Customer equity is defined as the sum of the discounted ... future value of a firm's customer base. ... product and service costs, and prices, the costs of capital ...
customer equity Lars Groeger and Francis Buttle
WHAT IS CUSTOMER EQUITY? Customer equity is defined as the sum of the discounted lifetime values of all of the firm’s current and potential customers. The customer equity concept recognizes customers as the primary source of both current and future cash-flows and thus, as one of a firm’s most valuable assets. As such, customer equity is a forward-looking concept that measures the future value of a firm’s customer base. Customer equity provides a customer-centered measure of a firm’s performance that is considered more significant than past and current sales or market share. The concept is viewed as an efficient guide to the allocation of marketing funds to increase the return on marketing investments. Firms that are guided by customer equity thinking view themselves not as portfolios of products, but as portfolios of customers; each customer, customer cohort, or market segment being a miniature profit center that needs to be managed effectively and efficiently. In order to maximize customer equity, firms have to be able to estimate customer lifetime value at the level of the unique customer, customer cohort, or market segment (see CUSTOMER LIFETIME VALUE). Computation of a meaningful customer lifetime value estimate requires companies to be able to forecast customer’s buying behavior, product and service costs, and prices, the costs of capital, and the costs of acquiring and retaining customers. Thus, accurate and reliable customer
data management processes are a prerequisite to compute a customer’s lifetime value and a firm’s customer equity. Nevertheless, any calculation of customer equity will always only represent a prediction of the value of current and potential customers and should be treated accordingly. Despite the general recognition of customers as assets, few companies report forward-looking customer metrics to the financial community. Models are currently evolving for reporting customer equity that will enable investors to monitor firms’ performance with respect to their customer assets (Wiesel, Skiera, and Villanueva, 2008). Bibliography Fader, P. (2011) Customer Centricity, Wharton Digital Press, Philadelphia. Gupta, S., Lehmann, D.R. and Stuart, J.A. (2004) Valuing customers. Journal of Marketing Research, 41, 7–18. Reinartz, W., Thomas, J.S. and Kumar, V. (2005) Balancing acquisition and retention resources to maximize customer profitability. Journal of Marketing, 69, 63–79. Rust, R.T., Lemon, K.N. and Zeithaml, V.A. (2004) Return on marketing: using customer equity to focus marketing strategy. Journal of Marketing, 68, 109–127. Rust, R.T., Zeithaml, V.A. and Lemon, K.N. (2000) Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy, Free Press, New York. Wiesel, T., Skiera, B. and Villanueva, J. (2008) Customer equity: an integral part of financial reporting. Journal of Marketing, 72 (2), 1–14.
Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper. Copyright © 2014 John Wiley & Sons, Ltd.
