Managing Customer Equity

Trends in Marketing thinking and practice From make-and-sell marketing to sense-andrespond marketing. From focusing on customer attraction to focusing on customer retention From pursuing market share to pursuing customer share From marketing monologue to customer dialogue.
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Trends in Marketing thinking and practice

From mass marketing to customized marketing From owning assets to owning brands. From operating in the marketplace to operating in cyberspace. From single-channel marketing to multichannel marketing. From product-centric marketing to customercentric marketing.
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Customer Equity
Customer equity is defined as the total of the discounted lifetime value of all the firms customers In other words, a firm is only as good as its customers think it will be the next time they will do business with that firm.
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Three Drivers of Customer Equity

Value Equity Brand Equity Retention Equity

Three Drivers of Customer Equity

Value Equity : the customer's objective evaluation of the firm offerings Brand Equity : the customer's subjective view of the firm and its offerings Retention Equity : the customer's view of the strength of the relationship between the customer and the firm.
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Value Equity
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Value Equity is the customer's objective assessment of the utility of a brand, based on perceptions of what is given up for what is received.

Drivers of Value Equity

Quality :How does the customer evaluate the quality of the firm's offerings? Price : How attractive is the price? Convenience : How convenient is it to do business with the firm?

Brand Equity

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 Brand Equity is the customer's subjective and intangible assessment of the brand, above and beyond its objectively perceived value. This evaluation is shaped by the firm's marketing strategy and tactics and is influenced by the customer through life experiences and associations with the brand.

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The Role of the Brand in Building Customer Equity

Builds awareness and attracts customers Build emotional connections with customers Reminds customers to repurchase
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Drivers of Brand Equity

customer brand awareness customer attitude toward the brand customer perception of brand ethics

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Retention Equity

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 Retention Equity is the tendency of the customer to stick with the brand, above and beyond the customer's objective and subjective assessments of the brand. It focuses on the relationship between the customer and the' firm, based upon the actions taken by the firm and by the customer to establish, build, and maintain a relationship. 15

Retention equity considers questions such as:

Does the customer benefit from relationship with the firm? Does the firm benefit from its relationship with the customer? Does the customer stand to lose if the relationship is discontinued?
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Drivers of Retention Equity

Loyalty programs (frequent purchase/reward programs) Special recognition and treatment programs Affinity (emotional connection) programs Community programs Knowledge-building programs (learning relationship or structural bonds)
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Why loyal customer Are More Profitable

Price Prem ium Referals

Annual Customer Profit

Cost Saving

Revenue Growth

Base Profit Acquisition Cost 0 1 2 3 4 5 6 7

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Customer Life Cycle

Customer Equity
First Time and Early Repeat Buyers Prospects

Core Customers

Defectors

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Impact of a 5-Percentage-Point Increase in Retention Rate on Customer Equity

Source: Frederick F. Reichheld and Thomas Teal, 1996

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Customer Life Cycle Profit Patterns

A u to S e rv ic e

A u to In s u ra n c e
1 50 1 00 50 0 -5 0 -1 0 0 -1 5 0 -2 0 0 -2 5 0 -3 0 0

-5 0
1 2

75

90

100

100 90 80 70 60 50 40 30 20 10 0

88 70 25 24

88

-2 5 0

In d u s tria l D is trib u tio n

C re d it C a rd
100 80 60 40 20 0 -2 0 -4 0 -6 0 -8 0

66 40
` 1 2 3

72

79

87

180 160 140 120 100 80 60 40 20 0

99 45

121

144

168

Source: Frederick F. Reichheld and Thomas Teal, 1996

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Customer Life Cycle Profit Patterns

Life Insurance
200 0 -200 -400 -600 -800 -1000 -1200 1 2

-76
3

-29
4

13
5

31
6

-175

-1125

Industrial Laundry
300 250 200 150 100 50 0 1 2 3 4 5

144

166

192

222

256

Source: Frederick F. Reichheld and Thomas Teal, 1996

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Other approach to customer equity Acquisition Retention Add-on selling

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Components of Customer Equity

Acquisition

Retention

Add-on Selling

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Marketing Mix by Stage in CLC

Prospects Advertising Awareness First time buyers
Reinforcement

Early Repeat Buyers

Reinforcement

Core Customer Personal

Defectors Apology
Closer, Personal Service

Sales Force Closers Pricing Promotion Product Offerings Customer Service Low Trial Lead Limited

