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Valuation of Customers in Growth Companies - a Scenario Based Model

Author

Listed:
  • Manfred Krafft
  • Markus Rudolf
  • Elisabeth Rudolf-Sipötz

Abstract

In this paper, we evaluate growth stocks by modeling a company´ s customer equity. We start with the observation that the number of customers in successful start-ups increases very quickly (exponentially) in the first few years. Then the customer base converges towards an industry average. On the other hand, the number of clients in poorly performing start-ups rap-idly declines until bankruptcy occurs. These observations imply a "bathtub" shape to the probability distribution for the number of customers in the initial years, i.e., low probabilities for the number of clients close to average but high probabilities for extreme realizations. The valuation procedure we present here is based on a binomial scenario tree technique for the number of clients and the cash flow generated by each client. We show that the model can explain higher company values than can traditional net present value calculations. Further-more, and in contrast to traditional valuation models, increasing the volatility in the change of the number of customers increases the value of each customer.

Suggested Citation

  • Manfred Krafft & Markus Rudolf & Elisabeth Rudolf-Sipötz, 2005. "Valuation of Customers in Growth Companies - a Scenario Based Model," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 57(2), pages 103-127, April.
  • Handle: RePEc:sbr:abstra:v:57:y:2005:i:2:p:103-127
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    Cited by:

    1. Meysam MALEKI & Virgilio CRUZ MACHADO, 2013. "Generic Integration of Lean, Agile, Resilient, and Green Practices in Automotive Supply Chain," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 14(2), pages 237-248, May.

    More about this item

    Keywords

    Bathtub Distribution; Bifurcation; Customer Valuation; Customer Equity; Growth Company; Mean Reversion Process; Momentum Process; Real Option; Start-up; Valuation.;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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