On Estimating Current-Customer Equity Using Company Summary Data

Abstract

This paper considers how to use company reported summary data to estimate current-customer equity, taken here to mean the sum of the customer lifetime values of the firm's current customer relationships. It offers general guidance about how to estimate retention rate and revenue per renewal when the reporting period spans multiple renewal periods (as, for example, when summary data are reported quarterly but customers pay and renew on a monthly basis). The paper goes on to show that traditional retention rate and revenue estimates based on the average number of customers are biased low when acquisition rates are low and vice versa. In addition, the paper demonstrates that monthly, quarterly, and annual models for customer lifetime value are not equivalent even though there exist annual, quarterly, and monthly retention and discount rates that are equivalent. The suggested improvements for estimating the equity of current customers are demonstrated first using a previously published illustrative example and then using company summary data from Netflix, Inc. For the illustrative example, the improvements make a substantial difference in the estimate of current-customer equity (15% and 25% for the two periods) despite being straightforward and somewhat obvious in retrospect.