When Customer Equity Matters

“Success is the result of perfection, hard work, learning from failure, loyalty and persistent.”

“Colin Powell”

PAPER PRESENTATION ON

MARKETING – WHEN CUSTOMER EQUITY MATTERS

SUBMITTED BY:-

1- SUSHEEL KUMAR SHUKLA

2- AARTI DEVI

DESIGNATION: - STUDENT (PURSUING PGPM)

INTERNATIONAL SCHOOL OF MANAGEMENT EXCELLENCE,

BANGALORE

Date: - 19/12/2009

When customer equity matters

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Executive summary:-

Traditional marketing has evolved through direct marketing into new marketing paradigm in the centre of

which, new marketing concept is developed. The new customer concept concerns the creation and design of

superior customer value for company‟s selected targets in order to obtain long term profits. New marketing

activities such as creation of customer life-time value, attraction and retention of customers are developed, thus

matching the customer preferences of products and services to prices, facilitated communication, promotions,

specified distribution channels. Rust, Zeithaml, and Lemon's customer equity model enables companies to

understand the drivers (value equity, brand equity and relationship equity ) which are most important for

influencing the buying behaviour of their customers and will help make managerial actions accountable to their

ultimate impact on customers. We have used both primary and secondary data to examine when customer

equity matters. We collected the conceptual data (secondary data) from internet, books, and magazine and

newspaper. We have also organized a group discussion on this topic among our peer groups in the institute. We

have described two main method of measuring customer equity: average customer‟s lifetime value and

individual customer‟s lifetime value. In this research, we have found that customer equity really matters:

When Brands Are Commodities, Owning the Customer is Essential

Budget allocation of marketing spending

Touching the intangible :- (winning shareholders trust)

Focus on winning mind share :- (world of mouth)

Leadership and formulation of strategy

Customer acquisition v/s customer retention

Mergers and acquisition

Thus there is no question that customer equity is essential for a business to thrive-customers. Customer is a key

strategic asset that needs to be monitored and nurtured by firms to maximize long term performance. Given the

advantages that accrue to a company with customer equity, effective management requires careful monitoring

of customer equity to both detect signals of erosion in customer equity and appropriate programs to enhance it.


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Table of content

1 Introduction........................................................................................................... .4

2 Literature review....................................................................................................4, 5

2.1 Customer Equity: A New Approach...........................................................4, 5

2.2 Link Between Loyalty Intention And Future Sales.....................................5

3 Methodology: Data Collection And Discussion...................................................6

4 Measuring customer equity...................................................................................6

5 Discussion and analysis : When Customer Equity Matters...............................7

5.1 When Brands Are Commodities, Owning The Brand Is Essential.............7

5.2 Budget Allocation Of Marketing Spending................................................8

5.3 Touching The Intangible : Winning Shareholders Trust............................8

5.4 Focus On Winning Mind Share : Word Of Mouth.....................................8

5.5 Leadership And Formulation Of Strategy..................................................8

5.6 Customer Acquisition V/S Customer Retention.........................................9

5.7 Mergers And Acquisition............................................................................9

6 Conclusion..............................................................................................................9

7 References..............................................................................................................10


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Introduction:-

Traditional marketing has evolved through direct marketing into new marketing paradigm in the centre of

which, new marketing concept is developed. The new customer concept concerns the creation and design of

superior customer value for company‟s selected targets in order to obtain long term profits. Customer equity is

based on customer lifetime value, and an understanding of customer equity can be used to optimize the balance

of investment in the acquisition and retention of customers. It is also known as customer capital and forms one

component of the intellectual capital of an organization. Since the 1960s, the customer has taken an

increasingly higher profile in marketing decision-making. In recent years, as the economy has become

increasingly service based, the slow shift from a product-focus toward a customer-focus has occurred across a

range of industries. New marketing activities such as creation of customer life-time value, attraction and

retention of customers are developed, thus matching the customer preferences of products and services to

prices, facilitated communication, promotions, specified distribution channels. Being a third element of the new

marketing paradigm, marketing domain establishes the realization of relationships between customers and

companies by integration and participation. To do so, the internal environment of companies plays a central

role.

