Guide 10 · for owners and deal teams
Customer-based valuation for services companies
A services company is worth what its customers are worth. Counting it that way shows where the value really sits.
By Cristian Paun · partner, Value Creation and Growth · Makers of New
The short answer
Value the company from its customers upwards. For each customer, take the contribution it brings each year and how likely it is to stay, and discount it at the company's own cost of capital. The sum, less what it costs to win new customers, is a value a buyer can rebuild from the company's own records. It also shows which customers carry the margin and which are carried.
Why it matters now
Revenue that repeats is priced higher than revenue that has to be won again. A company that can show its retention, customer by customer, can argue for that price with evidence.
How to do it
- Get revenue and gross margin by customer, by year. Three years is enough to see retention.
- Measure retention honestly. Revenue retained from the same customers, and logos retained, side by side.
- Compute the value of one retained customer. Contribution per year, adjusted for the chance it stays, discounted at the hurdle.
- Sort customers by value. The top fifth usually carries most of it.
- Price the moves that change retention. A point of retention on the top customers is often worth more than a new segment.
- Show concentration beside it. A buyer will ask what happens if the top three leave.
What good looks like
SIMULATION, an invented services company.
| Measure | Reading |
|---|---|
| Revenue retention, same customers | 104% |
| Logo retention | 88% |
| Share of value in the top 20% of customers | 71% |
| Top three customers' share of revenue | 31% |
Where it goes wrong
- Retention is measured on the customers who stayed. Count the ones who left.
- Margin is averaged. Some customers cost more to serve than they pay.
- The discount rate is borrowed. Use the company's own hurdle and say what it is.
The instrument
The customer valuation page of a MakersOS room reads the figures the company already holds on its boards and asks for nothing new. The arithmetic is shown beside it.
Method after McCarthy, Fader and Hardie, customer-based corporate valuation, Journal of Marketing 81(1), 2017.