Business

What Drives Customer Equity (and Thereby Company Valuation)

Definition

Customer equity is the total lifetime values that are summed over an organization’s current and future customers. The sum of all the company’s potential and current customer’s assets amounts to customer equity. Most companies should consider customer equity as a key to being successful because having more loyal customers mean there is more customer equity. This determines the value of a company, that is; the higher the customer equity the more the amount of money the company gets from its customers hence it becomes more valuable than companies with low customer equity.

Drivers of Customer Equity

Apart from customer equity being the key to a company’s success, its management is more complex and of paramount importance because it gives the company a competitive advantage over others. There are three components of customer equity where each component outlines specific decisions that a company can take to increase its customer equity.

1. Value Equity

This is the customer’s unbiased assessment of what the company has to offer based on perceptions of what the customer is willing to or sacrifices for what is received. The assessment done by the customers on the products depends on their quality, their prices and convenience. Quality refers to the physical and nonphysical characteristics of the product that the customers desire. Price is what the customers give up and convenience is the incisive actions that make customer interactions easier. Matching all three increases the value equity of the company.

2. Brand Equity

Brand equity refers to a customer’s subjective assessment of a company and its brands. In this case, depending on the brand identity, customers may be willing to pay more money just because they trust the brand regardless of its objectively perceived value. It mainly depends on the customer’s perceptions of what the company has to offer, customer attitude towards the brand, brand ethics and lastly, brand awareness. Brand equity can be enhanced through massive advertisement of the brands, customer interactions and proper marketing strategies.

3. Relationship Equity

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Most companies have great brands as well as high-quality products and services. Being able to attract new customers and keep existing customers is a requirement achieved through the meeting of customer expectations consistently. However, this is not enough. Brand and value equity are not sufficient to maintain a customer. What makes them stick to the company is the relationship equity which is the likelihood of a customer staying with the brand by ignoring his or her objective and subjective evaluation of it. The levers of relationship equity are loyalty programs, community-building programs, and others. These programs maximize the probability of the customers purchasing from the company while minimizing the probability of them switching to competitors.

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