Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy

Citation

Furrer, O. (2002), "Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy", International Journal of Service Industry Management, Vol. 13 No. 1, pp. 107-111. https://doi.org/10.1108/ijsim.2002.13.1.107.1

In fast‐moving and dynamic industries that involve customer relationships, Rust, Zeithaml, and Lemon write that: “products come and go, but customers remain.” In such a business landscape, brand equity alone cannot ensure the market value of a firm. Customer equity should be the metric to evaluate a firm’s market value. The authors identify four shifts in the business environment that justify the transition from brand equity to customer equity: the shift from goods to services, the shift from transaction to relationships, the shift from customer attraction to customer retention, and the shift from product focus to customer. In this new landscape, customer profitability, not productivity is the key to long‐term performance.

In such an environment, a focus on product profitability may lead to a disastrous outcome the authors call the Profitable Product Death Spiral. They illustrate this death spiral with a case example. In 1997, Opryland Hotel in Nashville, Tennessee was a thriving convention hotel with revenues of $231 million, and an 85 percent occupancy rate. However, the adjoining theme park was far less profitable. The solution to the problem appeared clear to the managers. The hotel was profitable, but the theme park was not. Therefore the theme park had to be shut down. One year later, Opryland’s convention room nights were down 22 percent from the previous year. It was evident that Opryland’s hotel business had been badly hurt by the closing of the theme park. In retrospect, what happened seems obvious. For individual customers, the presence of the theme park increased the value of the hotel. Opryland has been the victim of the Profitable Product Death Spiral. The spiral is the result of a short sighted, product‐focused way of thinking that should be substituted, according to the authors, by the more customer‐focused customer equity framework, which is the real driver of a firm’s long‐term profitability.

However, if it is easy to understand that customer equity is important, it is more difficult to determine exactly how to increase a firm’s customer equity. Of all the potential levers that a firm could pull, e.g. advertising, quality, price, retention programs, etc., which one will yield the best return on investment? In Driving Customer Equity, Rust, Zeithaml, and Lemon provide a customer equity framework, to help firms to answer this question in a systematic way. Customer equity, the total of the discounted lifetime value of all the customers of a firm, is made up of three drivers: value equity (the customer’s objective assessment of the brand’s utility, based on perceptions of what is given up for what is received), brand equity (the customer’s subjective and intangible assessment of the brand, above and beyond its objectively perceived value), and retention equity (the customer’s tendency to stick with the brand, above and beyond his or her objective and subjective assessments of the brand). The authors explain why these drivers are important, how a firm can measure them, and how they can be strategically deployed. Analyzing customer equity and its drivers gives a firm a road map for effective strategy. It identifies the strategic initiatives that will have the greatest impact on a firm’s long‐term profitability of its customer base:

1. 1.

   (1) Value equity. For all customers, choice is influenced by perceptions of value, which are formed primarily by perceptions of quality, price, and convenience. These perceptions tend to be relatively cognitive, objective, and rational. The authors define value as the comparison between what a customer perceives that he gets (quality or what ever else he wants in a product or service) for what he perceives that he gives (price plus other non‐monetary costs such as time and effort). Based on the example of restaurants, the authors show that there are essentially two ways to improve a firm’s value equity. First, a firm can give customers more of what they want to get. Or a firm can reduce what the customers must give for what they get. They also describe how a firm can manage the different sub‐drivers of value equity and identify in which situations value equity matters most.

2. 2.

   (2) Brand equity. Consumers may also have perceptions of a brand that are not explained by a firm’s objective attributes. These perceptions tend to be relatively emotional, subjective, and irrational. The authors argue that these perceptions are shaped by firms through their marketing strategies and tactics and influenced by customers through experiences and connections with the brand. They also described the key sub‐drivers of brand equity, customer brand awareness, customer attitude toward the brand, and customer perception of brand ethics, and discussed how these sub‐drivers can be managed.

3. 3.

   (4) Retention equity. Retention programs and relationship‐building activities can increase the odds that repeat customers will continue to choose the firm and even increase their spending. Retention impact focuses on the experienced relationship between customers and a firm, based upon the actions taken by a firm and by customers to establish, build, and maintain a high‐quality relationship. The authors present different programs that can be implemented to increase retention equity, such as loyalty programs, special recognition and treatments programs, affinity programs, community building programs, and knowledge‐building programs. Based on several case‐examples, the authors show how these sub‐drivers of retention equity should be managed to maximize the revenue from “sticky customers.”

