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Customer Equity - What's a Customer Worth?

Attention analysts! In Customer Equity: Building and Managing Relationships as Valuable Assets lies a new standard for measuring company success. Standard marketing dogma now centers on brand building or mass marketing. The customer equity approach tosses out this old thinking and looks at how existing data and technologies give us a new way of looking at the customer. The authors have created a framework for managing and measuring customers as a company's financial assets.

Customer Equity

How can an asset as wispy as customer value be measured? And should it be measured? In this excerpt, the authors explain not only how it can be done, but why it must be done.

There are two fundamental reasons for companies to move to a customer equity approach. First, several critical new technologies are converging to make customer asset-based management feasible. Second, these same technological capabilities, along with other changes in how markets work in today's turbulent business environment, are making it a requirement to manage marketing to maximize the value of a company's customer assets.

Because you can
Customer equity management is now possible because of intersecting advances in four areas: affordable information technology, low-cost communications, sophisticated statistical modeling, and flexible fulfillment.

Customer equity depends on technology because it requires the ability to build and use databases of customer purchases. Computing costs are continuing to decline to the point at which small businesses can have computing power sufficient to manage large databases at a fraction of what it would have cost in the 1980s. The ability to work with large, sophisticated databases is improving; software to manage customer relationships now exists, and its capabilities are expanding.

Now companies can predict future consumer behavior using the best possible indicator—current behavior.
—Blattberg, Getz, & Thomas

The rapid growth of the Internet as a medium for targeted communication allows firms to reach and communicate with customers at less than one-hundredth of the cost of more traditional techniques. Using direct marketing through the mail costs anywhere from $400 to $1,000 per 1,000 mailings. Communication through the Internet to customers equipped with e-mail is virtually free, and the speed of transmission allows customers to retrieve communications almost instantaneously. Firms have access to their preferred customers at costs that early direct marketers could only dream about, combined with unprecedented ability to tailor messages to individual recipients and provide electronic coupons to selected prospects. Furthermore, software is being created using artificial intelligence to develop automated two-way communications with customers based on their specific responses to queries.

In addition, technologies ranging from checkout scanning to Internet cookies are making it increasingly possible to track customers' buying behaviors. Now companies can predict future consumer behavior using the best possible indicator: current behavior. Instead of relying on focus groups and surveys to ask customers what they want (or think they want), firms can examine actual purchase histories. As more and more online customers grant companies permission to use their personal data in return for anticipating needs, this trend toward greater availability of behavioral data should only accelerate.

Companies must use advanced analytical tools to turn these data into insights. Techniques such as collaborative filtering track customer buying patterns and make recommendations about which types of books, movies, or other products the customer might want to purchase. Modeling methods for determining customers' sensitivity to price and responsiveness to offers, central to improving the efficiency of marketing offers, have become both more sophisticated and more available.

Because you must
Table 1-1 highlights several disruptive changes to the world of marketing that make customer equity management a necessity, along with the underlying trends that drive these disruptions.

Information-based targeted marketing is becoming more efficient and effective than blanketed mass marketing.

  • As one result, mass marketing strategies that achieve targeted profits by counting on more-profitable customers to subsidize less profitable ones will fail as the more attractive customers are stolen away by competitors' targeted acquisition efforts.
  • As customers gain near-perfect information on their alternatives, switching barriers are dropping dramatically.
  • Companies that use the deluge of available data on customer purchase behavior are acquiring new customers, retaining existing customers, and cross-selling more effectively than those who do not, and can link their insights with cost data to do so efficiently as well.
  • Companies can no longer depend on orderly vertical channel systems to control customers' buying behaviors.
  • In a world characterized by these five forces, companies that understand the asset value of each customer, and that tailor their marketing efforts (and their costs) to acquire and sustain the highest-value assets, will trump less-focused mass marketers.

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    Excerpted with permission from Customer Equity: Building and Managing Relationships as Valuable Assets, Harvard Business School Press, 2001.

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    Customer Equity Approaches