Personal Service Personal Service Personal Service

Moderate

Increasing

Higher Reward Add-on Personal Attention

Higher Apology Broad Problemfocused

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Similar to Trial Limited Second Lead Problemfocused Add-on Problemfocused

How Marketing Mix Affects Components of Customer Equity

Acquisition Retention Add-on Selling

Advertising Copy Media Selection Customer Service Product Quality

Awareness

Direct Customer Communication Data base Marketing

Affinity with the firm

Mass Media cost effective

Data base Marketing

Affects word of mouth A primary vehicle for creating retention Affects word of mouth Product Reliability creates retention

Increase response rates for add-on offers Increase response rates for add-on offers

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How Marketing Mix Affects Components of Customer Equity

Acquisition Product Positioning Retention Add-on Selling Creates affinity with customer base Affect size of target High retention occurs markets; Creates when positioning and customer expectation delivery of product match

Promotion

Generates trial among Increase retention Increase response rates potential customers when unique rewards to add-on offers are offered to best customer Third party channels Third party channels Direct channel makes it can increase customer decrease retention rate easier to target acquisition because the channel customers owns the customer

Channels of Distribution

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Customer Acquisition
Rule 1: Acquire any customer as long as the discounted future value of the customer exceeds the acquisition cost for that customers Rule 2: When you broaden the acquisition effort, be prepared for lower response rates Rule 3: The greater its profits from retention, the greater a firms customer acquisition investment should be Rule 4: The higher the percentage of the initial acquisition investment that a firm recovers in the first period, the greater its acquisition investment should be
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Acquisition Steps
Identify Target Customers Build awareness and brand postioning Market Penetration Pricing Trials Experiences and Satisfaction Pricing after trial and creating long-term value to customers
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Acquisition Steps
Identify Target Customers
Individual Customer Targeting - First degree targeting: profiling and regression score Segmented Targeting Second degree targeting: cluster Self-selection targeting third degree targeting: marketing offer

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Tools for Acquisition

Data Base Marketing
Type of Information Purchasing Potential Customer Characteristic Customer Equity Customer Organization Structure Key Purchasing Influences Competitors offers Customer Attitude Sales Force Marketing Research Source Sales Force Marketing Research Sales Force Marketing Research Accounting Dept. Sales Forces

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Tools for Acquisition

Data analysis
Calculating the Acquisition rate Calculating retention rate and defector rate Evaluating opportunity for add-on selling Understanding customers response to firms marketing programs Analysing and following customers purchasing pattern Predicting customers future purchasing trends Developing effective sales strategy

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Tools for Acquisition

Building customer Profiling Building customer segmentation profile Regression analysis

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Customer Retention
For short purchasing cycle product : customers return in next purchasing cycle For long purchasing cycle product: customers show willingness to repurchase next time (Repurchase intention)

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Retention Misunderstanding
Company must aim at 100% customer retention Maximum retention rate means maximum profit

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Customer Retention
Trap of customer satisfaction Expectation vs. Delivery Value Uniqueness of the offers Loyalty mechanism Ease of purchase
Product availability Purchasing convenience

Customer service Exit barriers

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Tools for Retention

Data base Marketing
Type of Information Customer Complain Sales information Communication Delivery and transportation Products Invoice and Payment Third party channels Source Customer service Accounting Marketing and sales Logistic Quality Control Accounting Accounting

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Tools for Retention

Measurement
Number of Existing customer Number of Defector Retention rate Defector Rate

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Customer Equity Balance sheet

2007 Revenue Profit Total number of customer Number of newly acquired customers Number of retained customers Average order size (value) of a first time buyer Average order size (value) of a retained customer Acquisition expense for one customer Retention expense for one customer 2008 2009

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Customer Equity Balance sheet

2007 Profit from first time buyers Projected Future profit from first time byers Profit from retained buyers Projected Future profit from retained byers Total customer equity 2008 2009

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Top Class Gym

Top Class Gym is a new, high class gym, located in a building in District 1 with a total area of 800 m2. The rent is 16USD/m2/month. This rent will hold unchanged for the first two years and will subject to 10% increase each year from 3rd year. The total invested capital for equipments and decoration is 1.5 millions USD. In average, the equipments will be depreciated in 5 years (straight line depreciation). The owner of the Gym is now looking for outstanding Marketing Manager with excellent Marketing Plan to Market Top Class Gym services to target customers.
Work with your teammates to:
Identify Target customers Setting Marketing Objectives for the firt 3 months, 6 months, 1 year, and 2 year. Outline your action plans to meet the above objectives
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