Page 294 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Unit 11: CRM Measurements

Customer Equity Notes

Customer Equity is the Net Present Value of a customer from the perspective of a supplier. It
can – and should – also include customer goodwill that is normally not expressed in financial
terms, e.g. a customer’s level of loyalty and advocacy. The concept of customer equity, which
unifies customer value management, brand management, and relationship/retention
management, has recently emerged from the work of Professors Roland Rust (Univ. of Maryland),
Valarie Zeithaml (Univ. of North Carolina) and Kay Lemon (Boston College). They view customer
equity as the basis for a new strategic framework from which to build more powerful, customer-
centred marketing programs that are financially accountable and measurable.
Quantitatively speaking, a firm’s customer equity is the total of the discounted lifetime value of
all of its customers. In their new book Driving Customer Equity: How Customer Lifetime Value
is Reshaping Corporate Strategy, Rust, Zeithaml and Lemon state that customer equity has three
drivers:
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.”
The customer equity model enables marketers to determine which of the three drivers – value,
brand or retention equity – are most critical to driving customer equity in their industry and
firm. Using this approach allows marketers to quantify the financial benefit from improving
one or more of the drivers.

Example: If a regional grocery chain wants to evaluate whether or not they should
spend $2 million on an advertising campaign that will improve ad awareness by 1 percent, the
customer equity model translates the percentage improvement in ad awareness into the
percentage improvement in brand equity (a component of customer equity). The percentage
improvement in customer equity then translates into dollar improvement. Comparing the
advertising expenditure to the dollar improvement allows the company to calculate its return
on the advertising investment.
The customer equity model provides a basis for projecting the ROI of any strategic investment
that improves customer equity whether as a function of value, brand or retention equity. It
provides a catalyst for companies to become truly customer-centric and to make marketing
programs more successful and accountable. 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.

!
Caution Managers simply do not know how to project the return on investment for their
marketing programs. They have lacked a basic model that links marketing actions with
customer spending actions, and instead use intuition to make decisions. The customer
equity model has the potential to forge that missing link.

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