Customer equity

Customer equity
Some companies are determined to increase their sales and profi t as quickly as
possible. In order to grow, they constantly try to acquire new customers, and end
up devoting less time to their existing customers. This weakens their position in the
long run. To fi nd the right balance in short term versus long term performance and
in new customer acquisitions versus attention paid to existing customers, managers
should consider the idea of systematically building customer equity.
Customer equity is the fi nancial value of the relationships the company maintains
with its customers. This includes both the profi ts from fi rst-time customers and the
expected profi ts from future sales to these new and to existing customers. Customer
equity can be increased by:
• Reducing the cost of getting new customers
• Retaining more customers longer
• Increasing profi ts from retained customers by selling them more products at higher
margins and with lower marketing costs.8
A company’s customer equity is the total lifetime value of all customers. The lifetime
value of an individual customer is the present value of the profi ts derived from this
customer’s future purchases from the company. This profi t contribution of a loyal
customer from repeat sales may be increased – as a result of his recommendations
and referrals – by the revenue stream from purchases made by others. One study
has estimated that the lifetime value of a loyal pizza customer can be 7,000 euros
and of a loyal Mercedes owner, in excess of 300,000 euros.9 Facing these numbers,
more and more managers realise that losing a customer may result in a far greater
loss than the value of a single transaction. Hence, they are trying to develop ongoing
relationships with customers, because this leads to customer loyalty and a greater
customer retention rate.
The relationship between marketing strategy and customer loyalty on the one
hand and sales, profi tability and customer equity on the other is illustrated in Figure
1.14. Loyal customers contribute to increased sales growth and profi ts because
they buy more over time. Also, gaining new customers from their referrals tends to
substantially lower the customer acquisition costs. From this perspective, customer
equity may be a better measure of a company’s marketing performance than its
current sales or market share.
Lifetime value
Customer loyalty

Customer complaints need to be dealt with properly to satisfy the buyers’ needs and to
build a good reputation for the company. Unfortunately, many fi rms underestimate
the importance of complaint handling as a marketing tool. The fi rst reaction of those
in charge of dealing with complaints is often defensive. What happened? Who was to
blame? What should I do about it? In other words, they immediately concentrate on
the business side and don’t consider the emotional aspects of the problem.
But a complaint usually has a deep emotional element. And that needs to be
addressed first. So start by showing a sense of commitment. ‘Oh, how awful for you!
Tell me more about what happened.’ Then explore a possible solution with the
customer that is not only clearly in his interest, but also underscores the relationship
with the customer.