October 15, 2012
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.
BrainTrust
Recent Discussions
Discussion Questions
With greater access to shopper data, is the retail industry closer to getting an accurate read on customer equity? How important is it for retailers to understand customer equity and how would you propose they calculate the value?
Poll
Sophisticated tools are available today for measuring customer/shopper data and some innovative retailers and CPGs are using them to put a tangible handle on what this all means. Although complex to analyze, new insights are being achieved, so yes, I believe we are getting closer and closer to the consumer with these capabilities. I think these learnings are critical for both retail execution and new product development and marketing for CPGs.
Here’s the litmus test. Would you be proud to show the customers how you calculate their value to you? If you’d never want the customer to see the dirty secrets of the back office scheming then you’re on the wrong track.
I worked with a bank years ago that had several ‘levels’ of customer engagement. If you were in the ‘A’ category you got that, but if you were only in the ‘D’ category you got much less attention, incentive, service, etc., all calculated on the basis of the customer’s financial ‘value’ to the bank. All hell broke loose when an employee explained this strategy to a customer as the reason something couldn’t be done for him.
Then the bank sat and wondered why on average they had only 1/3 ‘share-of-wallet’ from their customers!
So if you don’t want to shine a bright light on it for all to see, maybe it needs more thinking.
While it is true that we have far greater access to shopper data, it is equally true that all data is by its very nature a historical perspective. In today’s nanosecond world of the digitally empowered shopper, retail and brand marketing executives need enlightenment and recommendations for their marketing strategies looking forward — next week, next month, next quarter, next year. Shoppers are dictating that marketers strategize, activate and operate in an omni-channel environment and as such all of the insights need to be leveraged into proactive, forward-looking recommendations based upon predictive analysis. Customer equity is a very interesting metric that warrants further valuation as brand loyalty is an eroding reality. It is imperative that brands must constantly work to retain their customers and must create and activate ‘customers-for-life’ strategies.
It costs more to acquire a new customer than to extend the relationship with an existing customer. Determining lifetime value is key to retail success. Retailers should also be concerned with capturing a larger share of customer spend by category. If you can get a consumer to become a customer, how do you keep them coming back for more and how to you capture a larger share of their dollars?
Knowing this allows retailers to target specific messages to specific customers, to engage in a dialogue and to build real loyalty, all of which should lead to higher sales and profitability.
The concept of customer equity of course makes sense. For CPG manufacturers in particular, however, it is important to measure “equity” at two levels. The consumer is important, though that is more often measured at the brand level. (How much equity does the Tide Brand have with Mrs. Smith?)
But B2B relationships are also based on equities. Quantifying the equity Kimberly-Clark has versus key competitors with Walgreens and other key retailers can be equally important, and often yields insights that can have a much more tangible near-term impact on the business.
First, a great blog by David. Next, the game of retail going forward is all about the customer equity Factor (CE). Forecasting can be done in many many ways, but when aligned with a retailer’s own CE factor, it comes closer to the real thing. The challenge is for the retailer to determine their own unique calculation for the CE factor. CE is the foundation of the true shopper/retailer relationship. Thanks DZ.
I am with Mr. Percy on this one. Whatever the grade level, would you want to tell the customers that aren’t your top grade, what grade they are? What would that mean to them?
I look at it much differently than the contemporary thought. I was taught at a young age that two types of shoppers exist — primary and secondary. I was also taught that they were equally important, if not the secondary being of a slightly higher import. It isn’t that you have already won the primary shopper, you have to keep them. However, the greatest opportunity is with the secondary — the one’s you haven’t won or at least won completely.
The much more important calculation is that of a lost customer, not of a shopper itself. In the contemporary discussions on these topics way too much emphasis is spent on the “best” customers as they are graded or valued. The best customer is one that walks through your door or hits your web page and makes a purchase at any level.
Regardless of level, putting your best offer out to your best customers (all of them) is the best option. The calculation of a lost customer is the best one learned and taught, and when that becomes the focus, it is a calculation made less often.
Customer equity makes sense. Some companies have algorithms in place and some companies are working on them. The existing algorithms are not identical so it is too early to create a one size fits all formula. On the other hand, it is possible to create a tool for your own company. Doing so means making some decisions about what customer value and loyalty mean to your company.
Great blog Dave. Couple of observations:
All the quantities used in the calculation above are snapshot quantities and are not constant over time.
Any firm that uses a measure of Customer Equity (like the one delineated above) must ensure that it is not used to determine the level of customer service.
If it was only that easy to measure it through a formula. Yet the formula shared is so simplistic it does a disservice to what retailers practice today. Loyalty is a word with emotional and rational components; it neatly packages the discipline under one simple to think of word, but the discipline is highly sophisticated 1:1 marketing when done right.