Literature review:-

Customer Equity: A New Approach

one of the first attempts to linking marketing inputs to customer‟s reaction is “customer equity model”. The

concept of customer equity unifies customer value management, brand management, and relationship/retention

management. Customer equity is “a combination of a firm‟s current customer assets and the value of the firm‟s

potential customer assets”. Customer equity is defined as the total of the discounted lifetime values summed

over all of firm‟s current and potential customers (Roland Rust, 2004). It is viewed as the basis for a new

strategic framework which helps to build more powerful, customer-centred marketing programs that are

financially accountable and measurable (Lemon, Rust, and zeithaml,2001). There are three drivers (factors) of

customer equity, all of which refer to three sides of the same thing:

1. Value equity, "the customer's objective assessment of the utility of a brand, based on the perceptions of

what is given up for what is received"

2. Brand equity, "the customer's subjective and intangible assessment of the brand, above and beyond its

objectively-perceived value"

3. Retention equity, "the tendency of the customer to stick with the brand, above and beyond the

customer's objective and subjective assessments of the brand."


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This model is one of the first attempts to connect the two different research streams „Brand Equity‟ and

„Customer Equity‟. However this model is not considering some key concept of customer loyalty. This is done

by including the conceptual suggestions made by Bolton, Lemon, and Verhouf (2004) ,stating the need for

considering observed purchase behaviour and including loyalty constructs in particulars. This way our model is

well suited to improve our understanding of the relationship between perceived marketing actions, customer

attitude and future sales.

Link between loyalty Intention and future sales:-

Loyalty intentions have an immediate influence on behaviour. Loyalty intentions may result in a readiness to

buy. This readiness is accompanied by the consumer‟s willingness to search for a favourite offering despite

considerable efforts necessary to do so. Competitive offerings are not considered as alternatives. However,

action control studies imply that not all intentions are transformed into action. This positive effect of loyalty

intentions on future sales can be assumed.


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Methodology:-

Data collection and discussion:

Customer equity models offer a theoretical framework for making the firm customer centred. Our steady is a

result of opportunities provided by the existing literature in the performance outcome of the three customer

equity drivers – value equity, brand equity and relationship equity. We have used both primary and secondary

data to examine when customer equity matters. We collected the conceptual data (secondary data) from

internet, books, and magazine and newspaper. We have also organized a group discussion on this topic among

our peer groups in the institute.

Measuring customer equity:-

Firms typically adopt one of two approaches in assessing the value of their customers. A firm can either

calculate the total worth of its customer base from aggregate financial measures or compute the value of each

customer individually based on buying characteristics and purchase history. The total asset value of the firm‟s

customers thus computed is called customer equity.

Approach 1: average customers’ lifetime value

Under this approach firms use segment or firm-level data to compute the average lifetime value of a customer

(or average CLV), which is then multiplied by the number of customers to arrive at the customer equity.

Individual lifetime value is not available for all customers under this top–down approach, which is called

aggregate-level approach.

Approach 2: individual’s customer lifetime value

Under this approach, each customer‟s value to the firm (or the lifetime value) is computed individually for all

existing customers. Customer equity is then calculated by summing up the lifetime values of all the customers.

This approach is, therefore, a bottom–up approach, where customer equity is derived from individual-level

customer lifetime values, and is referred to as a disaggregate-level approach.


