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Unlocking Intangible Value: A Guide to Valuing Customer Relationships with MPEEM

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Unlocking Intangible Value

A visual Guide to Valuing Customer Relationship with the MPEEM Method.

Why Do Investors Pay Millions for Customer Relationship?

They aren't just buying names, they're buying future revenue.

The Essence of Customer Relationships

1. Beyond Transactions

  • Customer relationships are the ongoing connections, loyalty, and potential for repeat business that a company builds with its clients

2. Intangible Powerhouse

  • They represent a significant, yet often unquantified, source of future economic benefits. Think recurring revenue, referrals, and brand advocacy!

3. Key Components

This includes customer lists, contracts, loyalty programs, and the overall ****stickiness of the customer base.

The Power of Existing Customer (Statistics)

1. Subscription-based businesses

  • SaaS, streaming services, telecommunications

2. Healthcare

  • Patient lists, physician relationships

3. Financial Services

  • Client portfolios, wealth management accounts

4. Consumer Products

  • Established brand loyalty and repeat buyers

5. Professional Services

Client roster in consulting, legal, accounting

Acquiring new customers can be 5 to 25 times more expensive than retaining existing ones. (Harvard Business Review

New customers account for approximately 35% of a company's revenue, while existing customers contribute 65%. (inBeat Agency)

The likelihood of selling to an existing customer is 60- 70%, compared to 5-20% for a new customer. (inBeat Agency)

Positive customer experiences lead to 140% more spending over time. (inBeat Agency)

Introducing the Multi-Period Excess Earnings Method (MPEEM)

When customer relationships are the primary intangible asset driving a business's value, the MPEEM is often the most appropriate valuation method.

Income Approach Based: It falls under the income approach, focusing on the future cash flows generated by the asset.

Attributing Value: MPEEM isolates the earnings specifically attributable to the customer relationships after accounting for the returns required by all other contributing assets (tangible and other intangible assets).

Why MPEEM for Customer Relationships?

  • Comprehensive: It considers the full economic benefit derived from the customer base.
  • Granular: It helps in understanding the true contribution of customer relationships distinct from other assets.
  • Acquisition Insight: Essential for purchase price allocations in M&A, ensuring fair value is assigned to identifiable intangible assets.
  • Strategic Planning: Informs decisions on resource allocation, marketing strategies, and customer retention efforts.