Brand equity is fine. But what about customer equity?

I believe the current economic turmoil is not a recession or a depression. It is a crisis of transition. Transition in the very socio-economic structure that will change, at the deepest level, the way we relate to each other and on the surface level the way businesses and economies are run.
One of fundamental changes will be the disappearance of “valuation” as a key metric. By valuation I mean the hypothetical sum of money that a potential buyer would be willing to pay if he were to acquire a business lock, stock and barrel.
This is because the business of buying businesses will largely disappear. What will remain is the business of building business and running business profitably. Those of us old enough will recognize this as the way things were two decades ago.
The above seismic shift will see the re-emergence of a marketing fundamental.
Brands don’t create wealth. Customers do.
Attracting and keeping the highest-value customers is the cornerstone of a successful marketing program.
This was the thesis of an article published by Robert C. Blatberg & John Deighton titled “Managing Marketing by Customer Equity Test” in the July-August 1996 issue of Harvard Business Review.
In 1996 the article would have been trampled under the rush of salivating CEOs and investment bankers dreaming about ballooning brand valuations. I suspect that over the coming years reprint revenues for this article will see a spike.
Simply put customer equity is the net present value of all the customers of a business discounted for marketing rate of returns.
And once concepts like brand valuations are put aside, the simple objective of a business’s marketing program should be to maximize customer equity.
Maximizing customer equity has two distinct and equally important components. Maximizing customer equity contribution from customer acquisition and maximizing customer equity contribution from customer retention.
The second half of the twentieth century was the age of the mass media. And as a direct result of this, it was also the age of mass marketing.
Mass marketing by its very nature has difficulty in measuring effectiveness of its various components and in building predictive models.
However increasingly marketing is becoming interactive with pervasive individualized media like the Internet, mobile phones and increasingly RF id triggered shopper marketing programs.
In this new age of interactive marketing it is now possible to tightly define objectives of specific components of a marketing program and measure effectiveness.
This then allows the use of “Decision Calculus” to design marketing programs and budgets to maximize customer equity.
This decision calculus works on models built on tracking cost of acquisition against percentage of target population acquired and cost of retention against percentage of current customers retained.
The calculus is based on identifying the levels of acquisition and retention beyond which the marginal utility is negative.
Disruptive events can change this calculus dramatically.
For example in the early years of the courier business, the courier companies used regular scheduled flights and had no real control over delivery and thus customer satisfaction. In that scenario the acquisition yield curve was far better that the retention yield curve and most of the marketing budget was devoted to customer acquisition. However as big brands like Fedex acquired their own aircraft their control over customer satisfaction increased dramatically. This resulted in a change in retention yield curves and marketing budgets shifted in favour of customer retention.
In the case of IBM the shift of the market from high-value mainframes to low-value microcomputers prompted a shift in the yield curves in favour of customer acquisition, prompting a dramatic shift in marketing strategy.
It is my belief that increasingly as Interactive Marketing replaces Mass Marketing model based budgeting will become the norm and the key metric will be Customer Equity.
The concept of Customer Equity will also add a new metric to Marketing Audits.
The true measure of a company’s financial soundness lies not in its P&L account but in the analysis of its cash flows. The marketing soundness of a company does not lie in its market share or sales growth but in an analysis of the Customer Value Flow.
In conclusion it would be worthwhile for marketing thinkers in India to start examining the concept of Customer Equity closely and evaluate their current marketing strategy in the light of this old but newly relevant concept. It will be great preparation for the times to come.