Customer equity

From CEOpedia | Management online

Customer Equity can be defined as the perception that a customer experiences with a company's product or service versus what he or she has to give up to obtain the desired profit. It therefore refers to the value that customers have within an organisation. It is also the connections that are created between the customer and the company during the life cycle of the company.

According to Meier and Stormer, they describe customer equity as "the lifetime value of the consumer or the customer's wealth" [1].

Similarly, Zelkowitz cites customer equity as "the total lifetime value discounted by all the consumers that the company has" [2].

Customer equity in a company

Nowadays, customers have become increasingly demanding and the market has become more competitive. This means that companies have had to consider new strategies aimed at improving the company's relationship with customers, in other word new ways of approaching them, serving them and building customer loyalty.

Customer equity takes into account three defining factors that will enable a comprehensive analysis and the development of a customer-oriented strategy [3].

  • Value Equity: this refers to customers' evaluation of a business or brand to determine the value of the business or brand and what they give up for what they receive. There are also three crucial factors that influence brand equity: price, convenience and quality. Thus, brand equity will depend on the ratings given by consumers.
  • Brand Equity: this is an element related to the branding process, in other word the image and meaning of the brand. Similarly, it is the perception and evaluation that a consumer makes of a product or service. On many occasions, customers resort to certain elements such as advertising, logo, typography, brand colours .... to make their final choice. It should be noted that the three most important elements of brand equity are brand attitude, corporate ethics and brand awareness.
  • Relationship Equity: this is defined as the bond or tendency that a customer has with your brand, in other word they prefer it over any other competing brand. It is also the connection of loyalty that is formed between the consumer and a service or product. It should be emphasized that, to enhance this bond, loyalty programmes, affinity programmes, special deals, recognition, community building programmes must be used...

Having explained the three factors, we will now comment on which of them are most important for customer equity [4].

The equity of value will be important to the consumer in certain circumstances such as:

  1. Where there are significant differences between the products or services offered by competitors. Therefore, companies will need to influence customer perceptions to increase value equity.
  2. When purchases involve difficult decision processes for the customer.
  3. It will be substantial for most business-to-business (B2B) procurement.Importantly, these are complex processes and involve long-term commitments between the parties.
  4. When companies offer innovative services or products to their customers.

The brand equity will be more crucial at certain times:

  1. When purchases involve low involvement and simple decision processes for the consumer. For example, the purchase of primary goods which are routine purchases.
  2. When the consumer's use of the product is very noticeable to others.
  3. Also, when product experiences can be transferred from one person or generation to another.
  4. It is essential for reliable products where the quality is difficult for the customer to assess before consumption.

The relationship equity will be more important in certain circumstances:

  1. It is essential, when a consumer associates the benefits gained from loyalty programmes are higher than the actual "cash value" of the profits received.
  2. When communities created by loyal members are as important as the product or service itself.
  3. When companies have the opportunity to create learning connections with their customers, the value of the relationship is important. Also, once the organization knows and begins to understand the needs and buying habits of its consumers, the equity relationship increases.
  4. When customer intervention is necessary to decide whether to stop consuming the product or to continue receiving it.

Elements affecting customer equity

It should be noted that there are certain aspects that affect customer equity, which can be divided into three sections [5].

Managed directly by the marketing department:

  • Media advertisements
  • Sponsorship
  • Spend rate
  • Direct mailing-customers and prospects-branch salespersons

Indirectly controlled by the marketing department:

External:

Final conclusion

After the research and analysis on customer equity, it can be concluded that nowadays, it is very important for companies to take into account the connections they have with their customers. Likewise, the value that each of the consumers has within the organization so that they are present throughout the life cycle of the company.

Footnotes

  1. ↑ Coote Martin, G. (2015), p.153
  2. ↑ Coote Martin, G. (2015), p.153
  3. ↑ Lemon, K.N., & Rust, R.T., & Zeithaml, V.A. (2012), p.1-2.
  4. ↑ Kumar, V., & Shah, D. (2015), p.21-29.
  5. ↑ Hanssens, D.M., & Thorpe, D., & Finkbeiner, C. (2008), p.3


Customer equity — recommended articles
Nicosia model — Relationship selling — Client satisfaction — Customer loyalty — Brand value chain — Goals of marketing — Consumer decision making process — Howard Sheth model of consumer behaviour — High involvement product

References

Author: Zaira Bancells Guerrero,Mónica Guijarro Bernabeu,Gabriela Varela Barker

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