At some point, perhaps now, you might be considering going public. An IPO is an important decision that comes on the heels of much contemplation and isn’t easy to make. There’s always a possibility for failure, but still, it’s worthwhile if you succeed.
Before you jump in and offer an IPO, there are several important considerations to make. The first is the satisfaction level of your customer base. Your success with going public will be the result of business value, and the best way to assess business value is with customer metrics.
Customer Based Corporate Valuation (CBCV)
Customer metrics are the most authoritative way to assess the value of your business. In general, when customers are acquired profitably and retained for many years, an organization’s long-term profit potential increases. This will make your IPO more attractive to people because it shows a big potential for return.
Customer acquisition, attrition, and spending stats can provide insight into the value of your business. You can undervalue your business and still see massive success, but overvaluation won’t have the same effect.
For example, when the retail company Revolve went public in 2019, they priced their IPO too low at $1.2 billion and it exploded by another 89% the first day it was traded. Revolve’s valuation rose to 4.5 times its revenue from the previous year and blasted the competition.
What happened? The underwriters who determined the IPO price didn’t appreciate the value of Revolve’s investment in their customers. It was like it didn’t even exist, but to the public, it absolutely mattered and drove the value higher.
Today’s business growth comes from a high degree of accountability to customers and loyalty. Vanity metrics are no longer useful indicators of long-term success. Sure, you can gauge customer engagement through social media stats, but these metrics aren’t as meaningful as people believe.
A more reliable way to forecast revenue is by implementing CBCV. Instead of quarterly financial projections for revenue, CBCV projects revenue from the bottom up, starting with the customer base and homing in on how customer behavior impacts the top line.
There are four main components to the CBCV model:
- Acquisition. Forecasts the flow of new customers.
- Retention. Forecasts how long customers will be customers.
- Purchase. Forecasts the frequency of purchases or other transactions.
- Basket-size. Forecasts dollar amount per purchase.
These models help to understand how much customers will spend, how often, and how long they’ll stick around. The result is a more precise revenue projection, which makes it easier to assess the value of a company accurately.
Valuation is just one part of the equation
Valuing your business is just one component. When you haven’t gone public before, it can be challenging to figure everything out on your own. An easy way to get a handle on the details is by reading Workiva’s thorough guide on the IPO process.
In the guide, you’ll learn what the average timeline looks like and why you should operate as a public company before offering an IPO for at least a year or two. You’ll also learn about SEC registration, filing agents, and the importance of using a digital cloud-based platform to connect and sync your data across reports and documents. Finally, you’ll learn about what comes after the IPO, like secondary and follow-on offerings, SEC and ESG reporting, and SOX compliance.
Don’t set your IPO too low
Now that you know a little more about how customer based corporate valuation works, you can choose to include it in your process for valuing your IPO. Don’t let your team undervalue your business. If you assess your business through the lens of CBCV, and the numbers work out, walk your underwriters through your process and explain to them how you came to that conclusion. This works for any business in any industry, regardless of what you sell. Even social media platform Twitter went public in 2013.
When you go public, you should be confident in your decisions and disclosing customer metrics shouldn’t be an issue. If you feel hesitant to share those details, take some time to revisit your business strategy and make improvements that will make you proud of those metrics.
