Customer Equity is defined as the total of the discounted lifetime values of the organization’s customer. In short, more loyal the customers, higher is the customer equity. There are three drivers of customer equity namely: Value equity, Brand Equity, and Relationship equity.
Customer equity can be calculated using this simple formula:
Where LTV is the Lifetime Customer Value: This is the sum total of the money you expect to make from a customer. This includes cross selling and upselling.
Viral Coefficient is the number of users or referrals a user can generate for you.
To know customer equity is important because it gives you an empirical way of defining how much each customer is worth. By adding in the viral co-coefficient one can know the value a customer brings to the table over the lifetime.
The concept of customer equity encourages the organizations to consider their customers as one of the major sources of their cash flow, in present and in the future. This is the key goal of the marketing strategy that an organization follows.
Today the product life cycle is small and the customers have a variety of choices. Therefore to maintain customer loyalty the brands need to get innovative and work endlessly towards improving their customer experience.
There are various models that talk about customer equity. But these models don’t clearly explain the attributes that are involved or the components that make up for customer equity. Let us first understand a simple model that will help you understand the concept with clarity.
Now that we understand what customer equity is and what are its components, we now need to understand what is the customer equity model and how the customers and organizations perceive it.
From the organization’s point of view, any organization would start from the base i.e from customer attraction. Customer attraction is a process, where the brand communicates with the customers and makes them aware of their presence.
Once the customers know about the brand and when they have made a few purchases, customer retention becomes the top priority for the brand (if any organization or brand likes think otherwise, they are in deep trouble). Brand retention is only possible if the brand provides excellent customer experience.
From the customer’s semblance, the first question they would ask themselves is, if they want to be a customer of that brand or not. If all factors of the brand satisfy them then the buyer community slowly transforms itself to become a customer. Customer satisfaction is a crucial factor that helps brands retain their customers.
Since brand equity is a component of customer equity and the model emphasizes the importance of it, let us comprehend what brand equity is.
Brand equity refers to the total value of the brand as an asset. It is the sum total of the assets and the liability attached to a brand. Brand equity determines the customer’s relationship with the brand. Brand equity is reflected in the way the customers react to the brand.
With so many brands and choices, the consumer today buy what they need not what brands provide to them. This has not only made the brand as one of the most important assets of the company but has also made marketers to include strategies to build a strong positive brand equity.
There are 3 main components of brand equity: Brand awareness, brand loyalty, brand association.
As mentioned earlier customer equity is the lifetime value of all customers and brand equity is the strength and the value of the brand that decides its worth.
Customer equity and brand equity have two things in common:
However, conceptually customer equity and brand equity are different
Although not recommended, these two can stand apart and that’s where the distinctive differences can be seen.
