🙋‍♀️ Users First: User-Based Valuation of Firms 👩‍💻

User growth and value of a user

Or on valuation of a company that derives its value from users or subscribers. Or what Steve Jobs said: “You’ve got to start with the customer experience and work backwards to the technology. You can’t start with the technology and try to figure out where can I sell it.”

In 2017, two legends of New York University Stern business school—Aswath Damodaran and Scott Galloway—talked about valuing companies in modern day and age using the bottom-up valuation starting from the users. A decision to buy or use a product or service is an emotional decision after all and successful firms know how to make users develop (new) habits to start and continue using their goods and services:

Some takeaways:

  • Attachment/stickiness: How intense are the users? What are the spending time on?
    e.g. Loyalty - users can switch from Snap to Insta if it’s the next new thing
    Every action Facebook takes is designed to make you stay within the echosystem.

  • So, make the echosystem so good they can’t ignore you
    The users are magically locked in (think about your Instagram or Amazon habits or :freetrade: :+1:)
    e.g. Shipping for Prime members: next day! Seamless, addictive.
    Netflix created enough content business (back in 2017)—keeps users happy.

  • Off-topic: “Don’t get caught up by your conviction about the company”, Prof. Damodaran says—it will get stomped by the market sentiment e.g. try betting against Amazon.
    “Tesla is Elon Musk”—"…you buy Tesla, you buy a person and his dreams".
    What do the users feel like when they go to a retailer like Macy’s (think M&S)? Old time retail have messed up in the age of Amazon—they cut costs to improve margins and made it unpleasant to shop at physical stores.

Aswath Damodaran has been teaching valuation since 1986 as a securities analysis class before his university found out in 2008 and renamed it valuation.

“Fundamentally, anybody can do valuation. I think we choose to make it complex.”

He’s written a lot of books on corporate finance, security analysis and valuation of startups and mature companies.

Full video:

There is a detailed blog post with an Uber example in Damodaran’s free blog post from 2017:

  1. The value of a user increases with user stickiness and loyalty (captured in the expected lifetime of a user and the annual renewal rate).

  2. The value of a user is directly proportional to the profitability of that user (captured as the difference between the revenues from that user and the cost of servicing that user).

  3. The value of a user is directly proportional to the growth that you can generate in profitsover time, by either getting the user to use more of your product or service or coming up with other products or services that you can sell that user.

  4. The value of a user decreases as you become more uncertain about future cash flows from that user, with that uncertainty being a function of the revenue model that you use and the discretionary nature of the product or service. A subscription-based model, where users agree to pay a fixed amount every period, will generally be less risky and more valuable than a transaction-based model or an advertising-based model, that delivers the same cash flows. A product or service that delivers a necessity (transportation) is less risky than one that meets a more discretionary need (travel).

…consider the common sense implications:

  1. The value added by a new user increases with the value of a user, estimated in the last section. A strategy of going for fewer and more intense users may create more value than one with more and less engaged users, a warning that pursuing user growth at any cost can be dangerous for value.

  2. The value added by a new user decreases as the cost of adding users increases. That cost will be a function of the competitiveness of the business (increasing as competition increases) but also of networking effects. If you have strong networking effects, the cost of adding new users will decrease as you accumulate new users, thus creating a value accelerator for your business.

  3. The value added by a new user decreases as you become more uncertain about user growth. That uncertainty will be a function of competition and whether the technology that you have built your product or service on is sustainable.


Not all users are made equal. What would drive the value of a user?

More from Professor Damodaran’s lecture on User-Based Valuation:

1. Value of existing users :woman_technologist::woman_technologist::woman_technologist::woman_technologist:

  • What does the firm make and spend on revenues per user?
  • The company can be losing money per user to cultivate these users in the future.
  • How sticky are those users?
  • What’s the business model: the value of a subscription user - think recurring revenue e.g. your landlord :rofl:, pesky electricity provider :zap:, Amazon Prime (annualised) :books:, Spotify Premium/Netflix :headphones: - is more predictable than a transactional user - think non-recurring revenue e.g. from an Uber rider :taxi:, a ThomasCook tourist :coffin: - which are less predictable.

2. Value of new users :woman_technologist::woman_technologist::woman_technologist::woman_technologist::woman_technologist::money_with_wings::money_with_wings::money_with_wings::chart_with_upwards_trend:

3. Value corporate expenses :money_with_wings::money_with_wings::money_with_wings::money_with_wings:

Other notes:

  • Valuation - understand the business, build up to the cash flows, come up to the value
    Example: ThomasBook is valued at GBP 100 million which is what its net assets consisting of planes and other tangible assets may be worth.

  • Pricing (not valuation) - how some VCs value no-revenue/no-earnings companies, they look at what other people are paying for similar companies based on some metric and attach a price to it
    Example: Σober - a new hot ride-hailing startup - was priced at US$20 billion after last crowdfunding and VC-led series B



Missed some interesting slides

The adverts you see of Wealthify, Anna, Chip, Starling Bank, nutmeg etc effectively count as cost of acquiring new users—and they are probably not low.

And the sweet spot might be—assuming the company is growing—to have a high value per user and low cost of adding new users while the competition is struggling with high cost of acquiring users:

Source - https://youtu.be/VlcmHhbYeNY?t=1524

1 Like