“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
2
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.
When customer equity matters
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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
When customer equity matters
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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.
When customer equity matters
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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.
When customer equity matters
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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
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