Can I quantify equity in the customer to business relationship? Yes. But, it is not so neat and easy. It is different for stores with doors and products to sell vs. stores that provide services vs. pure play online product or service providers. The formulas are custom and involve not only setting measurable goals but ensuring you have the building blocks and back-end methodologies in place to capture all forms of customer response and engagement.
Simplistically, it is share of mind and/or share of wallet with a little bit of referral as an advocate thrown in when appropriate for a business to gain incremental lift from best customers. Do they hesitate to shop the competition because of the trust in the relationship and feel they will lose out if they shop somewhere else — especially in an undifferentiated category? Do they spend more on average with me vs. the competition? Will they convert more often when shopping in-store, online or both vs. the competition? Are they willing to speak up for my brand and tell others to buy my goods and/or use my services because they are a satisfied customer?
This type of data can be very important. The problem is that there is data that isn’t important, but it all gets mixed in together. Some of my clients determine what the critical data is to look at, but even that isn’t enough. They need to know what to do with it once they have it. If they can’t take action on the information, is it really worth having? In other words, data that isn’t used is a potential liability.
Customer measures when done right (which is a whole other topic) can add a lot of value. Simply put, they help businesses make much better decisions.
Having a macro-level measure is helpful but decisions are made every day at the micro-level.
To be successful, the metrics have to be consistent both across the organization and up and down the levels of business from the boardroom to the shop-floor.
I have argued more than a few times over the years that customer equity (or something like it) would not attain proper status and attention until it is reported as a line item on the balance sheet.
What is your portfolio of customer relationships worth? If you can’t answer that question, how are you going to define customer-focused strategy?
David’s post does a good job of pointing out why this is a loaded question. Recency-frequency-monetary (RFM) analysis reveals almost nothing about affective loyalty, while likelihood to recommend (L2R) asks customers to project their own behaviors, inviting response bias.
Ian’s litmus test is most excellent. Transparency is very important in this context. A well-engineered set of policies should provide clear incentives for individuals to engage in increased patronage.
In the end we really need to ask ourselves, “Who owns the shopper relationship?” I say the shopper is always in control, but the retailer may earn the right of custodianship through consistent positive action. A measure of that custodial success does indeed belong on the balance sheet.
I jump off of this (Zahn’s and Blattberg’s) customer equity train when they connote that retailers should be in charge of managing/controlling customer relationships. I see it the other way around: Instead of CRM (Customer Relationship Management), I recommend CMR (Customer Managed Relationships).
CMR hitchhikes on Ian’s “shine a light” comment by actively engaging customers in their relationship with a retailer. With the ample information retailers now have access to, they could offer an online “You’re In Charge” profile and questionnaire that would allow customers to define themselves in ways they prefer.
For instance, customers could start with, “Tell me what I buy from you.” They could move on to, “Based on what I buy, what departments or special offers am I overlooking in your store?” Or, “How can I shop your store more efficiently, e.g., what times of the day are you least busy and have the shortest checkout lines?”
Then, there’s the “How Do You Want To Be Treated?” section. In this profile/questionnaire part of CMR, customers can outline what they want from the retailer. How do you want your coupons and special offers delivered – mail, online, in-store, other? Do you want early notification when the items you buy most often are going to be on sale? Are you interested in learning about new items that fit your purchase habits? Do you want customized support for events such as birthdays, anniversaries, entertaining, holidays, or special events? And the list goes on.
Historically, the #1 reason shoppers give for NOT changing supermarkets is, “I know where everything is.” With CMR, that #1 reason could easily become, “They know me and give me what I want.” In this way, ownership of customer equity shifts from retailers to customers.
Dr. Banks’ comment is compelling and worth additional thought and exploration. There is nothing in what the article included that is contrary to the notion of managing relationships (either CMR or CRM) based on directionality. BOTH entities have a role to play and finding the place where they BOTH succeed is still a challenge. It is not all of one nor all of the other. It is a point of differentiation and attraction for a retailer to distinguish the value or offer it provides based on (fill in the blank — assortment, customer service, convenience, etc.).
Having said that, the comment is one that is easy to agree with and appreciated.
Doc makes an excellent point.
Customers OWN equity.
Retailers (or brand owners, or vendors) EARN equity.
While there is greater access to customer data today, I do not see any use of customer equity or customer value over the longer term used in decision-making. The pressure on quarterly sales seems to trump any long-term customer development strategy effort over and over again.
I do not want to rail on short-term thinking — I think that has been done over and over again with little change. What I am advocating is devoting 10-15% of effort (and resources) to growing relationships with best customers, turning them into advocates and managing high potential customers upward.
