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Customer Equity—Help for Companies Trying to Figure Out Why Marketing Programs Are Not Working As Well As They Could or Should

For more information about the customer equity work we do for clients, read about our customer equity services.

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:

  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.

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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