Can Customer Loyalty Increase a Company's Stock Price?
Original post by Angie Mohr of Demand Media
Stock prices fluctuate up and down based on many factors, including the company's financial statements, the overall market and investors' perceptions of the company. Customer loyalty -- or lack of it -- can also impact a company's stock price because investors view it as a sign of continuing revenue. Because a company's stock price is, in part, based on perceptions of what will happen in the future, how customers view a company's products or services can have a large impact on share price.
What Customer Loyalty Signifies
Customers frequent companies with quality products and services that provide good value with strong customer service. If a company is doing everything right, it can expect to hang on to a customer over time and sell to her repeatedly. Happy customers translate into higher future revenues because it is easier to keep an existing customer than to entice a new one. This means that loyal customers make for a bright corporate future and a healthy bottom line.
Goodwill represents the excess of a company's total value over the value of its tangible net assets, such as equipment, furniture or buildings. Under U.S. generally accepted accounting principles, goodwill is only accounted for on a company's financial statements if it has purchased another company for more than its tangible value. However, the concept of goodwill figures into the share price of a company's stocks. The intangible value, caused by a company's reputation and the loyalty of its customers, can cause a company's stock to rise.
Impact on Initial Offering
When a company first goes public, the underwriters working for the investment house must come up with an initial offering price that adequately reflects the value of the company. Part of that valuation is based on the excess of assets over liabilities the company has on its balance sheet. Part is based on analysts' projections of the future revenues of the company. This part of the projection is based on past history of revenues and customer sentiment. A company with rising sales and satisfied customers will be priced higher than a company that is experiencing a large number of dissatisfied customers.
Tracking Customer Loyalty
There are several ways that companies can track customer loyalty. Many large retail companies use customer loyalty cards. The customers are issued a card that they swipe every time they make a purchase. The customer usually gets a benefit -- such as a discount or loyalty points -- when using the card, but the company also can track each customer's spending. The company can determine spending habits, customer demographics and total spending. A company can also track some of this information using metrics such as average purchase per customer.
- "Entrepreneur"; Seven Tips for Building Customer Loyalty; Micah Solomon; April 2011
- Valu Adder: Business Goodwill
- Mayin.org: Finding the Right IPO Process
About the Author
Angie Mohr is a syndicated finance columnist and freelancer who has been writing professionally since 1987. She is the author of the best-selling Numbers 101 for Small Business books and "Money$marts: Teaching Your Kids the Value of a Buck." She is a chartered accountant and certified management accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.