Customer Equity: What It Is and Why Marketers Should Use It
Customer equity is one of the few forward-looking metrics that brands can use to measure their current and potential performance. When used effectively, customer equity gives marketers the insight they need to form smarter strategies, understand the brand’s relationship with customers, and estimate their return on investment (ROI) for marketing initiatives.
In this article, we’ll take a deep dive to explore the factors that make up customer equity. By the end of the post, you’ll know what customer equity is, why it’s important, and how to calculate it.
Let’s get started.
Key Takeaways
- Customer equity is a metric that brands use to measure the net profit of total customer lifetime values (CLVs).
- Marketers rely on customer equity to make strategic decisions about new campaigns, profit forecasting, return on investments, competitor research, budgets, and more.
- Value equity, brand equity, and retention (relationship) equity are the three key factors that impact customer equity.
- To calculate a brand’s customer equity, you first need to find the CLV.
What Is Customer Equity?
Customer equity is the sum of customer lifetime values (CLVs) for a brand. To put it another way, it’s the potential net profit a business can make from each customer after factoring out acquisition and retention costs.
Establishing a loyal base of customers increases a brand’s overall equity since repeat customers bring in more lifetime revenue than a one-time customer that never makes a second purchase.
The 3 Components of Customer Equity and Why They Matter to Marketers
Customer equity is one of the most significant factors to measure because it gauges the value of present and future consumers during their lifetime with a brand.
Businesses rely on customer equity to analyze:
- Return on investments (ROI)
- Future revenue potential
- Forecasting
- Marketing campaigns
- Competitor research
- Customer retention
- Budgets
Brands with high customer equity have a competitive advantage in the marketplace because consumers value their goods, products, or services at a higher price. Marketers can use this information to guide decisions for new campaign strategies, audience targeting, brand awareness, and more.
Three building blocks work together to form customer equity:
1. Value Equity
Value equity, also known as value for money (VFM), refers to a customer’s assessment of the value your business offers. Basically, “What do I get for my money?”
PwC’s December 2021 Global Consumer Insights Pulse Survey found that price and convenience are the most critical driving factors for value equity, although other factors like ESG, product quality, and customer care still play an important role.
When customers provide a favorable value assessment for products and services, the business establishes high-value equity.
2. Brand Equity
Brand equity is the consumer’s overall opinion of your brand regardless of its perceived value. In many cases, the customer wants a product simply because they trust the brand name behind it.
Building brand equity comes down to three key elements: awareness, loyalty, and association.
- Brand Awareness: Have people heard of your brand? Do they know what kinds of goods or services you offer, or even what industry you’re in? Brand awareness is critical because if people don’t know your brand exists, you have no equity.
- Brand Loyalty: Although difficult to measure, brand loyalty is a vital part of overall brand equity. Loyal customers like and trust your brand, and they’re willing to spend more money just for the sake of the brand name. For example, think about how loyal customers are to big names like Apple, Starbucks, and Disney. Fostering brand loyalty brings lifelong customers and encourages word-of-mouth marketing.
- Brand Association: What comes to mind when customers think about your brand? Colors, logos, fonts, slogans, ads, mascots, and community engagement are examples of brand association. Think of brand association as the memorable aspects of your brand that people remember. Some well-known examples: Nike’s basic “swoosh” logo, the Budweiser Clydesdales, the trademarked shade of brown for UPS drivers, and Skittles’ “Taste the Rainbow” slogan.
The 2021 Edelman Trust Barometer report discovered that trust has become the new brand equity. 40% of consumers who love a brand will stop buying if they don’t trust the company that owns the brand. 86% expect brands to take action beyond selling their products, such as addressing societal changes or donating proceeds to a good cause.
3. Retention Equity
Retention equity, also sometimes referred to as relationship equity, is how well a brand retains its customers. Essentially, it’s what turns a one-time customer into a repeat customer.
High retention equity means your customers consciously continue to choose your company over your competitors because they feel strongly about your brand.
How to Calculate Customer Equity
Customer equity is the sum of customer lifetime values (CLVs) for all of a company’s customers. To determine the customer equity, you first need to calculate the CLV.
A customer lifetime value is the net profit a customer spends at a business during their total patronage. Some companies take a much more sophisticated approach to calculate CLV with customized factors.
The basic CLV calculation happens in two phases. First, we need to find the lifetime value, which is the average value of sale times the number of transactions times the retention period.
To find the CLV, you’ll then take the lifetime value and multiply it by the profit margin.
Once you have your customer lifetime value, you can then find your customer equity as the total combined CLVs for all of the company’s customers.
Make Customer Equity Part of Your Marketing Strategy
Customer equity is an important metric that enables brands to track consumers with different spending habits, engagement levels, and profit margins. It also factors in acquisition costs for new customers and retention costs to maintain the existing base.
Is customer equity part of your existing customer experience marketing strategy? As consumers place more pressure on brands to foster socially conscious, trusting relationships with their customers, this metric will become even more important for marketers.
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