Customer Equity Valuation

1.1. Introduction

Current research uses a new, customer equity based valuation, approach to value the high growth companies operating on internet. There is an emerging need to identify qualitative factors which influence the perceived business value of companies operating on the internet and to apply these factors to business valuation practices. Recently many companies operating on internet have gone public. These include Facebook, LinkedIn, Groupon and Zynga. These companies boast their large user base as an asset (Facebook, 2012), (LinkedIn, 2011). The key matrices of these companies involve statistics of Daily Active Users (DAUs), Monthly Active Users (MAUs) and Monthly Unique Users (MUUs). There is an intense battle between companies operating on internet to become the gatekeeper of internet for users by establishing themselves as platform instead of product. In spite of the above mentioned factors the valuation of these companies is not certain.

1.2. Research Methodology

Facebook, which has recently floated its IPO in NASDAQ, is considered for the research as it is a prominent social networking websites whose data is publicly available. Primary and Secondary data sources have been considered for the research purpose.

Primary research:

i) A sample of 50 young users of social networking websites was selected to study their usage pattern of social networking websites.

ii) Factors such as average daily visits, count of friends at end of each year in lifetime of their membership have been considered to study the growth of networks.

iii) Expert interviews were conducted in order to understand the practical limitations and strategies used during valuation of a business.

Secondary research:

Internet based research, literature review on valuation models that can possibly quantify the high growth nature of social networks.

1.3. Industry KPI

The KPI in the internet social networking industry revolves around the Return on Investment (ROI) (Nelson, 2011). ROI is and always will be the standard of measurement of success of any business. However, there are other key performance indices (KPI’s) which will help in understanding whether the business is on the right track (Nelson, 2011).

Community: The most influential factor in the growth of a company operating on the internet is the community or communities involved and their growth. According to our research one must track the growth of these communities, in order to successfully quantify the growth of social networks on internet.

Traffic: Traffic or the number of visitors