What’s the value of a non-paying buyer?

BVWireIssue #54-2
March 14, 2007

Customer relationships are one of the more difficult intangibles to value. “The 80-20 rule suggests that over time, a small percentage of a company's customer base can generate a high percentage of its sales and profit,” says a new posting at Harvard Business School’s Working Knowledge.  “Models for calculating customer lifetime value [CLV] are built on just such a premise.”

But a recent article asks, “How Do You Value a ‘Free’ Customer?”, that is—one who pays nothing for the service but contributes considerable value to the entity. Think of eBay, whose buyers don’t provide any direct profit to the firm, but without whom there would be no sellers. This “two-sided” market is common in many industries such as real estate and employment services, says HBS Professor Sunil Gupta.  “A traditional model of CLV will not be able to estimate the worth of such buyers.”  His co-authored paper presents a model that captures these "indirect network effects," where more buyers potentially attract more sellers; for a copy, click here.

Please let us know if you have any comments about this article or enhancements you would like to see.