CRM: Customer Equity and Company Valuation

It's quite simple, it is customers that ensure the long term sustainability of a business. Products may come and go, but customers remain. Quite simply, a significant determinant of the long term value of a company is customer equity, not considering the value of assets, intellectual property and R&D competencies for example. 


Note, this article builds on a previous article, CRM: Customer Lifetime Value, a critical Customer Equity input, which itself builds on a previous article, So how do you calculate brand equity anyway?. 


From a company perspective, customers, being intangible assets, need to be measured, managed and maximised in order to optimise business performance. From a customer perspective though, value will be generated for the company for as long as the company meets their needs. I probably don't need to explain how critical the right types of customer value propositions are to this audience! Again, there's a topic for another article! Indeed, it may be worthwhile expressing it differently: As long as you continue to give customers what they want, value will be created for both the customer, and consequently for the company, subject to good management practice of course.

Customer Equity may be defined as the sum of all Customer Lifetime Value in company. Since the market value of a company is ultimately determined by the sum of its appropriately discounted future cash flows, and since it is customers that generate trading (vs non-trading investment income), it is easy to see why customer equity is a root of company valuation! 

The above statement may surprise both corporate financiers and marketers alike, both no doubt intent on protecting the independence of their turf. Note however, that EVERYTHING in a company is inter-related in terms of what the company has set out to achieve. Marketers need to understand corporate finance as much as the corporate financiers need to understand where the money in the business actually comes from! Oh, how I hate silo-based organisational design! But I digress. 


As cash flows are generated by customers acquiring and using products and services, and as Customer Lifetime Values are calculated by appropriately discounting these cash flows, it begins to become apparent that there is indeed a link between Customer Lifetime Value and the value of the business. Indeed, the valuation of the customer base, i.e. calculating Customer Equity, has been becoming increasingly important in recent times as Merger and Acquisitions mean the acquisition of new customer bases, at least from a marketing perspective. Indeed, the motivation for M&A transactions in the tertiary economic sector is usually based on the assumption that the acquirer can leverage the customer base of the acquiree more profitably. In the case of primary and secondary sectors though, the value comes in an improved utilisation of the operating assets - such as plant and equipment.

As a broad framework for evaluating return on marketing (wow, yet another topic to write about one day), an assessment of Customer Equity is key. Indeed, we can now understand why the increased value of a company exists in projects aimed at increasing Customer Equity. Indeed, I think Customer Equity terms of reference and assessments should be used as a basis of a mechanism to trade off competing marketing strategies such as advertising or service quality, for example.

So, we have a better understanding of customer equity now, and it's link to company valuation, but what are its levers? In other words, how can we drive increased customer equity?

• Well, first and foremost, the more a customer perceives value in the offerings of a company, in other words, the greater the customer value proposition, the greater the potential to increase customer equity
• Secondly, the more positive the image and perceptions the customer has of the company over that of its competitors, the greater the potential to increase customer equity. 

And here's yet another topic to write about - the extraordinary power of true socio-economic involvement and environmental concern (and I'm talking way beyond mere arms-length corporate cash grants here) in terms of growing brand equity, but I digress yet again!

• And the third is brand stickiness. What reasons are you giving your customer to remain strongly associated with your brand over time, beyond the significantly old school practice of increasing lock-in? A customer should want to stay with you, not be forced to!

Each of these levers can be deconstructed into highly relevant KPAs in quite a number of different ways within the organisation, as the below illustration shows. Again, designing KRA's to optimise customer equity can be the subject of yet another article!

A conceptual model linking examples of CRM value drivers to the three levers of customer equity (Richards & Jones 2006:7)

Customers therefore choose to conduct business with a company because it offers better value, has stronger brand appeal, and because, heaven forbid, wanting to switch away from it should be painful for many more reasons than simply the nature of the product or service you offer! That's all great, but if your staff are not tuned to what needs to be done and how it all ties together, please note that nothing appropriate will happen!


Now in a sequence of three consecutive articles, I have covered brand equity, customer lifetime value and customer equity in some depth. The next article (of many, looking at the two ideas writing this blog spawned) will consider optimising customer equity.    


Again, there's enough detail here to work with. If you need help, you know where to find me!