One of the best analyses of the process of learning where to spend and where to save marketing dollars for best return on your investments to turn customers into assets can be found in Driving Customer Equity: How Customer Lifetime Value is Reshaping Corporate Strategy (Rust, Zeithaml, and Lemon, The Free Press, 2000), named Marketing Book of the Year by the American Marketing Association. If you are serious about CMR, I suggest reading this book. The authors stress “managing according to Customer Equity (the value of a firm’s customers) rather than Brand Equity (the value of a firm’s brands) and focusing on customer profitability instead of product profitability.”
This concept of customer equity is so central to the accomplishment of CMR goals and objectives I have asked the authors to contribute the following:
If you had an extra $500K in your marketing budget, how would you spend it? Would you:
Run more television advertising?
Invest in your loyalty program?
Bring in exciting new merchandise?
Develop new products or services?
Hire more sales associates?
Sponsor a local community event?
How would you decide? Now it’s unlikely that you have an extra five hundred grand sitting around waiting to be spent. But think of it this way: if you had to cut your marketing budget by $500K, what would you cut? Wouldn’t it be great to be able to determine the value of each dollar spent on marketing, and to be able to invest in the efforts that will result in the greatest return?
Recently, new research has been done to develop a model and mechanism to figure out which investments (e.g., CRM programs, brand building, price discounts, merchandising enhancements, quality improvements) are worth the cost. These new models help you figure out where the next marketing dollar should go.
To understand how this new approach, called the Customer Equity Framework, works, it’s important to understand the critical questions facing marketers today:
What do my customers want?
How can I get my customers to come back more often? To buy more? To tell their friends about my company?
How do I convince customers to spend more money with my firm than with my competitors’?
Most important, how do I do this at a profit?
In answering these questions, you have to understand what truly drives your customers to do business with you and with your competitors. You also have to understand how your marketing actions impact the buying behaviors of your customers. Our research suggests that the key to understanding these issues and the metric that will help you maximize your return on marketing dollars is Customer Equity. Customer Equity is defined as the aggregate discounted lifetime values of all your customers. Without going deeply into the underlying math here, the key “asset” that you’re trying to “grow” is the value of the future stream of profits that you’ll receive from the customers in your market (those who buy from you now, and those who buy from your competitors). The greater your share of this “asset,” the greater your long-term profitability.
Now, just because Customer Equity deals with customer lifetime value (CLV), don’t think we’re talking about customer relationship management. We’re not.
Think about how you might grow the long-term profits from your customers and gain more share of your competitors’ custom- ers—in other words, how you might increase your Customer Equity. You can:
Improve the value your customer receives (we call this Value Equity)
Strengthen the customer perceptions of your brand (we call this Brand Equity)
Deepen the relationship the customer has with you (we call this Relationship Equity)
By breaking up the major drivers of Customer Equity into these three areas, you can then begin to understand what is most important to you customers. Your Customer Equity will grow or shrink based upon (1) how well you understand which of these drivers is most important to your customers, and (2) how well you manage—and invest in—those drivers that are critical to your customers.
A bit more about each driver:
Value Equity is defined as the customer’s objective assessment of the utility of a brand based on perceptions of what is given up for what is received. In essence, your customer’s objective evaluation of your products and services. Think about this as the customer’s head. The critical, actionable steps you can take to strengthen your store’s Value Equity are in three areas: quality, price, and convenience.
Brand Equity is defined as the customer’s subjective and intangible assessment of your brand, beyond its objectively perceived value. Brand Equity represents the customer’s emotional connection with your store—the customer’s heart. Action steps you can take to strengthen Brand Equity are: improving customer awareness, improving the customer’s attitude toward your store, and investing in actions to improve your firm’s corporate citizenship reputation. Not surprisingly, marketing communications play a critical role in growing Brand Equity.
Relationship Equity is defined as the customer’s tendency to “stick” with your store, beyond the customer’s objective and subjective assessments of your firm. Think of Relationship Equity as your firm’s social connection or glue with the customer—built up over time through the interactions the customer has with you. The key action steps to strengthen Relationship Equity are: loyalty programs (with both soft and hard benefits), community-building programs, and knowledge- building programs.
Right now, many firms try to do all of these tasks simultaneously, without differentiation, and always with limited budgets. We’re not sure that’s possible. But we are certain it’s not the best use of your resources. The key to growing long-term profits is determining where to best invest your efforts—based upon what is most important to the customer.
So, how do you begin to determine where you should invest your marketing efforts for maximum return? The decision support system, Customer Equity Driver™, takes you through the following steps to determine the best use of your marketing dollars:
First, you must determine what is the most important driver to your customers in their future purchasing decisions. Brand Equity? Value Equity? Relationship Equity?
Second, you need to understand which actionable subdrivers are most effective in growing the value of your customer base. In other words, what actions will be most effective in getting your current customers to buy more, increase the likelihood that your current customers come back, and increase the probability that your competitors’ customers switch to your store.
Third, evaluate where you are on each driver relative to your competitors. For example, you may find out that your firm is perceived as “average” on a subdriver of Value Equity that customers really care about (e.g., knowledgeable sales staff, convenient hours)—and your key competitor may be performing much better on that dimension. A good candidate for marketing investment!
Finally, invest where the payback is highest. You will actually be able to compare the potential returns from very different strategies—a loyalty program versus a price reduction; a community involvement program versus a merchandising initiative.
The Customer Equity framework provides an actionable approach to marketing that is customer centered, yet competitor cognizant. You will finally be able to understand, as the old adage suggests, which half of your marketing efforts are “wasted.” New levels of efficiencies and effectiveness (not to mention accountability) for marketing investments are possible. Are you ready?
In our research on Customer Equity and in the writing of our book, Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy (McGraw-Hill, 2000), we have learned some key lessons about how to grow Customer Equity in a variety of business environments. Here’s what we’ve learned.
It’s not always about price.
It’s not always about having the right brands.
Loyalty programs are not the key driver for all retailers (you may be giving away unnecessary margin).
Soft benefits can be as (or more) important as hard benefits in loyalty programs.
You can’t overlook the importance of assortment and convenience to your customers.
Most important: It’s not just about brand. It’s not just about quality, convenience, and price. It’s not just about CRM. It is about finding out what’s important to your customers—what “drives them” to do business with you—and making sure that you’re the best at what matters most to them! Best in your region. Best in your specialty area. Continue to deliver on what is most important to your customers. It’s not rocket science. But it is hard work.
Roland T. Rust, Valarie A. Zeithaml, and Katherine N. Lemon, Driving Customer Equity—How Customer Lifetime Value is Reshaping Corporate Strategy. Copyright 2000 by Roland T. Rust, Valarie A. Zeithaml, and Katherine N. Lemon. Reprinted with permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group.
Katherine Lemon is assistant professor of marketing at the Carroll School of Management, Boston College. She can be reached at email@example.com. Roland Rust is the David Bruce Smith Chair in Marketing and director of the Center for E-Service at the R. H. Smith School of Business at the University of Maryland. Valarie Zeithaml is Roy and Alice H. Richards Bicentennial Professor and Area Chair of Marketing at the Kenan-Flagler School of Business at the University of North Carolina.