Customers Equity
Arunashish Ghosh

The customer is a financial asset that companies and organizations should measure, manage and maximize like any other asset. This concept is known as the Customer Value or Customer Equity, which can also be expressed on the balance sheet of the enterprise. Customer Equity Management (CEM) is a dynamic, integrative marketing system that uses financial valuation techniques and data about the customers to optimize the acquisition of the, retention of and selling of additional products to a firm’s customers at a profit and that maximizes the value to the enterprise of customer relationship throughout its life cycle.

Customer life cycle:

CEM recognizes that customer-firm relationships, like all relationships, evolve over time. Customer’s relationships with the enterprise change, so do their expectations and behaviour. The concept of customer life cycle provides a framework for understanding and managing these differences.

1 PROSPECT
2 FIRST TIME BUYER AND EARLY REPEAT BUYERS.
3 CORE CUSTOMERS
4 CORE DEFECTORS.

The five stages of customer life cycle are:

 1) Prospects:

They are not yet customers, but they represent the potential value. During the prospect stage the customer develops an initial set of expectations about a product or a service. This is where enterprise’s ad campaign, promotional activities are predominant.

2) First Time Buyers:

These newly acquired customers usually have the lowest retention rates within a firm’s customer base. They need to learn whether the products and customer service levels meet their expectations. This stage is characterized by short purchase cycles and frequent repurchasing. This is the stage where the customer defection is at its highest.

3) Early Repeat Buyers:

These early repeat buyers are “still evaluating the relationship” in terms of add-on services, product satisfaction level (Palpable and non-palpable). These buyers may not be as vulnerable as first time buyers but still they have lower retention rates.

4) Core Customers:

The firm’s product or service meets their required specifications, perceived and also actual value. This stage has the highest retention rates and highest sales per customer.

5) Core Defectors:

At some point, core customers become willing to switch brands or products, showing the declining phase of the customer life cycle, this is due to new competing products or services. At this stage the customer is re-engineering his perceived value of his present product thus causing a decline in the customer life cycle which is been apparently reflected in the product life cycle.

The three major phases of Customer Equity Management (CEM): 

1)  Managing the customer acquisition:

            As it has been observed that the enterprise with high Retention rates loses customers and must continuously acquire new customer assets. Second, the more efficiently and effectively, a firm acquires customers; the larger the pool of affordably acquired assets whose retention and add-on selling value can be captured. Thirdly the customer-firm relationship developed during the acquisition stage strongly influences retention and add-on selling.      

2)   Customer Retention :- (The satisfaction trap approach) The success of the product has         major two aspects, the advantage and the benefit derived from it. While the advantage lies in the product and the enterprise, the benefits derived from the product rests on the customer, his psyche and his perceived value out of the product. The benefit part of the product has two facets like tangible benefits and intangible benefits derived by the customer from the product.

The various variables affecting the customer retention.

a) Customer expectations and delivered quality: Customers do not simply evaluate a product or service on its own merits. They evaluate it relative to their expectations. Through the market communications the enterprise sets customers expectations.

b) Value and value saturation:  Value is defined as the ratio of the quality delivered to the offered price. Value saturation is a point where there is no value addition to the product is possible or the value is constant. It is the point at which the customer life cycle starts declining with reference to the product. At this point the enterprise needs to re-engineer or innovate the product portfolio.

c) Product uniqueness: Identical products cause more of brand and product switching; this is caused due to no product differentiation. A unique product establishes a clear product positioning. Thus making it more visible and appealing to the targeted customer.

d) Customer service: It is an important factor in customer retention. It includes a proper coordinated functioning of the enterprise. Customer affinity becomes a critical part of the customer service and its satisfaction.

3) Customer Affinity (CA):

Customer Affinity is a combination of the relationship a customer has with an enterprise and the expertise that the customer believes the enterprise possesses. As CA increases, customers become more confident in firm’s ability to meet their needs for quality and service, and more willingly to try the firm’s new products. Therefore an enterprise with greater CA can expect higher response rates and can increase the number and type of its offers.

Customer Affinity leads to

a) It helps in product re-engineering and innovation at the value saturation stage with higher response rate.

b) The CA can lead to Add-on sales and high end solutions to the customers.

c) The CA leads to higher rate of repurchasing, thus adding to the balance sheet as higher Customer Equity.

 Brand Equity and Customer Equity

Customer Equity does not preclude developing strong brand, but for higher customer equity you need strong brands. Brand Equity is the driving force in the product differentiation. The reflection of product life cycle on the customer life cycle is basically determined by brand equity. Brand equity attracts the customers towards a certain brand when the customer is at his value saturation point of customer life cycle. Thus higher brand Equity leads to higher Customer Equity form we can formulate

Customer Equity = Brand Equity * Number of re-purchasing.

Thus Leveraging relationships across value chain can be achieved only with strong Brand and higher Customer Equity, reflecting lifetime customer value.

Authors:

Arunashish Ghosh
Prashant Kumar
PGDBM 2005
IMT Knowledge Forum
Corporate research and consultancy forum
Institute of management Technology, Ghaziabad
Mail us: knowledgeforum@imt.ac.in

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