Customer Accounting

In recent years, firms in all industries have witnessed a period of transformative developments that emphasize the central role of customers in creating and sustain value. In this chapter, we introduce the concept of customer-centricity as the key strategic orientation that several companies currently strive for to remain competitive in such a fast-evolving business landscape. Next, we motivate the rationale behind this book by pointing at a relatively unexplored area in accounting research focused on measurement and management of customer performance broadly labeled as ‘customer accounting’. We further explain the Organizational Architecture as overarching conceptual framework that guides the contents of the book’s chapters. An outline of this book concludes this chapter.

This chapter provides definitions of the most widely diffused customer metrics, namely Customer Profitability (CP), Customer Lifetime Value (CLV), Customer Equity (CE). We refer to the marketing literature that extensively covers these metrics and illustrate their interrelationships. We point at applications in business settings that have a contractual, subscription-based model and mention potential challenges to compute CLV in non-contractual settings. To illustrate the implementation and impact of customer metrics in a real-world context, we provide a case study focused on the computation of CLV in an Internet-based, subscription-based company. The case presents a simulation that applies cohort analysis in an attempt to fill the void between theoretical CLV models and its implementation in practice. The main rationale is to provide CFOs and CMOs a better understanding of new and latent customer preferences in a typical subscription-based business model by directly observing the customer’s purchase behavior and subsequently linking this data to estimate CLV and firm performance.

The chapter provides critical evaluation of the literature in accounting that examined the role of customer metrics in internal decision-making and control purposes. We draw on the relationships theorized in the organizational architecture outlined in Chap. 1 to structure our selective review and emphasize key critical gaps in our knowledge, especially vis-à-vis extant developments in the marketing literature. The chapter then presents two empirical studies aimed at generating insights on the adoption of customer metrics for internal decision-making and control purposes. The first study is a qualitative case study conducted within a subscription-based enterprise (SBE). The second study reports a survey about the diffusion of customer metrics in a sample of SBEs. In combination, the empirical evidence highlights relevant take-away points and current challenges about the actual use of customer metrics in performance measurement and management control systems.

Current financial accounting models (e.g. IFRS/US GAAP) cannot capture the principle value creator for customer centric firms: Customer Franchise. Among the intangible assets, Customer Franchise is one of the most important for understanding firm’s value. We argue that companies should disclose in the Management discussion and analysis section of their annual report information about the success of their company’s business model, such as new subscriber acquisitions, revenue per subscriber, customer dropouts, cost of customer acquisition. Additionally, we believe that disclosing customer metrics identifies important value drivers and provides an easy-to-implement algorithm to summarize these drivers into a measure of considerable usefulness to investors. In this chapter, we approach the issue by characterizing the business model of subscription-based enterprises (SBEs) that offer a for-fee-per-period access to products or services. Specifically, we show how to aggregate publicly available data into a measure of a firm’s Customer Equity value, which incorporates the major value drivers of SBEs, and empirically examine its properties. We build on the idea that the acquisition and retention of profitable customers is crucial for SBEs to identify the fundamental elements of their business model (e.g., customer base, revenues and service cost per user, and customer turnover).

This chapter concludes the book and provides a glimpse on fundamental managerial, technological and institutional trends that will likely affect the way customer metrics will be deployed to create business value in the next decade.