Customer Equity - PCC - ebook

Customer Equity provides a unifying framework for measuring customer value - the potential profitability of each customer to the company - as a financial asset and defines and shows how to implement customer-centric strategies for long-term customer retention, relationship building and bottom-line intangible value-creation. The book provides tools for managing the customer portfolio across segments and over time so that marketers can lengthen customer life cycles, tailor the marketing mix, optimize cross-functional operations and balance customer acquisition and retention, and considers IT's role in improving all company-customer interactions.

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Main Idea

The equity created by customer relationships are any organization's most important financial asset—and like any other asset they should be measured and managed effectively so as to maximize their growth.

Specifically, customer equity is created by three key business activities:

Acquiring new customers

Retaining existing customers

Expanding the customer relationship—by selling more products and services to current customers

Historically, managers have tended to focus on cost management or revenue growth, with the prevailing wisdom suggesting a company should attempt to acquire as many new customers as it possibly can given its available resources for advertising and other marketing expenditure. Customer equity, by contrast, suggests more value will be created if the three key activities are approached as an optimized set of business activities. Or put differently, customer equity suggests the maximum amount of value will not be created solely by securing new customers. Customer retention and add-on selling also hold the potential to add significant long-term value to an organization, particularly as customers work their way through the typical life cycle.

Firms that manage their customers as an important asset will have three competitive advantages:

They will be able to make better decisions than anyone who views their business by product lines.

They will make better use of all the customer information available to them.

They will be better positioned to respond to changing market conditions in the years ahead.

The Basic Principles of Customer Equity

The customer equity of a firm consolidates the financial value of each customer relationship—the potential profitability of each customer to the company over the entire lifetime of each relationship.

Businesses that understand customer equity better than their competitors are then able to:

■ Make better informed decisions—by hitting the right balance between cost management and revenue growth

■ Generate higher profits—by managing products and customers better over the lifecycle

■ Increase shareholder wealth—by allocating resources and efforts more efficiently

The three key elements of customer equity are:

1. The acquisition of new customers

For some organizations, this is the entire focus of all marketing initiatives; but if too much focus is put on acquiring new customers, the business will be missing the opportunity to generate more value through later add-on sales.

2. The retention of existing customers

Retaining current customers is also an opportunity to add value, because it will always be cheaper and more efficient to market additional products and services to current customers.

3. The enhancement of the customer relationship through the sale of additional products and services.

Add-on sales make each customer relationship worth more throughout the customer life cycle. It is the payoff and accelerator based on the prior acquisition and retention initiatives.

Historically, marketing has generally been weak on accurate measurement methodologies, with anecdotal evaluation being commonly used. Customer equity provides a more direct statistical measure. Thus, it will become easier to manage marketing because decisions will be fact based rather than opinion based.

The use of the customer equity model: