Customer Equity 2

8/6/2019 Customer Equity 2

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ManagingCustomer Equity


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Trends in Marketing thinking and practice

From mass marketingtocustomizedmarketing

From owning assets to owning brands.

From operating in the marketplace tooperating in cyberspace.

From single-channel marketingto

multichannel marketing. From product-centric marketingto customer-

centric marketing.


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Customer EquityCustomer Equity

Customer equity is defined as the

total of the discounted lifetime valueof all the firms customers

In other words, a firm is only as good

as its customers think it will be thenext time they will do business with

that firm.


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Three Drivers ofThree Drivers of

Customer EquityCustomer Equity

Value Equity

Brand Equity

Retention Equity


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Three Drivers of Customer EquityThree Drivers of Customer Equity

Value Equity : the customer's objective

evaluation of the firm offerings Brand Equity : the customer's subjective

view of the firm and its offerings

Retention Equity : the customer's view of

the strength of the relationship between

the customer and the firm.


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Value

Equity


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Value Equityis the customer'sobjective assessment of the utility of

a brand, based on perceptions of

what is given up for what is received.


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Quality :How does the customer

evaluate the quality of the firm's

offerings?

Price : How attractive is the price?

Convenience : How convenient is it to

do business with the firm?

Drivers of Value Equity


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Brand Equity


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Brand Equity is the customer's subjective

and intangible assessment of the brand,

above and beyond its objectivelyperceived value.

This evaluation is shaped by the firm's

marketing strategy and tactics and isinfluenced by the customer through life

experiences and associations with the

brand.


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Builds awareness and attractscustomers

Build emotional connections with

customers

Reminds customers to repurchase

The Role of the Brand inBuilding Customer Equity


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customer brand awareness

customer attitude toward the brand

customer perception of brand ethics

Drivers of Brand Equity


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Retention

Equity


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Retention Equity isthe tendency of thecustomer to stick with the brand, above

and beyond the customer's objective

and subjective assessments of thebrand.

It focuses on the relationship between

the customer and the' firm, based upon

the actions taken by the firm and by the

customer to establish, build, and

maintain a relationship.


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Does the customer benefit from relationship

with the firm?

Does the firm benefit from its relationship

with the customer? Does the customer stand to lose if the

relationship is discontinued?

Retention equity considers

questions such as:


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Loyalty programs (frequent purchase/reward

programs)

Special recognition and treatment programs

Affinity (emotional connection) programs

Community programs Knowledge-building programs (learning

relationship or structural bonds)

Drivers of Retention Equity


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Why loyal customer Are More Profitable

Price

Premium

Referals

Cost Saving

Revenue

Growth

Base Profit

0 1 2 3 4 5 6 7

Acquisition

Cost

Annua

lCustom

er

Profit


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Customer Life Cycle

Customer Equity

Prospects

0

First Time

and Early

RepeatBuyers

Core

Customers

Defectors


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Impact of a 5-Percentage-Point Increase in

Retention Rate on Customer Equity

Source: Frederick F. Reichheld and Thomas Teal, 1996


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Customer Life Cycle Profit Patterns

A u to I n s u r a

7 5 9 01 0

-2 5

-5 0

- 3 0 0

- 2 5 0

- 2 0 0

- 1 5 0

- 1 0 0

-5 0

0

5 0

1 0 0

1 5 0

1 2 3 4 5

Auto S erv i

2 5 2 4

7 0

8 8 8 8

0

10

20

30

40

50

60

70

8090

10 0

1 2 3 4 5

C re d it C

-

4 0

6 6 7 27 9

8 7

-

-8 0

-6 0

-4 0

-2 0

0

2 0

4 0

6 0

8 0

1 0 0

1 2 3 4 5 6

`

I nd u s t ri a l D i s tr ib

4 5

9 9

1 2 1

1 4

1 6

0

2 0

4 0

6 0

8 0

1 0 0

1 2 0

1 4 0

1 6 0

1 8 0

1 2 3 4 5



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Customer Life Cycle Profit Patterns

Life Insurance

-175

1331

-29-76

-1125-1200

-1000

-800

-600

-400

-200

0

200

1 2 3 4 5 6

Industrial Laundry

144166

192222

256

0

50

100

150

200

250

300

1 2 3 4 5



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Other approachOther approach

to customerto customer

equityequity

Acquisition

Retention

Add-on selling


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Components of Customer Equity

