Customer Equity – University Marketing Blog

Some measurements of customer value such as customer lifetime value (CLV) and customer profit (CP) aim to measure the direct economic value of a customer (Kumar, 2018).

As many of us understand, the customer’s value goes far beyond this with their indirect value they provide through their engagement with the brand and those around them.

The indirect value of a customer is generated through activities such as making recommendations (word-of-mouth), influencing others’ purchase decisions, and providing insights and feedback to a company (Kumar, 2018).

The TRUE overall value of a customer must take into account both the direct and indirect activities for the following reason:

A customer who frequently buys a product such as shampoo will have a far greater direct value to the company. But a customer who may infrequently buy the shampoo but influences 5 or more of their friends to buy the shampoo will produce a far greater indirect value and potentially overall value than the first customer.

Understandably, calculating these indirect values of a customer is an extremely complex task and is why measurements such as CLV and CP avoid accounting for them (Kumar, 2018).

References:

Kumar, V (2018) “A theory of customer valuation: Concepts, metrics, strategy, and implementation” Journal of Marketing, 82 (January), 1-19.

In the previous blog, customer profit was discussed which is relevant to the past tense of customer’s behaviour. Customer Lifetime Value (CLV) is concerned with “the present value of the future cash flows attributed to the customer relationship” (Bendle et al., 2016, p159).

Essentially, by gathering information about a customer’s behaviours we can reflect on the information and cash flows associated with the customer to provide an insight and estimation of the future value they might bring to the company.

Calculating CLV becomes extremely simple in contractual situations given the predetermined nature of the contract’s agreements but can provide a good element to planning for future cash flow.

The difference between CLV and Customer Equity (CE) is that CLV is concerned with a customer on an individual level while CE provides a measurement of the value of all customers (Bendle et al., 2016).

CE is another element that can increase the accuracy of financial standings and would, at the bare minimum, compliment the current processes in nearly any organisation.

References:

Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey

Tag: Customer Equity

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