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Innovation EquityAssessing and Managing the Monetary Value of New Products and Services$
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Elie Ofek, Eitan Muller, and Barak Libai

Print publication date: 2016

Print ISBN-13: 9780226618296

Published to Chicago Scholarship Online: May 2017

DOI: 10.7208/chicago/9780226394145.001.0001

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The Whole Is Bigger Than the Sum of Its (Diffusion and Customer Lifetime Value) Parts

The Whole Is Bigger Than the Sum of Its (Diffusion and Customer Lifetime Value) Parts

(p.42) Chapter Two The Whole Is Bigger Than the Sum of Its (Diffusion and Customer Lifetime Value) Parts
Innovation Equity

Elie ofek

Eitan Muller

Barak Libai

University of Chicago Press

This chapter begins by establishing that each first-time adoption of an innovation can be thought of as the start of a customer-firm relationship in which the adopter generates a stream of profits for the firm. The financial value of this profit stream is termed the customer’s lifetime value. Four main elements drive customer lifetime value: the per-period profit margin, the retention rate, the discount factor, and the acquisition cost. Linking the number of new customers expected to adopt in a given time period, by using the basic diffusion model developed in chapter 1, with the future profits each acquired customer is expected to generate, by using the customer lifetime value model, yields the monetary value of all new customers adopting in that period. Conducting this analysis for every period over the desired time horizon, applying financial discounting to future contributions, and summing the results yields the innovation equity of a new product or service. Innovation equity, the book’s central framework, is thus a monetary assessment of the total future cash flows—across customers and time—associated with the diffusion of an innovation. The chapter concludes with an example showing how to evaluate the innovation equity of XM Satellite Radio.

Keywords:   customer relationship management, customer lifetime value, profit margins, retention, acquisition costs, discount factor, cash flow, monetization, innovation equity, XM Satellite Radio

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