Never underestimate the value of a customer. To stay ahead of your competitors and survive in the world of business, understand the 3 components of customer equity.
What is Customer Equity?
Customer equity is the sum of discounted lifetime values of a business’s customer. In other words, it is the potential profit a business stands to make from a single customer. Loyal customers mean an increase in customer equity. This is clear in businesses like McDonald’s and Apple.
Because their customer equity is high, they have a sustainable competitive advantage. Businesses with higher levels of customer equity are valued at a higher price compared to other companies in their industry.
What is the Importance of Customer Equity?
Customer equity is significant to any business. It helps to determine a business’s future revenue potential by measuring the value present and future customers will provide across the lifetime of the relationship. This is important for estimating customer asset value. In addition, it helps with making sound financial decisions.
It’s also important to know so that a business can establish effective marketing strategies that will promote its products and services and attract the right customers to gain even more profits and revenue. This helps a business to know where to devote a percentage of its marketing efforts and how to budget going forward.
Customer equity is one of the most significant factors to consider when measuring your rate of return on future marketing efforts.
Calculating Customer Equity
When calculating customer equity, consider this formula:
Customer Equity = Viral Coefficient times LTV minus (Acquitision plus Retention).
You first need to consider the customer lifetime value (CLV), also sometimes called lifetime value (LTV), or lifetime customer value (LCV). This is equal to the total amount of money a business expects to make from a customer. This includes any sales over the lifetime of the customer-business relationship, including cross-selling and upselling.
To get the CLV, businesses consider factors such as the amount of money spent to get one customer, the amount needed to keep that customer and any profit and cash flows generated by a customer overestimated retention and specific time frame.
Viral Coefficient refers to the number of referrals a customer can get you. This figure is beneficial to help a business know a customer’s worth over the lifetime of the business relationship.
Acquisition is what it costs to acquire a new customer. Retention is the survival rate of customers over the course of a year.
Another way to calculate the customer equity is to:
- Determine how much the budget is to acquire a new customer.
- Calculate how much money your brand spends on retaining customers.
- Determine how much money your client spends during the year.
- Determine how much money you get from each customer.
- List the cash flow of an average customer for a specific period.
- Separate the cash flow for each year.
- Add up the present values of all the cash flows throughout the defined period.
As the calculations show, much of the customer equity resides in your ability to retain customers. We’ll talk just a little bit more about customer retention and how to retain customers.
Customer retention is a business’s ability to keep its customers. It relates to the number of new customers acquired and the existing customers who leave. They may not return to ever purchase a product. They may cancel their subscription, or they may discontinue their contract. All of this is taken into consideration when determining the customer retention rate. This also lets a business know when they need to put strategies in place to improve their customer’s experience.
Customer retention is important because it saves on marketing costs, establishes for customers to buy again, provides for useful feedback of the business’s services or products and brings in revenue.
Even if you shy away from determining your customer equity, it’s always a good thing to know your customer retention rate. Here’s how to calculate the customer retention rate (CRR):
E=The number of customers a business has at the end of a period.
N=The number of customers a business acquired during that same period.
S=The number of customers a business has at the beginning of that given period.
Here are some email strategies to consider when trying to increase customer retention:
Email Preferences – Let the customer decide their email preferences and how often they receive them.
Give Them Value – Provide customers with valuable information and exciting stories via blog posts, interviews and case studies.
Reengage – If it’s been a while since your customers have heard from you, reengage through email. Include offerings, benefits and freebies as a way to win them back.
Personalize it – Stop the generic email messages and start customizing your emails to your customers. They prefer this.
Give Discounts – Discounts and specials make your customer consider coming back. Offer discounts from time to time.
Special Days – Use the holidays to welcome your customers back with special opportunities for them. Remember their birthdays and make them feel special.
What are the Components of Customer Equity?
The three main components of customer equity are value equity, brand equity and relationship equity.
A common term used in marketing is “value for money” or VFM. This refers to how the customer assesses what your business has to offer. The customer takes into account everything about the offer, including price and convenience. If the customer gives a high assessment, the business is considered to have high-value equity. Consider McDonald’s again. It’s available almost everywhere and it’s affordable, yielding high-value equity for them.
Thus, high-value equity means the customer gets good value for what they are paying (“value for money”).