Add-onSelling

Retention

Acquisition


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How Marketing Mix Affects


Acquisition Retention Add-on Selling

AdvertisingCopy

Awareness Direct CustomerCommunication

Affinity with the firm

MediaSelection

Mass Media costeffective

Data base Marketing Data base Marketing

CustomerService

Affects word of mouth A primary vehicle forcreating retention

Increase response ratesfor add-on offers

ProductQuality

Affects word of mouth Product Reliabilitycreates retention

Increase response ratesfor add-on offers


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How Marketing Mix Affects


Acquisition Retention Add-on Selling

ProductPositioning

Affect size of targetmarkets; Createscustomer expectation

High retention occurswhen positioning anddelivery of productmatch

Creates affinity withcustomer base

Promotion Generates trial amongpotential customers

Increase retentionwhen unique rewardsare offered to bestcustomer

Increase response ratesto add-on offers

Channels ofDistribution

Third party channelscan increase customeracquisition

Third party channelsdecrease retention ratebecause the channelowns the customer

Direct channel makes iteasier to targetcustomers


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Customer Acquisition

Rule 1: Acquire any customer as long as thediscounted future value of the customer exceedsthe acquisition cost for that customers

Rule 2: When you broaden the acquisition effort,

be prepared for lower response rates Rule 3: The greater its profits from retention, the

greater a firms customer acquisition investmentshould be

Rule 4: The higher the percentage of the initialacquisition investment that a firm recovers in thefirst period, the greater its acquisition investmentshould be


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Acquisition Steps

Identify Target Customers

Build awareness and brand postioning

Market Penetration Pricing Trials

Experiences and Satisfaction

Pricing after trial and creating long-termvalue to customers


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Acquisition Steps

Identify Target Customers

Individual Customer Targeting - First degree

targeting: profiling and regression score

Segmented Targeting Second degree

targeting: cluster

Self-selection targeting third degree

targeting: marketing offer


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Tools for Acquisition

Data Base Marketing

Type of Information Source

Purchasing Potential Sales Force

Marketing ResearchCustomer Characteristic Sales Force

Marketing Research

Customer Equity Accounting Dept. Sales Forces

Customer Organization Structure

Sales ForceMarketing Research

Key Purchasing Influences

Competitors offers

Customer Attitude


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Data analysis Calculating the Acquisition rate

Calculating retention rate and defector rate

Evaluating opportunity for add-on selling

Understanding customers response to firmsmarketing programs

Analysing and following customers purchasing

pattern

Predicting customers future purchasing trends Developing effective sales strategy


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Building customer Profiling Building customer segmentation profile

Regression analysis


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Customer Retention

For short purchasing cycle product :customers return in next purchasing cycle

For long purchasing cycle product: customers

show willingness to repurchase next time

(Repurchase intention)


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Retention Misunderstanding

Company must aim at 100% customer retention Maximum retention rate means maximum profit


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Customer Retention

Trap of customer satisfaction Expectation vs. Delivery

Value

Uniqueness of the offers Loyalty mechanism

Ease of purchase Product availability

Purchasing convenience

Customer service

Exit barriers


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Tools for Retention

Data base Marketing

Type of Information Source

Customer Complain Customer service

Sales information Accounting

Communication Marketing and sales

Delivery and transportation Logistic

Products Quality Control

Invoice and Payment AccountingThird party channels Accounting


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Tools for Retention

Measurement Number of Existing customer

Number of Defector

Retention rate

Defector Rate


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Customer Equity Balance sheet

2007 2008 2009

Revenue

Profit

Total number of customer

Number of newly acquired customers

Number of retained customers

Average order size (value) of a first time buyer

Average order size (value) of a retained customer

Acquisition expense for one customerRetention expense for one customer


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Customer Equity Balance sheet

2007 2008 2009

Profit from first time buyers

Projected Future profit from first time byers

Profit from retained buyers

Projected Future profit from retained byers

Total customer equity

Top Class Gym


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Top Class Gym

Top Class Gym is a new, high class gym, located in a building

in District 1 with a total area of 800 m2. The rent is

16USD/m2/month. This rent will hold unchanged for the firsttwo years and will subject to 10% increase each year from 3rd

year. The total invested capital for equipments and decoration

is 1.5 millions USD. In average, the equipments will be

depreciated in 5 years (straight line depreciation). The owner of the Gym is now looking for outstanding Marketing

Manager with excellent Marketing Plan to Market Top Class

Gym services to target customers.

Work with your teammates to: Identify Target customers

Setting Marketing Objectives for the firt 3 months, 6 months, 1 year,

and 2 year.

Outline your action plans to meet the above objectives

Documents

Customer Equity 2