Customer Equity and Net Promoter Score (NPS)

How increase in NPS will increase your valuation!

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How increase in NPS will increase your valuation!

Customer equity is defined as the cumulative value generated by a customer for your business. Not to be confused with the amount a customer has paid you - this is the value or “equity” a particular customer has to your business. Equity - meaning future value after taking into account acquisition and retention costs.

Customer Equity = Viral Coeffecient x CLV - (Acquisition + Retention)

If you are not in the SaaS world, we will dissect both these acronyms:
Customer Lifetime Value (CLV) : Customer Lifetime Value (CLV) is the sum total of money you predict to make from a customer. This includes cross-selling and upselling.
Viral Coefficient : Viral Coefficient is the number of users or referrals a user can generate for you.

In most cases, the acquisition and retention costs associated with a customer is exactly the same, and in many cases, you really can’t spend too much time reducing them. In effect, we can say - Customer Equity is the total future cash flow value of a customer. This includes their propensity to recommend and use your product or service and also includes the length of time they stick around as customer or become a repeat-buyer. The longer a customer sticks around, the higher the probability of them recommending your products and services to their colleagues and friends. The longer a customer sticks around, the higher the probability of them buying a lateral product. This is why loyalty has a direct impact on future cash flow!

Net Promoter Score (NPS) intrinsically measures both - the viral index as well as LTV intrinsically. If you are getting low NPS scores - the odds of loyalty, and hence LTV, go down. This means the Customer Equity is directly proportional to NPS - and as such increase in NPS will automatically increase customer equity.

Why is Customer Equity Important?

Customer equity gives you an empirical way of defining how much each customer is worth - from an equity standpoint. LTV already measures this - but it typically does not include the viral co-efficient. By adding in the viral co-coefficient - we are modeling in the net value a customer brings to the table over the lifetime.

NPS - What is it and how it measures loyalty?

NPS’s key measurement is the propensity for a customer to recommend. The argument is that, if customers are going to recommend you - they will typically be loyal to you. Hence this is used as a measure of loyalty.

Customer Equity Vs. Brand Equity

Customer equity is more correlated to the valuation and future cash flow - whereas Brand Equity is an attempt to measure the value of a brand - when making a purchasing decision. They are two orthogonal metrics and are generally not used together.

Measuring NPS or any measurement model that measures loyalty is important - not only for retention and churn, but also to empirically value and increase the valuation of your business. Ultimately the valuation of all business are based on their ability to generate future cash flow!

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