Wednesday, December 9, 2009

Come and meet the Letter People

Come and meet The Letter People. Business people love acronyms! I've learned a few this semester, and I wanted to share five of my favorites, which you can use in daily conversations to seem all businessy and stuff:

1. EBITDA: Earnings Before Income, Taxes, Depreciation and Amortization. This is a calculation based on numbers on an income statement, and it gives you an idea about cash earnings. I think all the terms are self-explanatory, but FYI, "depreciation" refers to a physical asset losing value either because of use or because of time, and "amortization" is the same thing but applied to intangible assets, like a patent.

2. CLV: Customer Lifetime Value. This number comes from a calculation of how much a customer spends throughout his "life" with a business, discounted to today's dollar terms. It stresses the importance of retaining customers, and can shed light on which types of customers are most valuable.

3. CAPM: Capital Asset Pricing Model. Pronounced "Cap-Em," this is a measurement of how risky a security is, which is based on how much is covaries with the market. Knowing how risky a stock is helps you determine what price to pay for it.

4. ARC: Architecture, Routines and Culture. This is a framework to examine a firm's organizational design, and to illustrate how a manager can solve incentive and coordination problems.

5. 4 Ps: Product, Price, Place and Promotion: This is another framework, designed to cover the bases of a solid marketing strategy. Using this framework, we ask what we're selling, how much it costs, where we're selling it and how we're communicating a message about it.

Let's put them all together!!

"Looking at EBITDA and using the CAPM, this company clearly isn't thinking about CLV or the 4 Ps, probably because of its ARC."

Go say that to someone.

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