year in 1999 to about 120 million worldwide by 2010—84 million in the United States and 36 million outside it. We assume that Amazon.com will remain the number one U.S. online retailer and achieve an attractive position abroad.

Scenario B also calls for Amazon.com's average revenue per customer to rise to $500 by 2010, from $140 in 1999. That $500 could be accounted for by two CDs at $15 each, three books at $20 each, two bottles of perfume at $30 each, and one personal organizer at $350. Amazon.com will probably continue to dominate its core book and music markets. It will probably enter adjacent categories and may come to dominate them.

In Scenario B, Amazon.com's 2010 contribution margin per customer before the cost of acquiring customers is 14 percent, a figure in line with that of current top-notch large-scale retailers—Wal-Mart, for instance. Despite competition, this seems rational in view of Amazon.com's likely ability to gain offsetting economies of scale, for example, by renting other retailers space to market their products on Amazon.com's Web sites.

Scenario B predicts that Amazon.com will have acquisition costs per customer of $50. Despite the argument that these costs will rise once all online customers have been claimed, this is a reasonable figure if the company can achieve brand dominance and advertising economies of scale. The cost of acquiring new customers is closely linked to the customer churn rate, which at 25 percent suggests that once Amazon.com acquires customers it will keep them four years. This implies a truly world-class (or addictive) customer offer and a deeply loyal (or lazy) customer base.

Looking at customer economics in this way makes it possible to generate the kind of information needed to assess the probabilities assigned to various scenarios. Consider how two hypothetical young companies, Loyalty.com and Turnover.com, with different customer economics might evolve (Exhibit 15.5). Each had $100 million in revenues in 1999 and an operating loss of $3 million. On traditional financial statements, the two companies look the

Exhibit 15.5 Customer Economics

Exhibit 15.5 Customer Economics

same. Deeper analysis, using the customer economics model, reveals striking differences.

The lifetime value of a typical Loyalty.com customer is $50 over an average of five years; the typical Turnover.com customer is worth -$1 over two years. The difference in the value of a customer reflects the churn rate (20 percent attrition each year for Loyalty.com versus 46 percent for Turnover.com) and Turnover.com's higher acquisition costs.

Even though Turnover.com earns higher revenues per customer than Loyalty.com does with similar contribution margins, its economic model is not sustainable. Loyalty.com will find it much easier to grow because it doesn't have to find as many new customers each year. Since Loyalty.com will have substantially lower customer acquisition costs than Turnover.com, Loyalty.com's figures for earnings before income tax (EBIT) will turn positive

Exhibit 15.6 Long-Term Performance

more quickly. If Loyalty.com and Turnover.com invested the same amount of money in efforts to acquire customers over the next 10 years, and other factors remained the same, the revenue growth and EBIT patterns of the two companies would vary a good deal (Exhibit 15.6 on page 323). This in turn means that their DCF values would differ radically, despite similar short-term financial results.

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