During the Internet boom, many start-ups invested a large part of their marketing budget in attracting “visitors.” The idea was that visitors would eventually bring in revenue. But, for many companies, that revenue never materialized – their customers were not profitable.
Companies devote large budgets to attracting customers through various channels, hoping to increase their profit. But in the end, a company’s long-term profitability depends not on attracting just any customers but the best ones. Frequent and happy customers keep you from running out of business.
What is Customer Equity?
Customer equity is a new paradigm that is very useful for measuring and managing the value of a company’s customer base. Why? Because it allows marketers to estimate profit and allocate their resources in the best possible way.
Customer equity is defined as the sum of the existing and future customers’ lifetime value. Long story short, customer equity is the estimation of how much money you can make out of maintaining a buy-sell relationship with a client.
It depends on many variables, including price sensitivity, customer lifetime, or purchase volume.
Intangible assets are those that the company doesn’t usually account for on the balance sheet. Over the years, many companies have invested significant sums in marketing programs and smaller sums in production fixed assets. The book value of a company doesn’t take into account this immaterial value or capital. The most common are as follows:
- Brand value (brand equity). It refers to the value of the brand image.
- Channel support (trade acceptance). It consists of the numerical and weighted distribution and how easy and fast it is to introduce new products to the market.
- Patents: linked to products or product manufacturing processes.
- People, such as researchers or key personnel.
- Value of the consumer or customer base (customer equity). It is the possibility that customers will continue to make the company prosper in the long term, that is, the sum of the lifetime value of each of the company’s customers.
All these intangible assets make the difference between a company’s book value and its market value, and this is what investors are interested in: creating value in the future.
The value of the clientele consists of three pillars:
- Value equity: this refers mainly to the attributes or characteristics of the products and services, their perceived quality, the right price, the ease of finding them, or their exclusivity.
- Brand equity: If a customer does not know the brand, they will not consider it a choice. Hence the importance of brand awareness. The brand image is the set of associations created in the customer’s mind. These associations must be strong, positive, and unique to leverage consumer trust: if there is not enough brand awareness or if the image is negative, there will be no brand value and, therefore, no customer value.
- Relationship equity: The relationship value consists of placing customer relationship management (CRM) at the center of the business model. For example, brands can implement loyalty programs that work with fidelity cards. Depending on what the brand wants to achieve, it can offer points for purchases, refer other customers, etc.
Each of these drivers by themselves can play a meaningful role in increasing customer equity. There’s software available like REVEAL that analyzes your customer’s behavior. It allows you to acquire, retain and satisfy them to increase customer lifetime value. The better you understand how your customers think and act, the higher the chances of turning them into lifelong buyers.
> Learn how to calculate and improve Customer Lifetime Value – the north star metric of every eCommerce store.
But why is customer equity so relevant for companies?
Importance of Customer Equity
First of all, it allows businesses to estimate how much they spend on gaining customers and retaining them and how much they earn. Is it profitable and worth it? If a company employs $50 in acquiring a client that only spends $15 in the store and never comes back, they’re losing money.
Over the last few decades, the marketing strategy has shifted from product-centric to customer-centric. Marketing now implies a greater emphasis on building long-term relationships with customers rather than short-term transactional relationships. People can get your product somewhere else, but they will stick with you if you give them a good reason.
Customer equity is critical for companies because it is the foundation for long-term success. A successful company is one that is successful in the eyes of its clients. Hence the importance of customer retention and creating a reputable customer base.
Customer equity is based on the idea that clients are the company’s most valuable asset because they are the ones who produce money. Managing customer equity entails a company’s decision to invest in its customers and make the most out of it.
On the other hand, companies should learn which marketing activities boost cash flow and review them to get the most out of them. To maintain constant cash flow, a company must either expand the number of clients or the lifetime value of existing ones.
The principal purpose of relationship equity programs was to increase the likelihood and magnitude of future repeat purchases while reducing the possibility of a client purchasing from a competitor.
Researchers believe that companies should use the marketing activities’ budget on programs to increase and maintain customer equity.
Here’s an example: think of Nike and its “Just Do It.” It evokes a feeling of success and uniqueness – those who wear the brand are winners. Nike’s customers keep turning back because products are good, the brand’s image is good, and they feel good wearing their clothes and shoes. What is best for the company: attracting one-time buyers or building customer loyalty that results in frequent shopping?
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How to Calculate Customer Equity
Now that we have established the importance of customer equity, how do we measure it?
Calculate how much money the company spends on customer acquisition. Marketing techniques, costs, and response rates will influence the calculation. For example, if you spend $50,000 a year on billboard ads that attract 500 customers, each person will cost you $100 on average.
Calculate how much money the company spends on customer retention through initiatives such as loyalty programs, member discounts, and newsletters. For example, a company might pay $5 per customer yearly on printing and delivering catalogs and promotions.
Calculate how much money each customer spends in a year. For example, if the average customer buys ten times a year, spending $10 each time, that person’s average annual spending is $100.