This small level of effort would be an astronomical sea change in thinking and behavior. Start by thinking small and then grow from there in mindset and actions.
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Sophisticated tools are available today for measuring customer/shopper data and some innovative retailers and CPGs are using them to put a tangible handle on what this all means. Although complex to analyze, new insights are being achieved, so yes, I believe we are getting closer and closer to the consumer with these capabilities. I think these learnings are critical for both retail execution and new product development and marketing for CPGs.
Here’s the litmus test. Would you be proud to show the customers how you calculate their value to you? If you’d never want the customer to see the dirty secrets of the back office scheming then you’re on the wrong track.
I worked with a bank years ago that had several ‘levels’ of customer engagement. If you were in the ‘A’ category you got that, but if you were only in the ‘D’ category you got much less attention, incentive, service, etc., all calculated on the basis of the customer’s financial ‘value’ to the bank. All hell broke loose when an employee explained this strategy to a customer as the reason something couldn’t be done for him.
Then the bank sat and wondered why on average they had only 1/3 ‘share-of-wallet’ from their customers!
So if you don’t want to shine a bright light on it for all to see, maybe it needs more thinking.
While it is true that we have far greater access to shopper data, it is equally true that all data is by its very nature a historical perspective. In today’s nanosecond world of the digitally empowered shopper, retail and brand marketing executives need enlightenment and recommendations for their marketing strategies looking forward — next week, next month, next quarter, next year. Shoppers are dictating that marketers strategize, activate and operate in an omni-channel environment and as such all of the insights need to be leveraged into proactive, forward-looking recommendations based upon predictive analysis. Customer equity is a very interesting metric that warrants further valuation as brand loyalty is an eroding reality. It is imperative that brands must constantly work to retain their customers and must create and activate ‘customers-for-life’ strategies.
It costs more to acquire a new customer than to extend the relationship with an existing customer. Determining lifetime value is key to retail success. Retailers should also be concerned with capturing a larger share of customer spend by category. If you can get a consumer to become a customer, how do you keep them coming back for more and how to you capture a larger share of their dollars?
Knowing this allows retailers to target specific messages to specific customers, to engage in a dialogue and to build real loyalty, all of which should lead to higher sales and profitability.
The concept of customer equity of course makes sense. For CPG manufacturers in particular, however, it is important to measure “equity” at two levels. The consumer is important, though that is more often measured at the brand level. (How much equity does the Tide Brand have with Mrs. Smith?)
But B2B relationships are also based on equities. Quantifying the equity Kimberly-Clark has versus key competitors with Walgreens and other key retailers can be equally important, and often yields insights that can have a much more tangible near-term impact on the business.
First, a great blog by David. Next, the game of retail going forward is all about the customer equity Factor (CE). Forecasting can be done in many many ways, but when aligned with a retailer’s own CE factor, it comes closer to the real thing. The challenge is for the retailer to determine their own unique calculation for the CE factor. CE is the foundation of the true shopper/retailer relationship. Thanks DZ.
I am with Mr. Percy on this one. Whatever the grade level, would you want to tell the customers that aren’t your top grade, what grade they are? What would that mean to them?
I look at it much differently than the contemporary thought. I was taught at a young age that two types of shoppers exist — primary and secondary. I was also taught that they were equally important, if not the secondary being of a slightly higher import. It isn’t that you have already won the primary shopper, you have to keep them. However, the greatest opportunity is with the secondary — the one’s you haven’t won or at least won completely.
The much more important calculation is that of a lost customer, not of a shopper itself. In the contemporary discussions on these topics way too much emphasis is spent on the “best” customers as they are graded or valued. The best customer is one that walks through your door or hits your web page and makes a purchase at any level.
Regardless of level, putting your best offer out to your best customers (all of them) is the best option. The calculation of a lost customer is the best one learned and taught, and when that becomes the focus, it is a calculation made less often.
Customer equity makes sense. Some companies have algorithms in place and some companies are working on them. The existing algorithms are not identical so it is too early to create a one size fits all formula. On the other hand, it is possible to create a tool for your own company. Doing so means making some decisions about what customer value and loyalty mean to your company.
Great blog Dave. Couple of observations:
All the quantities used in the calculation above are snapshot quantities and are not constant over time.
Any firm that uses a measure of Customer Equity (like the one delineated above) must ensure that it is not used to determine the level of customer service.
If it was only that easy to measure it through a formula. Yet the formula shared is so simplistic it does a disservice to what retailers practice today. Loyalty is a word with emotional and rational components; it neatly packages the discipline under one simple to think of word, but the discipline is highly sophisticated 1:1 marketing when done right.
