Three key dimensions of Customer Equity

It is interesting that there is so much conversation and debate about customer equity and how to measure it. It becomes even more interesting when you ask your corporate customer the question, "Why do you want to measure Customer Equity?" 

Before we get to the point of this blog, it might be useful to reflect on the 'technical' relationship between brand, the sale, customer lifetime value and customer equity - see figure 1: 

The brand is essentially the arrowhead of the marketing value chain. Brand ultimately aims to create a desire within the target market to interact with it, hopefully culminating in a sale. Once you have acquired a customer and achieved that first sale, customer lifetime value is then an estimate of the future sales you are likely to generate from that customer, over a given timeframe. The sum of all customer lifetime value for every customer makes up your customer equity. Please carefully note the word 'likely' and the phrase 'over a given timeframe' ... more on this later.

Figure 1: The relationship between brand and the sale, and ultimately profitability. Source: Guy Pearce, from a presentation to Brand in Banking and Finance, September 2011, itself based on a presentation made to the academic Academy of Marketing in Birmingham(UK) in 2008.

Given that introduction, note that without a proper answer to the opening question, the true nature of Customer Equity will always be foreign. 

For starters, it is important to note that the concept of customer equity is not all about the measure. It is in essence about understanding what a customer is likely to buy from you in future in order to put you in a better position to fine-tune your marketing to ensure that your customer equity is indeed realised. Note that at this point, no measure has been introduced yet, yet with this simple information, you already have significantly more insight from which to drive your marketing strategies than without it, which will most certainly result in enhanced sales if you put it into practice.

If this is so, then what's the big deal about measuring customer equity anyway? 

Good point! I think that too much emphasis has been placed on customer equity as a measure rather than on customer equity as a marketing concept. Given this though, if I measure what a customer is likely to buy from me over a given future timeframe, then I have an ability to determine what my most important customers will be in future, and as a result, I can fine-tune everything from my overall marketing strategies to my 1-to-1 strategies, determine VIP marketing strategies and all sorts of other fun and creative marketing tactics!   

So what's the deal on the word 'likely' and the phrase 'over a given timeframe' as highlighted above? 

Likely: Note that an estimate of what a customer will buy from you is not an exact science. It is based on probabilities founded on an assessment of historical purchasing data, how the market is evolving, and how your products are evolving relative to competitors, and indeed, much more! Therefore it is nonsense to say that the customer lifetime value of customer X over the next three years is $1000, unless you know for certain that a customer will buy what you think he/she will. It is therefore much better to say that the customer lifetime value of customer X over the next three years is between $253 and $1185. This estimation itself is a little more statistical, but then since we are talking about likelihood, we are talking about probability after all! Finally, in the same way, a point measure of customer equity, the sum of the total customer lifetime value, is also meaningless.

Over a given timeframe: There's no point in estimating what a customer is likely to buy from you over ten years, or even over five years. The world is just too volatile for that, whether in terms of product innovation, customer preferences, or changes in disposable income. Indeed, who knows whether you will still be in business for that long? As a result, I prefer not to estimate customer equity much beyond one year, and to align those findings with your annual marketing strategy. Sometimes I include an estimate to two years, but there's no point to that if there's no alignment with a marketing plan!  

This blog is already getting a bit long, so let me round off by getting back to the title of this article, "The three key dimensions of Customer Equity"

1. Customer Equity is forward looking

Why would you want to know what a customer might have bought from you? The only lessons in that concern lost opportunity! Yep, customer equity is about tomorrow - you have more control over your future than over your past!

2. Customer Equity is a measure of what a customer is likely to buy IN A GIVEN TIMEFRAME

This important point was covered in an earlier paragraph. Depending on the market (industrial marketing being a possible exception), there's not much point in estimating customer equity much beyond two years.

3. Customer Equity is best not seen as a point measure, but as a range

Customer equity is about probability, about the likelihood that a customer will buy something from you in future. Given that it's about probability, it's almost meaningless to publish a single figure for customer equity. That's almost the same as saying the next roll of the dice will be a three, when it could actually be anything from a one to a six!

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An aside on customer lifetime value: I'm not sure the concept of measuring the sales likely to come over the lifetime of the customer is a feasible construct in an economic environment characterised by disequilibrium, given how many things can change during the life of the customer, and also of the service provider, during a 'lifetime', but that's perhaps a topic for a different blog article.