Maybe one of the most important insights a manager can get from reading the book is that the relative importance of the three drivers of customer equity varies from one industry to the other and that their contribution to a firm’s profitability varies from one firm to the other. This is why it is so important for managers to better understand how to measure customer equity, and identify what are the key drivers and sub‐drivers of customer equity for their firm. To help managers to do so, Rust, Zeithaml, and Lemon provide a ten‐step approach to build a customer equity organization. These steps are:

1. 1.

   (1) the measurement of a firm’s customer equity;

2. 2.

   (2) the determination of a firm’s key competitors;

3. 3.

   (3) the customization of the potential drivers of value, brand, and retention equity;

4. 4.

   (4) the choice of the population of interest;

5. 5.

   (5) the development of the survey instrument;

6. 6.

   (6) the data collection;

7. 7.

   (7) the analysis of the data to determine the key equities and drivers of each equities;

8. 8.

   (8) the benchmarking against competitors;

9. 9.

   (9) the determination of the key areas for improvement; and

10. 10.

    (10) the determination of return on equity for each improvement, and the investment in the drivers that provide maximum return on customer equity.

Conceptually, the book expands on the ideas proposed by Rust et al. (1995), suggesting that every quality‐related expenditure should be made financially accountable. Customer equity is not just a customer‐centered viewpoint, it is a strategic tool to improve a firm’s financial performance. The financial impact of improving the drivers of customer equity should therefore be carefully evaluated. Return on quality, return on price, return on convenience, return on advertising, return on retention, and return on ethics are in turn examined. To support their argument, the authors have surveyed customers in five industries, airline, facial tissues, rental cars, electronics, and grocery, and found significant differences in the three drivers’ relative importance. For example, value equity and retention equity were key factors for rental cars but relatively unimportant for facial tissues, where brand equity was the most important driver of customer equity.

A strong argument of the book is that not all customers are kings. Even if the customer equity approach is customer‐focused, this does not mean that a firm should seek to serve all customers as well as possible. Customers differ in their contribution to a firm’s profits, and therefore the focus of a firm’s attention should be on those that contribute the most to customer equity as well as those who have the potential to do so. The authors propose a framework, the customer pyramid, to segment customers by profitability. The customer pyramid classifies customers into four categories: platinum, gold, iron, and lead customers. Then, the authors develop possible strategic actions to retain platinum customers, convert gold and iron customers into platinum and gold customers respectively, and to eliminate lead customers.

Written before the dot.com crash, the book pays its tribute to the Internet with a chapter where the Internet is described as the ultimate customer equity tool. In this chapter, the authors use a collection of case‐examples to show how increasing a firm’s value equity, brand equity, and retention equity can be accelerated. In the last chapter of the books, the authors make the argument that to be really customer‐centered, a firm needs to modify its organizational structure. They argue that the multi‐product structure (the product‐centered corporation), and the functional structure (the hybrid corporation) should be replaced by an equity‐based structure (the customer equity corporation). In the customer equity corporation, a value equity officer, a retention equity officer, and brand equity officer are subordinated to the chief equity officer, the CEO. These last two chapters however are conceptually lighter than the previous ones and are less well integrated in the customer equity framework

One of the key features of the book is to be manager friendly and at the same time to be academically robust. Managers will find great value in this book, because they will to be able find in clear, non‐technical language, how to apply the customer equity framework to their own business and how to identify the most important drivers in their industry. They will be able to find how they can make efficient trade‐offs between expenditures on the drivers of value, brand, and retention equities, and how to project financial return from these expenditures.

Academic scholars will also find the book useful because it integrates current thinking on customer equity, by bringing together service quality literature, brand management literature, and relationship marketing literature in a coherent and integrated framework. Written in a non‐technical language, the book is nevertheless based on solid theoretical and methodological foundations. Readers interested by the theoretical and methodological issues and the mathematical modeling underlying the customer equity framework are directed to the companion paper published by the Marketing Science Institute (Rust et al., 2000).

To conclude, Driving Customer Equity is an exciting and interesting book that should be read by any manager interested in improving its firm customer equity as well as by any academic scholar excited by the prospect of discovering a new approach to customer equity.