BrainTrust Query: Should You Measure Customer Equity?
Through a special arrangement, presented here for discussion is a summary of a current article from Getting Personal About Business, the blog of Zahn Consulting, LLC
There are many specific measures employed to gauge business success, such as profit, sales, market share, number of customers and costs. While these are certainly indicative of success and appropriate to be tracked, they do not give as accurate a picture of future success if they are not balanced by a measure known as customer equity.
Can we know the following?
- How much value is there in loyalty (assuming we can even qualify what that means and looks like to begin to put a quantification to it)?
- What is the lifetime value of a consumer/customer worth to the organization (LTV)?
- What is the customer value proposition (CVP)?
- Where does profitable volume growth (PVG) come from?
We have large reams of data on our customers — through frequent shopper programs, credit card tracking, email and other online engagement strategies, including social media — that often remain untouched or analyzed. Other than providing opportunity for discount programs, most businesses struggle with what to do with the information.
In his book, Customer Equity - Building and Managing Relationships as Valuable Assets, Robert Blattberg comes up with a mathematical formula for such a metric.
The basic calculations are:
- Profit from first-time customers (derived by number of prospects or potential customers contacted/communicated with, etc. multiplied by the acquisition probability and margin of those sales);
- Minus the sales costs incurred to acquire those customers;
- Plus expected profits from future sales (retention rate x profit/margin of their sales divided by the discount rate because future sales are worth less than current sales);
- Summed across all customer segments.
The focus on the hard numbers without recognition and understanding of the relationship aspects that fuel the numbers will rarely tell the whole story. It is only by going back to the dynamics of the relationship and measuring the customer equity components that true forecasting will ever be accomplished. Otherwise, one can only rely on past results and hope that nothing changes today or into the future. Starting with that false premise can only lead to poor assumptions, missed targets, and becoming bewildered at why projections are so far off expectation levels.