Around the turn of the millennium, there was a lot of interest in the idea of customers as financially relevant. Thus work started to concentrate on the idea of customer equity. Customer equity was sometimes equated with the idea of customers as assets. This is an important aim (even though I have some measurement quibbles). Roland T. Rust, Valarie A. Zeithaml and Katherine N. Lemon tried to find out what drives customer equity.
Death Spirals
The authors start out with lots of details about how not concentrating on customers can lead to death spirals for firms. For example, you focus on products and cut an unprofitable item. This means you lose a customer because the item they needed wasn’t profitable. Losing the customer means you also lose the profits you were getting from them on the other more profitable items. Some of these previously profitable items may then become unprofitable. If you cut these items the process starts again. Eventually you don’t have any customers despite the fact you were only trying to improve profitability by weeding out underperforming products. This is a very compelling start to my mind. To my mind, this is possibly the best statement I have seen of ‘why’ for a customer focused approach.
Customer Equity
The authors look at how we might value customers. There is some interesting stuff in there but I would have liked some more detail. They tackle Customer Lifetime Value (CLV) using a different approach to the retention based approach of traditional database marketing. This has a lot of potential, especially for non-subscription/non-contractual goods where customers have a fuzzier relationship to the firm. These customers buy some of the products, don’t buy some, buy more, stop for a while etc…. This makes is much harder to see a customer relationship in such situation. The authors is a very interesting basic approach.
What Drives Customer Equity?
Most of the book, however, is dominated by an investigation of what drives customer equity. To be honest this was the least interesting bit to me. They identify three drives of customer equity: Value Equity, Brand Equity and Retention Equity. Yet conceptually these aren’t well tied into the idea of customer equity to my mind. There also isn’t a nice mapping between the drivers and any formula for customer equity. The linkage is through surveys which I don’t find 100% clear. (Maybe that says more about my obsessions than the idea though).
For example,
Value Equity represents the customer’s rational and objective evaluation of your offering – the “head” part of customer equity.
Rust, Zeithaml and Lemon, 2000, page 79
This is too imprecise for my liking. Whenever you mention ‘rational’ in a definition you have lost me given I have never seen a clear definition of rational in marketing. (See here for more). If you define something with something else that is vague then your definition must be vague.
To my mind their idea of customer equity should be a firm number. Therefore, we should be able to mathematically decompose what drives it. Later in the text the book becomes a more generic type marketing strategy book. The book contains more than its fair share of good advice but it had the opportunity to achieve more in terms of measurement. (Again that speaks a lot to what I care about but I’m not sure how representative I am).
Customer Alchemy
They do describe what to do with customers. How to increase their value etc.. They describe this as ‘customer alchemy’ which is pretty cool to my mind.
Overall this is a great contribution. Still I would suggest more is needed to really refocus marketing on customers and their financial value.
For more on CLV see here.
Read: Roland T. Rust, Valarie A. Zeithaml and Katherine N. Lemon (2000) Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy, The Free Press