Calculate the annual profit generated by each customer. If you spend $4 for every $10 you generate, you would have a profit margin of 60%. Each customer would cause a profit of $60 per year if they spent $100 annually.
For each year of the analysis period, write down the cash flow of an average customer. Imagine that, after initial marketing efforts, you want a customer to continue with your brand for five years. You then chart years 0 through 5 and write down the cash flows that correspond to them. Your cash flow in year 0 is -$100 because you spent $100 to acquire that customer. You expect to recover in the next few years, which can only be achieved by improving customer equity.
How to increase Customer Equity
Customer happiness and loyalty are critical to a company’s long-term survival. Customer happiness is regarded as a prerequisite for customer retention, and it aids in achieving economic objectives such as sales turnover and profit generation. Similarly, many businesses see client loyalty as the key to long-term profitability.
Businesses must work hard to maintain long-term customer relationships to harvest the benefits of client equity. How? By up-selling and cross-selling to their customers to satisfy them as much as possible.
Customer satisfaction and the length of their engagement with the company are two of the most relevant factors in increasing customer lifetime value. Here are some ways to improve customer equity:
#1 Appreciate your clients
To increase retention rate and build loyal customers, you should appreciate and consider them. Imagine that someone frequently buys at your store – you could send them a thank you email along with discounts or any small reward. They will feel appreciated and probably repurchase.
It also works for creating marketing strategies. Why don’t you develop a poll or survey to find what your clients want to buy and see in your brand? Maybe they got tired of the same design and now seek something new. Always keep their opinions in mind.
#2 Focus on quality
This piece of advice may be a no-brainer, but it’s key. Brand images sell, but customers need quality products to come back. You might as well be the top retail company in your region – don’t satisfy your clients’ needs and see where that gets you.
You can only make revenue if you build customer loyalty. No business has ever been successful without focusing on quality. Don’t compromise quality for quantity or easy cash. Think of Apple: people buy its products at high prices because they know they’re good.
#3 Customer service is more important than you think
Have you ever got mad because you had a problem, telephoned a company, and they didn’t solve it? Or worse yet, they wasted your time? Welcome to the club.
Companies must deliver high-quality customer service. Otherwise, clients might switch to competitors. Problems arise every day, and people want to rest assured the company will solve their issues efficiently. It’s always a good option to have a live chat so workers can respond to queries in real-time and solve problems faster.
Last but not least, make sure to have multiple channels. Someone may prefer to email the company while other clients straight-up call you. It’s up to them, and you should provide solutions.
#4 Give your customers something competitors don’t
Brands stand out because they have USP (Unique Selling Propositions) that their competitors don’t. That’s what makes them desirable and different from every other manufacturer.
It’s a good strategy to find out what your rivals are doing and improve that service. But you know what works better? To provide something unique that others don’t. You should put more effort into coming up with new ideas than reusing existing ones. Not only will they increase customer activity and purchases, but they will also boost their lifetime values.
Say that delivering on time is one of your competitors’ strengths. You might want to provide good delivery services while thinking of other ways to beat them that don’t revolve around deliveries.
Frequently asked questions about customer equity
What is a customer equity example?
Think of a reputable brand like Apple or McDonald’s. They have frequent customers that come back regularly. Why? Because the products are good, the prices are affordable, and the marketing strategies are on point. Building a brand image and reputation takes time, just like creating a loyal customer base. However, it’s one of the first steps towards success.
What is customer equity, and why is it important?
Customer equity is the sum of a brand’s customer lifetime values for each client. During the business-customer interaction, it is the potential profit that all customers can bring.
Companies frequently encounter the challenges of more discerning customers and fierce market competition. Generating consumer equity is critical to a brand’s survival over its competitors.
Customer equity is important in today’s market because it allows you to estimate the financial profit you can make from your customers throughout your partnership. This enables businesses to calculate the value of their client assets and make informed financial decisions about add-on selling, retention, and acquisition.
How is customer equity calculated?
To calculate customer equity you have to:
> Determine how much money you spend to acquire a new customer.
> Determine how much your company spends on customer retention.
> Calculate how much your client spends every year.
> Determine the amount of money you receive from each customer.
> List the average customer’s cash flow for a certain period.
> Separate each year’s cash flow.
> Add up the present values of all cash flows throughout the specified period.
How do you build customer equity?
Keeping your client base happy is the first step towards building customer loyalty and keeping them coming back to your brand. There are different ways to do this, but make sure to follow these essential steps:
> Appreciate your clients. Reward them from time to time to show respect for their loyalty.
> Focus on quality. People will buy products at high prices if they believe they’re good.
> Customer service is more important than you think. People encounter problems all the time, and they seek customer service to solve them efficiently.
> USP (Unique Selling Propositions). Companies stand out because they provide something their competitors don’t.
> Implement software like REVEAL to understand visitors’ behavior and create a loyal customer base.