Customer equity is the sum of customer lifetime values for every client of a particular brand. It is the potential profit that all of the company’s customers can bring during the business-customer relationship.
Why is customer equity important?
Companies often face the challenges of increasingly discerning customers and extremely high competition in the market. Each brand’s survival over its surrounding competitors depends on its ability to increase customer equity.
In today’s market, customer equity is essential because it helps you estimate the financial profit you can obtain from all your customers during your relationship. This allows companies to estimate their customer asset value and make sound financial decisions regarding add-on selling, retention, and acquisition.
It focuses on every customer and uses interactions with consumers that aim at strengthening communication. Nowadays, a company's success depends on its ability to generate as many loyal customers as possible.
To understand what customer equity is, it's useful to explore the difference between customer and brand equity which are often confused although each has distinctive features.
Customer Equity vs Brand Equity
Both customer and brand equity underline the level of loyalty a client has toward a brand and the value consumers add to a specific business. The two concepts have something in common, but customer and brand equity have different features and goals. To understand the difference, let’s analyze each of them.
Many brands pay attention to customer equity because it defines the financial success of a certain brand. The higher the customer equity, the higher the revenue a company receives and the more valuable it becomes on the market. Brands like Levi’s and Burger King have high customer equity and an excellent competitive advantage.
Brand equity defines the level of influence a company’s name has on customers. This is based on the way customers perceive a particular brand and their positive and negative experiences purchasing from it. You can create this value by offering recognizable and high-quality products to your customers to increase brand recognition. Besides, companies provide customers with excellent experiences that entice them to continue purchasing with the brand.
Companies with positive brand equity benefit in several ways. Firstly, customers are more likely to purchase from a brand they know and admire even if it has higher prices. Secondly, they won’t buy from competitors because they know that their brand sells the best quality products. Thirdly, since consumers are ready to pay a premium price for products, the brand can receive high profits.
On the contrary, if a brand disappoints buyers to the point that they won’t recommend purchasing from this particular company, it will obtain negative brand equity. As a result, such brands are deprived of several benefits mentioned above.
Now that you know the difference, let’s walk you through a start-to-finish guide on how to calculate customer equity.
How to Calculate Customer Equity
- Determine the budget necessary to acquire a new customer
- Calculate how much money your brand spends on customer retention
- Estimate the approximate amount your client spends each year
- Find out how much money you receive from each customer
- List the cash flow of an average customer for a specific period
- Separate the cash flow for each year
- Sum up the present values of all the cash flows throughout the defined period
Throughout company-customer interaction, consumers generate a value called customer equity. Consider the steps below to calculate it.
- Determine the amount of money your company spends to acquire a new customer. For instance, if your brand spends $60,000 a year on pre-roll ads that attract 600 customers, you spend approximately $100 on each new customer.
- Calculate how much money your brand spends on customer retention. Customer loyalty programs, member cards, customer education programs, holiday marketing, and reactivation emails require additional spending. For instance, you may pay $200 per year to send your email campaigns.
- Estimate the approximate amount your client spends each year. Let’s imagine that your average customer purchases with your company 10 times a year and spends $10 on every purchase. The annual spending would be $100.
- Find out how much money you receive from each customer. For instance, if you spend $4 for every $10 you earn, you would have a profit margin of 60%.
- List the cash flow of an average customer for a specific period. Set your expectations about every customer. For instance, you expect a customer to stay with your company for five years. Create a chart listing the estimated cash flow you'll receive over the years.
- Separate the cash flow for each year. Starting from the first year (plus your discount rate), divide the cash flow to calculate today's cash value. The discount is based on your circumstances.
- Sum up the present values of all the cash flows throughout the defined period. To get the customer lifetime value for your business, add up all the present values for a given period of time.
To increase customer equity, let’s proceed to five tactics that will help you in this process.
5 Tactics to Increase Customer Equity
- Show your clients that you appreciate them
- Be more convenient than your competitors
- Be ready to solve problems
- Provide customers with unique value propositions
- Ensure to provide the best quality
There are several steps to help you improve your company’s customer equity.
- Show your clients that you appreciate them. To keep loyal customers, you should regularly improve your brand. Before implementing any innovations, find out what your clients want instead of just going with your gut. For instance, create a poll containing some of your ideas and send it to your customers via email campaign, blog post, Instagram, etc. It’s crucial to let clients make suggestions and share their ideas. Don’t forget to thank them for participating in the poll by giving a small gift.
- Be more convenient than your competitors. Ensure that your customers can obtain the product they need as fast as possible. For example, if your client needs a new pair of contact lenses necessary to finish their work immediately, they don't have time to call and wait for hours to make an order. So it’s useful to consider using automatic orders, refills, and reminders to make the purchasing process fast and convenient.
- Be ready to solve problems. Ensure to provide customers with everything necessary to solve their problems through all the available channels. If social media platforms or your blog aren’t your main channels, you still need to be ready to bring the solution using these channels.
- Provide customers with unique value propositions. This step isn’t about the discounts that every company offers to the customers, but about features, services, resources that can bring value. Be ready to provide incredible value to a particular group of clients who can become your loyal customers in the nearest future. If you can’t do that, try to be as useful as possible when your clients need help.
- Ensure to provide the best quality. If your product is the best on the market and you keep improving it, you have the opportunity to obtain loyal customers. People always want to have high-quality things, and when they know that the product is the best, they will purchase it.
To conclude, the customer equity metric enables you to track customers with different engagement levels, different spending habits, and the profit your customers bring to your business. The tactics above will help you acquire positive customer equity.
- The article “10 Tactics For Increasing Your Customer Lifetime Value and Loyalty” on Neil Patel’s blog provides readers with ten steps to increase customer lifetime value and loyalty.
- The article “What is Customer Equity? Components of Customer Equity” defines the term, explains the importance of customer equity, and provides readers with explanations of its three components.
Last Updated: 07.07.2021