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Are they worth it?

There’s a lot of talk about valuing customers, the importance of customer service, improving customer retention… but how do you know if the customers you have are worth keeping?  

You may have heard about Customer Lifetime Value (CLV) and Customer Relationship Management (CRM), two techniques that help ascertain the value of a customer to the company.

Customer equity is an additional concept that ranks customer value to a company in terms of cash flow. By measuring the NPV (Net Present Value: the present and future value) of customers, it is possible to better understand return on marketing spend and, ultimately, the worth of the firm itself.

Like brand equity, customer equity tries to ‘quantify’ the intangible value of marketing. While brand equity focuses on the product, customer equity is concerned with the value of the customer to the company. Customer equity measures quantifiable behaviours, like revenue and profit generated, number, value and frequency of order placement etc. Brand equity, on the other hand, is less tangible and can be very tricky to measure.

Customer behaviour and their purchase decisions are directly linked, so if you combine financial mexasures such as NPV to forecast the revenue generation of any customer over their lifetime you arrive at a single, objective measurement of customer ‘worth’ to the organisation.

Measured accurately, customer equity can give a company vital information about which type of customers afford the most value, where that value comes from and even how to ensure the longevity of these types of customers. Knowing your customer equity value will minimise making key marketing mistakes such as:

- Allocating resources to generating new customers who may only provide short term gains and no long term benefits due to poor targeting;

- Wasting money on tactics which have little or no influence on customer behaviour and purchase decisions; and

- Focusing only on revenues that look financially positive but ignore the high cost of acquiring and maintaining a particular class of customers.

Customer equity helps you determine the optimal level of marketing expenditure for the best long-term return by knowing the cost of three key variables: customer acquisition, customer retention and add ons.  Let’s look at the three variables.

AcquisitionWe know that all customers are not created equal: the most valuable customers contribute more by introducing other customers that gives the company additional revenue. They are also more responsive to the company’s marketing messages that make them worth the allocation of additional resources. It’s these customers that give the greatest customer equity value. 

RetentionWhat we want are customers who cost less to keep and who are more likely to continue to buy without requiring additional substantial investment in generating those sales. These customers represent better equity because they cost less to maintain and also because they’re less likely to switch. 

‘Add on’ sales 
This is the company’s ‘untapped potential’, the customers who buy more via cross selling or increased purchase volume. Quantifying these measures is complicated, in part because we don’t know what they’re buying from competitors. They may not generate a lot of revenue for you right now, but they may have significant customer equity value if you can help them ‘realise’ their potential to increase their spend with your company. This is where your marketing resources may well be best employed-targeting consumers with potentially significant customer equity.

It is entirely possible that a company believes its customers are generating as much revenue as possible and are worth maintaining. But if the idea of customer equity is employed, they may find out that they’re spending a lot of money for very little net return.

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