Brand equity is the customer’s opinion of your business’s brand, regardless of its perceived value. For your brand equity to grow, trust must first be built. In essence, the customer wants the product, mainly because of its brand. They may even be willing to pay more for a product just because of its brand. Brand awareness, brand loyalty and brand association are the driving factors of brand equity.
The driving factors of brand equity are crucial to the success of the business. We’ll go more in-depth about them here.
Brand awareness is the first step in the equity-building process. Do people know about your brand? Do they know what your brand is associated with? These are the basic questions you can ask yourself as you consider your brand awareness. When people are not aware that your brand exists, you risk losing equity. When your business can’t get past this stage of the process, there is no equity at all.
Loyal customers don’t come overnight, and they shouldn’t be taken lightly. A loyal customer is someone who will purchase from your brand, no matter what. They know, like and trust your brand. And they trust it so much, they’ll gladly tell all of their friends and family about it. This is your avid returning customer.
Brand associations are the things consumers associate with your brand, such as the color and logo. Brand association is established when the brand is actively engaged with the buyer community. This also speaks to the relationship the brand has developed with the buyer. Buyers know your brand when they see it, and your brand is attuned to the needs of the consumers, as well as their likes and dislikes. When consumers associate with a brand, they’re more likely to seek them out for what they do immediately.
Relationship equity is what keeps a customer with a preferred brand rather than its competition. True relationship equity comes when a customer stays with a brand because of how strongly they feel about it, with or without loyalty programs.
Putting It All Together
To help put it in perspective, before the customer-business relationship even starts, something needs to attract the customer to the business. For that to happen, the business needs to communicate its brand so potential customers can be aware of its products and services.
When the customer becomes aware of the products, they have the option of purchasing or not. In most cases, they do not at first, but with time and brand recognition, they will. Now that the customer has made purchases, it is the business’s job to retain them as a customer, so they’ll keep coming back. This can only happen if the customer has been receiving the level of customer service that appeals to them, so customer service is crucial to retention.
Customer Equity vs. Brand Equity
Customer equity and brand equity have two things in common: They both emphasize customer loyalty toward the brand, and they both stress the value that customers add to the brand. However, they differ in some ways as well. Customer equity focuses more on the financial aspect of the customers, and brand equity focuses more on the strategic management of the brand. They’re not dependent on one another, and one can exist without the other. Furthermore, customer equity is more numbers-driven, whereas brand equity is more about the quality of the brand and how customers connect with it.
Increasing Customer Equity
Customer equity goes a long way in securing a business’s future and keeping them ahead of its competitors. The bottom line is, you want to have a high level of customer equity. Here are several things you can do to increase your overall customer equity:
You know your loyal customers will always be there. But to ensure this, let them know how much you appreciate their loyalty by finding out what it is they would like to see improved. Get their opinions, take a poll. Don’t just go with your gut when it comes to pleasing the most loyal. Keeping them happy is the most sure-fire way to keep them coming back.
Don’t give your most loyal customers a reason to turn to the competition. Ensure you’re doing everything to be as convenient as possible. Automate orders, refills and reminders to make sure you’re processing quickly and in rare emergency situations.
You’re a business. Be ready to resolve your customer’s pain points. If you advertise it, be ready to do it. Don’t make excuses.
Know what your customers need so you can provide them with value. Provide them with unique value propositions. Think about product features, services and resources that will bring value. Let them know without a doubt that you’re the right source for their issue.
Unique Value Propositions
Your business’s unique value proposition (UVP) is the be-all and end-all of your business. It underscores what your business offers in products and services, brand offers and defines your marketing strategy and positioning.
Your UVP lets your customers know why they should be in business with you why doing business with you is the best choice they can make. Without it, your business is nothing special to them. They can clearly see why your products or services stand out and what sets your brand apart from all the others.
Always make sure your customers know the unique value your product or service brings to the table and how it soothes their pain points. A well-designed UVP brings clear communication about your offerings to your customers. It also drives conversion rates for your business, improves engagement with your customers and sends a unified message about your brand.
People always value quality. Ensure that your product is the best on the market and you will always have customers.
Selling Revolution helps small businesses align their three most critical communication channels. Our solutions improve communication with employees and customers and help you achieve long-term growth. Learn more about how you can grow your business with our specialized solutions. Book a call with us today!