Can I quantify equity in the customer to business relationship? Yes. But, it is not so neat and easy. It is different for stores with doors and products to sell vs. stores that provide services vs. pure play online product or service providers. The formulas are custom and involve not only setting measurable goals but ensuring you have the building blocks and back-end methodologies in place to capture all forms of customer response and engagement.
Simplistically, it is share of mind and/or share of wallet with a little bit of referral as an advocate thrown in when appropriate for a business to gain incremental lift from best customers. Do they hesitate to shop the competition because of the trust in the relationship and feel they will lose out if they shop somewhere else — especially in an undifferentiated category? Do they spend more on average with me vs. the competition? Will they convert more often when shopping in-store, online or both vs. the competition? Are they willing to speak up for my brand and tell others to buy my goods and/or use my services because they are a satisfied customer?
This type of data can be very important. The problem is that there is data that isn’t important, but it all gets mixed in together. Some of my clients determine what the critical data is to look at, but even that isn’t enough. They need to know what to do with it once they have it. If they can’t take action on the information, is it really worth having? In other words, data that isn’t used is a potential liability.
Customer measures when done right (which is a whole other topic) can add a lot of value. Simply put, they help businesses make much better decisions.
Having a macro-level measure is helpful but decisions are made every day at the micro-level.
To be successful, the metrics have to be consistent both across the organization and up and down the levels of business from the boardroom to the shop-floor.
I have argued more than a few times over the years that customer equity (or something like it) would not attain proper status and attention until it is reported as a line item on the balance sheet.
What is your portfolio of customer relationships worth? If you can’t answer that question, how are you going to define customer-focused strategy?
David’s post does a good job of pointing out why this is a loaded question. Recency-frequency-monetary (RFM) analysis reveals almost nothing about affective loyalty, while likelihood to recommend (L2R) asks customers to project their own behaviors, inviting response bias.
Ian’s litmus test is most excellent. Transparency is very important in this context. A well-engineered set of policies should provide clear incentives for individuals to engage in increased patronage.
In the end we really need to ask ourselves, “Who owns the shopper relationship?” I say the shopper is always in control, but the retailer may earn the right of custodianship through consistent positive action. A measure of that custodial success does indeed belong on the balance sheet.
I jump off of this (Zahn’s and Blattberg’s) customer equity train when they connote that retailers should be in charge of managing/controlling customer relationships. I see it the other way around: Instead of CRM (Customer Relationship Management), I recommend CMR (Customer Managed Relationships).
CMR hitchhikes on Ian’s “shine a light” comment by actively engaging customers in their relationship with a retailer. With the ample information retailers now have access to, they could offer an online “You’re In Charge” profile and questionnaire that would allow customers to define themselves in ways they prefer.
For instance, customers could start with, “Tell me what I buy from you.” They could move on to, “Based on what I buy, what departments or special offers am I overlooking in your store?” Or, “How can I shop your store more efficiently, e.g., what times of the day are you least busy and have the shortest checkout lines?”
Then, there’s the “How Do You Want To Be Treated?” section. In this profile/questionnaire part of CMR, customers can outline what they want from the retailer. How do you want your coupons and special offers delivered – mail, online, in-store, other? Do you want early notification when the items you buy most often are going to be on sale? Are you interested in learning about new items that fit your purchase habits? Do you want customized support for events such as birthdays, anniversaries, entertaining, holidays, or special events? And the list goes on.
Historically, the #1 reason shoppers give for NOT changing supermarkets is, “I know where everything is.” With CMR, that #1 reason could easily become, “They know me and give me what I want.” In this way, ownership of customer equity shifts from retailers to customers.
Dr. Banks’ comment is compelling and worth additional thought and exploration. There is nothing in what the article included that is contrary to the notion of managing relationships (either CMR or CRM) based on directionality. BOTH entities have a role to play and finding the place where they BOTH succeed is still a challenge. It is not all of one nor all of the other. It is a point of differentiation and attraction for a retailer to distinguish the value or offer it provides based on (fill in the blank — assortment, customer service, convenience, etc.).
Having said that, the comment is one that is easy to agree with and appreciated.
Doc makes an excellent point.
Customers OWN equity.
Retailers (or brand owners, or vendors) EARN equity.
While there is greater access to customer data today, I do not see any use of customer equity or customer value over the longer term used in decision-making. The pressure on quarterly sales seems to trump any long-term customer development strategy effort over and over again.
I do not want to rail on short-term thinking — I think that has been done over and over again with little change. What I am advocating is devoting 10-15% of effort (and resources) to growing relationships with best customers, turning them into advocates and managing high potential customers upward.
This small level of effort would be an astronomical sea change in thinking and behavior. Start by thinking small and then grow from there in mindset and actions.