Clusters of interrelated firms could be an important source of competitive advantage. However, measuring the performance of clusters and firms within clusters is difficult. In this paper the authors show how the residual income model can be used to measure the performance of clusters and firms within clusters. This is accomplished by separating the performance due to cluster membership from the performance due to firm-specific factors. The developed model should be of particular interest to managers of firms within clusters and the public sector in determining appropriate interventions for forming and supporting clusters.