Calculating the financial value of an enterprise is a valuable exercise for any organization, and a great tool to inform ongoing decisions and strategy.
Enterprise value calculation has really changed over the last 30-40 years. It used to be based on hard assets – machinery, equipment, inventory, buildings, etc. Since then, it has shifted to softer assets – the most important being customers.
Think of customers as a financial instrument, like a bond. From a bond, you get a flow of dividends over time until the bond expires. You calculate the value of the bond by looking at the flow of income, discounted, and establish a net-present value.
You do the same thing with the customer. You get a flow of income from each customer until that customer defects. What you need to calculate is how long they’re expected to stay with you and how variable that income stream is going to be. Then you discount it, establish, the net-present value, sum the customers and you’ve got a value.
In this video, we go through that exercise and illustrate it:
In these tables, you can see that the numbers really depend on the strength of the relationship the customers have with the client. Using CRM data with the survey data, we can really derive the value of each of the relationship segments that exist and tally the overall value of the organization.
The question that typically follows is, what can I do to change those numbers? In our next video, we will cover strategies to increase your enterprise value using your customer base.