How should we be measuring customer equity on a balance sheet?

How should we be measuring customer equity on a balance sheet?

How can customer equity be measured on a balance sheet? How or where does it fit into the bottom line?

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The lifetime values of customers can be thought of as an intangible asset. And there are a number of accounting initiatives being considered in various countries to do a better job of reporting on the kind of intangible value that customer equity represents. Under current accounting principles in the U.S., direct marketing firms are allowed to capitalize the value of their lists – which is essentially like carrying a number for "customer equity" on their balance sheets.

But the way we define customer equity, it includes the value of future customers, in addition to current ones. An easier way to think of this might be to say that by our definition, customer equity should not only include the value of current customers, but the value of prospects as well. Every identified prospect has some probability of becoming a customer, and if the prospect becomes a customer then the customer will have a lifetime value. So, the value of any single prospect is the probability that he will become a customer, multiplied by his lifetime value if he does.

Hear more in Creating Customer Value, a SearchCRM.com monthly podcast series with Peppers and Rogers.

This was first published in May 2007