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A Customer Equity Balance Sheet

The book, Customer Equity, is a bit of a classic in the marketing field. It is an early attempt to refocus companies from products to customers, specifically through measurement of the value of the customer base. The authors introduce a lot of interesting new ideas. They have many admirably big swings and, to be honest, a few misses. One of the most interesting (and challenging) is the customer equity balance sheet.

Customer (Relationships) As A Financial Asset

The authors — Robert C. Blattberg, Gary Getz, and Jacquelyn Thomas — grab the reader straight off. It is a powerful statement of intent.

The customer is a financial asset that companies and organizations should measure, manage, and maximize just like any other asset.

Balttberg, Getz, and Thomas, 2000, page 3

This is interesting stuff. We know what they are trying to do. They want managers to take customers seriously as the lifeblood of a firm. If you monitoring the value of your stationary supplies but not your customers something isn’t going great in your approach to measurement. They note that measurement is the core of their idea. Some other work in the customer equity area becomes a bit too generic strategy for my liking. These authors see the problem to be solved as primarily about the measurement. I agree.

Computing Customer Equity

There is much to admire in the book but it gets a bit unclear quickly. This is before most of the work on customer lifetime value (CLV) so the idea of customer equity as the sum of CLVs is not as widely held. When they introduce their customer equity formula they miss a great opportunity to be clear. They show a lot of Greek letters and subscripts but do a limited job of explaining their choices.

They seem to have acquisition costs in there. This is a challenge as they are calculating something they want to be an asset. After an asset is purchased its costs are sunk. Basically the sacrifice you made for the acquisition is already taken into account. (For example, your cash assets may have been reduced or alternatively you may have increased liabilities if you borrowed to recruit the customer). Thus, the choices they make for their formula make it impossible to achieve what they want to do. They cannot show the value of the customer asset.

The customer equity metric they create is thus a real challenge. They have created a number which it isn’t exactly clear what it is for or who should use it. It certainly isn’t a measure of the value of a financial asset.

Customer Equity Accounting

Despite the challenges I was really impressed by how wide they strove to make the book. To give some appeal to a diverse range of managers who might want to advance the ideas of customers as assets. To this end they have an entire section on customer equity accounting. I really appreciated that.

Still to my mind it didn’t really work and it somewhat exposures the challenges in their entire conceptualization. The authors clearly want to get to some sort of an idea of the profit on customers from when the customer was a prospect to the end of the relationship. (As an aside I love the clear statement — “Prospects are not customers..” (Blattberg, Getz, and Thomas, 2000, page 52. It is worth remembering this when doing CLV calculations).

Unfortunately the desire to show a profit figure on a relationship gets them into trouble. They want to produce a customer balance sheet but the accounting idea of a balance sheet isn’t going to fit with what what they want to do, i.e. show a profit. Faced with a problem the authors junk basic accounting ideas. In doing so, I believe, they destroyed any chance of making progress with accountants who surely have to be involved in improving firm measurement systems.

A Customer Equity Balance Sheet

The fact that the authors’ ideas don’t fit with current accounting practice can be seen pretty clearly. They introduce the idea of a customer equity balance sheet. This would be a great thing to have. Unfortunately what they do can’t really be said to produce a balance sheet. I don’t really know why they did what they did.

The nature of a balance sheet is that it is a snapshot at any given time, e.g., December 31, 2020. A balance sheet does not cover a period it covers a precise point in time. (It is often explained as measuring ‘stocks’ of things at a given point). Another statement, the profit and loss, covers a period between two balance sheets. (It shows ‘flows’ that account for changes in the balance sheet over the period). If you want to show movement you should look to the profit and loss statement. Unfortunately they blend everything together into a single confusing statement.

The Balance Sheet Is A Snapshot It Cannot Show Profit Over A Period

You Can’t Have A Period In A Balance Sheet As It Is A Single Point In Time

The authors’ balance sheets (table 8.3, 8.6 and 8.7) introduce the idea of profits in a period. The balance sheet though does not cover a period. You can’t really have the idea of current and future periods in a balance sheet, which is what the authors try. This is because a balance sheet covers a single point in time. There is no current period in a single point in time, it is all just ‘now’.

When discussing the “balance sheet” they say that “New customer current profit” (which is a customer equity balance sheet item) “may be viewed as liability” (Blattberg, Getz, Thomas, 2000, page 163). This doesn’t make any sense. How could a profitable customer whose cost has already been paid be a liability? Isn’t the point of the whole customer equity idea to show that customers are assets? (And don’t get me started on why the term equity was used. For more see here).

A Valiant Attempt

As an accountant from a past career (FCCA) I have to say that this is not at all convincing. If I was a CFO and picked this up book I’d think it was completely weird. Measurement is at the heart of the idea and the measures are simply confusing.

That said, I must confess to a lot of admiration for what they were trying to do. You have to appreciate the bold attempt. This is not just another generic marketing book full of fun anecdotes but little substance. This is a serious attempt to make a difference. I am a little disappointed that relatively few scholars ran with improving the idea of accounting for customers. The massive potential is clearly there in this work. You just have to see past the bits that don’t work.

For more on customer lifetime value see here.

Read: Robert C. Blattberg, Gary Getz, and Jacquelyn Thomas, 2001, Customer Equity, Harvard Business School Publishing

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