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COPERNICUS WHITE PAPER
Customer
Equity—A Fix for Modern Marketing
Customer equity can help businesses determine why marketing programs are not working as
well as they could or should.
Looking fore more information about our customer equity services?
Click
here.
By Kevin J. Clancy and Peter Krieg
The Rise of the
Customer
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. The emphasis on building relationships rather
than transactions has resulted in a greater awareness of the customer.
Yet strangely, the
metric marketers use to evaluate and measure the success of marketing
programs remains product-focused. Brand equity is still the most commonly
used measure of success for brands and companies alike. It's the intuitive
and commonsensical standard because everyone else is using it. The fact
that managers can measure brand equity (although the components of the
measure differ across companies) may be one of the reasons companies have
continued to focus on brand building and other product-centered programs
while merely paying lip-service to being customer-centered. Yet if the
goal truly is customer-centrism, both marketing efforts and marketing
standards should reflect that goal.
Customer Equity:
A New Approach
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-centered 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:
- 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"
- Brand equity, "the
customer's subjective and intangible assessment of the brand, above
and beyond its objectively-perceived value"
- 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.
For 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.
When Brands Are
Commodities, Owning the Customer is Essential
Recently, our firm
Copernicus Marketing Consulting undertook a joint research study with
leading researcher Market Facts that investigated whether brands are becoming
more similar and commodity-like over time. The study examined consumer
perceptions of similarity in 48 pairs of leading brands and 51 different
product and service categories-from both the Old and New Economy.
Our research found
that in categories as diverse as hair care products and rental cars, a
nationally representative sample of adult consumers perceives the leading
brands (#1 and #2) becoming more similar rather than more distinct. Of
the 48 categories evaluated, the leading brands in 40 of these categories
are perceived as becoming more similar. Moreover, in 28 of 37 categories,
consumers indicated price was more important than brand when making a
purchase. In six categories, price and brand were about equally important,
and in only three categories was brand more important (automobiles, liquor
and beer).
Given this research,
it is clear that brand equity alone is becoming an increasingly weak measure
for marketing efforts. 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. One possible
explanation, however, is that 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.
Becoming Truly
Customer-Centric
There is no question
that customer-centrism is essential for a business to thrive-customers,
after all, are what keep companies in business. But customer-centrism
must be much more than something that managers talk about. Companies claiming
to be customer-centered should evaluate whether they are practicing what
they preach and use the customer equity model as a check on their
actions. Rust, Zeithaml, and Lemon's customer equity model enables
companies to understand the drivers which are most important for influencing
the buying behavior of their customers and will help make managerial actions
accountable to their ultimate impact on customers.
Learn more about how you can understand and measure your customer equity by clicking here.
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