Finally, note that managers can use the framework described in this chapter to both evaluate investment projects and to make strategic decisions regarding which customers to invest in. Consider Potato Supreme, which makes potato products for sale to retail outlets. It is currently analyzing two of its customers: Shine Stores and Always Open. Potato Supreme predicts the following cash flow from operations, net of income taxes (in thousands), from each customer account for the next 5 years:
| 2020 | 2021 | 2022 | 2023 | 2024 | |
| Shine Stores | $1,450 | $1,305 | $1,175 | $1,058 | $ 950 |
| Always Open | 690 | 1,160 | 1,900 | 2,950 | 4,160 |
Which customer is more valuable to Potato Supreme? Looking at only the current period, 2020, Shine Stores provides more than double the cash flow compared to Always Open ($1,450 versus $690). A different picture emerges, however, if you look at the entire 5-year horizon. Potato Supreme anticipates Always Open’s orders to increase; meanwhile, it expects Shine Stores’ orders to decline. Using Potato Supreme’s 10% RRR, the NPV of the Always Open customer is $7,610, compared with $4,591 for Shine Stores (computations not shown). Note how NPV captures in its estimate of customer value the future growth of Always Open. Potato Supreme uses this information to allocate more resources and salespeople to service the Always Open account. Potato Supreme can also use NPV calculations to examine the effects of alternative ways of increasing customer loyalty and retention, such as introducing frequent-purchaser cards.
A comparison of year-to-year changes in customer NPV estimates highlights whether managers have been successful in maintaining long-run profitable relationships with their customers. Suppose the NPV of Potato Supreme’s customer accounts declines by 15% in a year. The firm’s managers can then examine the reasons for the decline, such as aggressive pricing by competitors, and devise new-product development and marketing strategies for the future.
Capital One, a financial-services company, uses NPV to estimate the value of different credit-card customers. Cellular telephone companies such as Sprint and Verizon Wireless attempt to sign up customers for multiple years of service. The objective is to prevent “customer churn”—that is, customers switching frequently from one company to another. The higher the probability is of a customer switching, the lower the customer’s NPV.