Customer-Based Corporate Valuation for Publicly Traded Noncontractual Firms

There is growing interest in “customer-based corporate valuation”—that is, explicitly tying the value of a firm’s customer base to its overall financial valuation using publicly disclosed data. While much progress has been made in building a well-validated customer-based valuation model for contractual (or subscription-based) firms, there has been little progress for noncontractual firms. Noncontractual businesses have more complex transactional patterns because customer churn is not observed, and customer purchase timing and spend amounts are more irregular. Furthermore, publicly disclosed data are aggregated over time and across customers, are often censored, and may vary from firm to firm, making it harder to estimate models for customer acquisition, ordering, and spend per order. The authors develop a general customer-based valuation methodology for noncontractual firms that accounts for these issues. They apply this methodology to publicly disclosed data from e-commerce retailers Overstock.com and Wayfair, provide valuation point estimates and valuation intervals for the firms, and compare the unit economics of newly acquired customers.