Customer equity is the sum of the discounted lifetime values of the customers of a business.
It’s a customer-centric measure of the value of the business and should be a key strategic focus.
The way to grow customer equity is with the strategy and tactics of customer relationship management.
Components of Customer Equity
Let’s look closely at the formula:
Customer Equity = Sum for all customers of the discounted lifetime value of each customer
Our aim is to increase customer equity, and we can do this in many ways:
1. Increase the lifetime of customers – i.e. retain customers for longer.
In a previous blog, CRM and Customer Retention, I looked at the issue of customer retention. To retain customers, you need to show them that you care about them. A CRM system enables staff, especially customer service staff, to care more effectively. With built-in machine-learning, enterprise CRM systems can now deliver predictions of which customers are likely to churn so remedial action can be taken to retain them.
2. Increase the value of customers – i.e. provide more goods or services to your customers.
The Sales approach would be up-selling or cross-selling. “Do you want fries with that?” I look at it as striving to increase the value we deliver to our clients – to help them achieve more via the services we provide. As we provide more value to our clients, they become more valuable to us.
Your CRM system can help here. You can add related products or services as suggestions for up-sell, cross-sell, accessories, or substitutes and help your sales agents with their recommendations to customers. You can precisely define target groups of customers for information and promotion of relevant products or services.
3. Focus on the higher value customers
Marketing, sales and customer service resources are limited and need to be optimised. Growing customer equity requires your resources to be focused on clients or customer segments with greatest lifetime value.
Your marketing efforts should be focussed on customers that will be more valuable. The highest value customers will be those that are both profitable and loyal because the lifetime value is effectively the product of value and duration. It’s relatively easy to identify customers or market segments that are likely to be profitable – perhaps harder to identify loyalty in advance.
Your sales process can be configured to highlight the lifetime value of the customer rather than the value of the initial order or project. Normally opportunities are viewed in order of potential sale size or date or pipeline stage. By including a field for a measure of customer lifetime value or potential customer lifetime value, opportunities can be ordered and prioritised based on their potential contribution to customer equity.
Apply the 80:20 rule to your customer service. High value customers can be highlighted in your CRM system so when any of your team interact with them, they will be alerted to the importance of the client.
You may need to ‘prune’ some customers. There is a cost associated with winning a client and retaining a client. Unless the value of the client exceeds this cost, the client will be lowering customer equity.
A focus on building customer equity is the right focus for businesses and organisations that exist to serve customers or stakeholders. It will change for the better the way we do marketing, sales and customer service.