Marketing Thought

The Origins Of Customer Equity

Customer equity is a concept that seems to have had its day in marketing. It arose, and it seems to me somewhat went away, relatively quickly. A 1996 article on the Harvard Business Review by Robert Blattberg and John Deighton lays out the idea of managing by a customer equity test. In many ways, this helps show us the origins of customer equity. There are noticeable flaws in the approach that the authors suggest. Still, I feel they had a very important basic insight. I hope we still can take the basic strength of their ideas while tidying up the bits that 25 years on don’t seem perfect. Their central insight can make a bit of a comeback if not the terminology.

The Central Insight

Despite the flaws of the article I want to ensure that the reader understands that the basic idea is powerful. They were hoping to facilitate a move from thinking about a product, or a single sale, to considering an entire customer relationship. The idea was to focus marketers on increasing the value of customer relationships. They also wanted to bring greater rigor to marketing budgeting determining how to allocate funds to acquisition and retention.

Problems From The Origins Of Customer Equity

There are, however, a number of significant problems in the article. I, for one, think they are a little vague in explaining the idea of customer equity. The later mess that marketing gets into in respect of acquisition costs and CLV (customer lifetime value) seems to have already been present in their initial thinking. We have the terms ‘customer value in the first year’ and ‘customer equity’ both used without being properly defined. Every time I revisit this literature I can’t get over what a mess definitions of customer equity are. Defining customer equity seems pretty fundamental to managing by it.

They do mention that managers can get into the analysis of different customer segments. This I think protects them from some later criticism focused on the work in this area that says it ignores customer heterogeneity. That said, the authors are a little blasé about how simple things are to implement in the real world. For instance, they skirt the problems of up-selling and cost allocation by saying:

Amending the method later to accommodate refinements will be a straightforward task.

Blattberg and Deighton, 1996

Sadly it really isn’t that easy. One of the problems I would say customer equity had was that it never sorted the measurement side out. It was all very well talking about a customer scorecard but the accounting scorecards used in firms still focused on products and transactions. I don’t want to be too critical, this was early work, but this article didn’t really change the world in the way we might have hoped. It didn’t really give a new solution to replace the old flawed system.

Interest In Customer Equity Has Not Gripped World As One Might Have Hoped (Google Trends Analysis On Keyword “Customer Equity” 04/10/21)

Decision Making In Firms

Finally, the method they outline is interesting but raises lots of questions about decision-making in firms. Not least the idea of optimization as a process. Furthermore, the advice they generate from their thinking — separate acquisition and retention — seems pretty odd to me. All in all, I believe if one rewrote this article 25 years on a few different choices would be made. (To be fair though what paper wouldn’t be different 25 years on?)

Contribution Is What Matters

I don’t want to finish on a negative note given the importance of the idea. Instead, I would like to say that I was impressed by how clear the authors were on the use of contribution in the measurement of customer value. (I confess I don’t think I have always been as clear myself). These authors had an important perspective and I am disappointed that we, as a discipline, didn’t take this idea as far we might have. As the authors say, they aim to “put the customer at the forefront of [managers’] strategic thinking” (Blattberg and Deighton, 1996). A worthy goal. Let us bring the ideas back from the dead. (Although I’m not sure the badly defined term customer equity needs to be used when that happens. Customer asset is a much stronger concept to my mind).

For more on customer lifetime value see here and here and on customer equity see here.

Read: Robert C. Blattberg and john Deighton, 1996, Manage Marketing By The Customer Equity Test, Harvard Business Review, July-August.

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