From P/E Ratios to Customer Lifetime Value: A Modern Approach to Valuing Companies

The Evolution of Company Valuation

In the past, valuing a company was straightforward: you tallied up its tangible assets such as its buildings, machinery, and cash. But this approach had a glaring flaw, it ignored the company’s future earnings potential.

Enter the Price-to-Earnings (P/E) Ratio, which compares a company’s share price to its profits. A high P/E suggests strong future growth expectations. For example:

• Private companies typically trade at P/E ratios of 6–10, meaning an investor recoups their investment in 6–10 years.

• Public companies often have higher P/Es (usually 15–20), reflecting greater confidence in long-term earnings.

• Tesla, as of early June 2025, trades at a P/E of 172—an astronomical figure signalling extreme optimism about its profit potential.

But is P/E the best measure in today’s customer-driven economy?

Dan McCarthy’s Customer-Centric Alternative: CLV

Dan McCarthy, Associate Professor of Marketing at the University of Maryland’s Robert H. Smith School of Business, argues that Customer Lifetime Value (CLV) is a more accurate way to assess a company’s worth.

Customers are the lifeblood of any business. A company’s true value lies in:

1. Customer Acquisition Cost (CAC): The sales and marketing spend required to gain a customer.

2. Customer Retention: How long customers stay and how much they spend.

3. Profitability: The net revenue each customer generates over their lifetime.

   
   

While CAC isn’t a perfect metric (it blends acquisition costs with brand-building efforts), it’s a powerful predictor of future cash flows.

The Peloton Case Study: CLV in Action

In a recent World’s Greatest Business Thinkers podcast with Nick Hague, McCarthy highlighted Peloton’s rise and challenges:

• Pandemic Boom: Peloton spent ~$1,000 to acquire each customer but earned ~$1,000 gross profit per bike. Subscriptions added recurring revenue.

• Post-Pandemic Reality: As demand waned, Peloton slashed bike prices, squeezing margins. Tariffs on Taiwan-made bikes further threatened profitability.

This example underscores why CLV matters—companies must balance acquisition costs with long-term retention and monetisation.

How McCarthy’s CLV Model Works

1. Segmentation: Customers are grouped by behaviour, acquisition time, or demographics.

2. Probabilistic Forecasting: Utilises machine learning and survival analysis to forecast retention, advancing beyond fixed assumptions.

3. Discounted Cash Flow (DCF): Projects future customer profits, summing CLV across all cohorts to estimate total equity value.

The model is best for subscription companies (such as Netflix, Spotify), SaaS (Salesforce, Shopify), and e-commerce businesses where recurring revenue drives valuation.

Key Takeaway

CLV shifts valuation from abstract multiples to tangible customer behaviour. For businesses with recurring revenue, it’s the gold standard.

Want to dive deeper? Listen to Dan McCarthy’s full discussion with Nick Hague here.