better at making projections. Mean reversion and base rates are important.
13/ "Small companies are more likely to be privately held, which means performing the analysis with internal transaction log data. The analysis when working ‘inside-out’ is much easier in general than ‘outside-in’ because there is so much more data." bizjournals.com/atlanta/news/2…
14/ "Find acquisition characteristics of the very best customers to find more like them. Don't over-invest in customers who are unlikely to stay around for the long term. Pull in more customers like the good ones. That’s going to drive durable revenue growth and value creation.”
16/ Peter Fader: "For years, I’ve been talking about this idea of customer-based corporate valuation... 'Hey, if we can project the future value of all of our customers and add all that up, that should be like the value of the firm.'" knowledge.wharton.upenn.edu/article/findin…
17/ "If [a startup] has customers who stay around for a long time and/or increase their relationship with the firm, spending more over time, that's supportive of being able to generate operating leverage they will need to grow their way out of unprofitability." Dan McCarthy
18/ "We look at a business from the bottom up, from the vantage point of customers. We may see that they are not doing a very good job of being able to the retain customers they have brought in. Or they’re spending a lot more to bring them in...."
19/ "Or the amount of revenue that they’re generating from those customers while they’re alive is flat or down. It’s those latter companies that we would be a little bit more skeptical about. It really speaks to the fact that not all revenue growth is created equal." Dan McCarthy
20/ "We're decomposing revenue into the underlying customer behaviors."
"It's a revolution in how people are performing corporate valuation and thinking about where the value is coming from. We’re not thinking about it from the top down. We think about it from the bottom up."
"It's a revolution in how people are performing corporate valuation and thinking about where the value is coming from. We’re not thinking about it from the top down. We think about it from the bottom up."