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Potential sources for change in customer equity

Discussion and Analysis: -

When customer equity matters:

When Brands Are Commodities, Owning the Customer is Essential:-

Now a day‟s brands are becoming more similar and commodity like overtime. In a study of research conducted

by Copernicus marketing consulting firm, we found that 48% of leading brand are becoming more similar

rather than more distinct, so the brand equity alone is becoming an increasingly weak measure for marketing

efforts. The gross profit of organization can be calculated as:

Life time

Discount rate

Relation expenditures

Acquisition

expenditures

Lost customer

New customers

Customer lifetime

value

Marketing

expenditures

Number of customers

Customer equity

Gross Profit = Profit margin ×Sales volume


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So if the brand is commodity, means profit margin of the product is low because of having no key

differentiator. So it is essential to have large customer equity because if profit margin is low, sales volume

should be high to growing a business.

Budget allocation of marketing spending: -

It's a mystery to us why managers seem to spend millions of dollars on marketing programs without knowing if

their investment produces a fair return. One possible explanation, however, is that managers simply do not

know how to project the return on investment for their marketing programs. Measuring the effectiveness of

marketing investments can be frustrating - especially if a company focuses on a long-term outcome like

increasing customer equity. Though there are decision-support models to help marketers allocate their budgets

which aren't always consistent with long-term brand health.

Touching the intangible :- (winning shareholders trust)

The market value of stock listed companies is to a large extent attributable to investor‟s value estimations of

intangible assets. Among these, customer equity, the monetary value potential of a company‟s current and

future customers, is of central importance. It is the driver of shareholder preference.

Focus on winning mind share :- (world of mouth)

This is a process of creating differentiation that enhances value of from the customer‟s perspective. When it

comes to business transaction social media an open cooperative conversation enables people to share insights

and opportunities and help each others to make decision and make sense. So business must now deliver what

customers value or be forced to complete on price and convenience.

Leadership and formulation of strategy :-

Customer equity helps to hold leadership in the market. Company formulates strategy after analyzing customer,

corporation and competition. A company having large customer equity can follow the strategy „Promise less,

Deliver more‟ by conventional cost cutting most often undermines customer satisfaction, brand loyalty and

sales. A focus should be on effectiveness.

Business Strategy Triangle

Corporation

Customer Competition


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Customer acquisition v/s customer retention :-

One of the most fundamental issues to any company is whether to place more focus on customer acquisition as

opposed to customer retention. Of course both are extremely important to making your business a success

online, however frequently much more effort is placed on acquiring new customers. This would make sense due

to the fact that most of a company‟s initial revenue is generated by new customer acquisitions. However, if a

company doesn‟t care what happens to a customer after they are on board, the company will have a high

attrition rate and not do well long-term. Right from day one, company should place a strong emphasis on

customer-relations and treating customers like they are the most important people in the world. The company

can follow the following parameters to acquire new customers.

1- Selectively acquiring customers whose discounted future value exceeds acquisition costs

2- Determining acquisition investment based on the potential to recover this investment in the first period

3- Managing the acquisition-retention link

4- Balancing retention spending based on returns

Mergers and acquisition:-

During significant merger of two organizations or an acquisition of an organization, senior management have to

decide to substantially in building the brand of the newly combined entity. The organization having large

customer equity plays a significant role in making policy, strategy formulation and building brands to create

great customer loyalty.

Conclusion:-

In the current competitive marketing environment customer equity as a measure of expected future behaviour of

a firm, customer is a key strategic asset that needs to be monitored and nurtured by firms to maximize long term

performance. Given the advantages that accrue to a company with customer equity, effective management

requires careful monitoring of customer equity to both detect signals of erosion in customer equity and

appropriate programs to enhance it. With the growing recognition that customers are market based asset,

research on linking operational marketing inputs to customer attitudes and customer equity has been gaining

increasing significance.


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References:-

Lemon, Roland T. Rust, Zeithaml (2001), “what drives customer equity”.

Phillip Kotler, K. L. Keller, A. Koshi, M. Jha (2009), “Marketing management, 13th edition”.

Rust, Roland, Lemon, Zeithmal (2004), “Return on marketing using customer equity to focus marketing

strategy”.

www.hbr.org

www.emeraldinsight.co

www.business- strategy.com

http://www.hbr.org/

http://www.emeraldinsight.co/

When Customer Equity Matters

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