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ManagingCustomer Equity
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Trends in Marketing thinking and practice
From mass marketingtocustomizedmarketing
From owning assets to owning brands.
From operating in the marketplace tooperating in cyberspace.
From single-channel marketingto
multichannel marketing. From product-centric marketingto customer-
centric marketing.
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Customer EquityCustomer Equity
Customer equity is defined as the
total of the discounted lifetime valueof all the firms customers
In other words, a firm is only as good
as its customers think it will be thenext time they will do business with
that firm.
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Three Drivers ofThree Drivers of
Customer EquityCustomer Equity
Value Equity
Brand Equity
Retention Equity
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Three Drivers of Customer EquityThree Drivers of Customer Equity
Value Equity : the customer's objective
evaluation of the firm offerings Brand Equity : the customer's subjective
view of the firm and its offerings
Retention Equity : the customer's view of
the strength of the relationship between
the customer and the firm.
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Value
Equity
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Value Equityis the customer'sobjective assessment of the utility of
a brand, based on perceptions of
what is given up for what is received.
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Quality :How does the customer
evaluate the quality of the firm's
offerings?
Price : How attractive is the price?
Convenience : How convenient is it to
do business with the firm?
Drivers of Value Equity
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Brand Equity
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Brand Equity is the customer's subjective
and intangible assessment of the brand,
above and beyond its objectivelyperceived value.
This evaluation is shaped by the firm's
marketing strategy and tactics and isinfluenced by the customer through life
experiences and associations with the
brand.
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Builds awareness and attractscustomers
Build emotional connections with
customers
Reminds customers to repurchase
The Role of the Brand inBuilding Customer Equity
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customer brand awareness
customer attitude toward the brand
customer perception of brand ethics
Drivers of Brand Equity
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Retention
Equity
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Retention Equity isthe tendency of thecustomer to stick with the brand, above
and beyond the customer's objective
and subjective assessments of thebrand.
It focuses on the relationship between
the customer and the' firm, based upon
the actions taken by the firm and by the
customer to establish, build, and
maintain a relationship.
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Does the customer benefit from relationship
with the firm?
Does the firm benefit from its relationship
with the customer? Does the customer stand to lose if the
relationship is discontinued?
Retention equity considers
questions such as:
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Loyalty programs (frequent purchase/reward
programs)
Special recognition and treatment programs
Affinity (emotional connection) programs
Community programs Knowledge-building programs (learning
relationship or structural bonds)
Drivers of Retention Equity
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Why loyal customer Are More Profitable
Price
Premium
Referals
Cost Saving
Revenue
Growth
Base Profit
0 1 2 3 4 5 6 7
Acquisition
Cost
Annua
lCustom
er
Profit
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Customer Life Cycle
Customer Equity
Prospects
0
First Time
and Early
RepeatBuyers
Core
Customers
Defectors
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Impact of a 5-Percentage-Point Increase in
Retention Rate on Customer Equity
Source: Frederick F. Reichheld and Thomas Teal, 1996
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Customer Life Cycle Profit Patterns
A u to I n s u r a
7 5 9 01 0
-2 5
-5 0
- 3 0 0
- 2 5 0
- 2 0 0
- 1 5 0
- 1 0 0
-5 0
0
5 0
1 0 0
1 5 0
1 2 3 4 5
Auto S erv i
2 5 2 4
7 0
8 8 8 8
0
10
20
30
40
50
60
70
8090
10 0
1 2 3 4 5
C re d it C
-
4 0
6 6 7 27 9
8 7
-
-8 0
-6 0
-4 0
-2 0
0
2 0
4 0
6 0
8 0
1 0 0
1 2 3 4 5 6
`
I nd u s t ri a l D i s tr ib
4 5
9 9
1 2 1
1 4
1 6
0
2 0
4 0
6 0
8 0
1 0 0
1 2 0
1 4 0
1 6 0
1 8 0
1 2 3 4 5
Source: Frederick F. Reichheld and Thomas Teal, 1996
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Customer Life Cycle Profit Patterns
Life Insurance
-175
1331
-29-76
-1125-1200
-1000
-800
-600
-400
-200
0
200
1 2 3 4 5 6
Industrial Laundry
144166
192222
256
0
50
100
150
200
250
300
1 2 3 4 5
Source: Frederick F. Reichheld and Thomas Teal, 1996
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Other approachOther approach
to customerto customer
equityequity
Acquisition
Retention
Add-on selling
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Components of Customer Equity
Add-onSelling
Retention
Acquisition
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How Marketing Mix Affects
Components of Customer Equity
Acquisition Retention Add-on Selling
AdvertisingCopy
Awareness Direct CustomerCommunication
Affinity with the firm
MediaSelection
Mass Media costeffective
Data base Marketing Data base Marketing
CustomerService
Affects word of mouth A primary vehicle forcreating retention
Increase response ratesfor add-on offers
ProductQuality
Affects word of mouth Product Reliabilitycreates retention
Increase response ratesfor add-on offers
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How Marketing Mix Affects
Components of Customer Equity
Acquisition Retention Add-on Selling
ProductPositioning
Affect size of targetmarkets; Createscustomer expectation
High retention occurswhen positioning anddelivery of productmatch
Creates affinity withcustomer base
Promotion Generates trial amongpotential customers
Increase retentionwhen unique rewardsare offered to bestcustomer
Increase response ratesto add-on offers
Channels ofDistribution
Third party channelscan increase customeracquisition
Third party channelsdecrease retention ratebecause the channelowns the customer
Direct channel makes iteasier to targetcustomers
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Customer Acquisition
Rule 1: Acquire any customer as long as thediscounted future value of the customer exceedsthe acquisition cost for that customers
Rule 2: When you broaden the acquisition effort,
be prepared for lower response rates Rule 3: The greater its profits from retention, the
greater a firms customer acquisition investmentshould be
Rule 4: The higher the percentage of the initialacquisition investment that a firm recovers in thefirst period, the greater its acquisition investmentshould be
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Acquisition Steps
Identify Target Customers
Build awareness and brand postioning
Market Penetration Pricing Trials
Experiences and Satisfaction
Pricing after trial and creating long-termvalue to customers
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Acquisition Steps
Identify Target Customers
Individual Customer Targeting - First degree
targeting: profiling and regression score
Segmented Targeting Second degree
targeting: cluster
Self-selection targeting third degree
targeting: marketing offer
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Tools for Acquisition
Data Base Marketing
Type of Information Source
Purchasing Potential Sales Force
Marketing ResearchCustomer Characteristic Sales Force
Marketing Research
Customer Equity Accounting Dept. Sales Forces
Customer Organization Structure
Sales ForceMarketing Research
Key Purchasing Influences
Competitors offers
Customer Attitude
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Tools for Acquisition
Data analysis Calculating the Acquisition rate
Calculating retention rate and defector rate
Evaluating opportunity for add-on selling
Understanding customers response to firmsmarketing programs
Analysing and following customers purchasing
pattern
Predicting customers future purchasing trends Developing effective sales strategy
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Tools for Acquisition
Building customer Profiling Building customer segmentation profile
Regression analysis
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Customer Retention
For short purchasing cycle product :customers return in next purchasing cycle
For long purchasing cycle product: customers
show willingness to repurchase next time
(Repurchase intention)
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Retention Misunderstanding
Company must aim at 100% customer retention Maximum retention rate means maximum profit
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Customer Retention
Trap of customer satisfaction Expectation vs. Delivery
Value
Uniqueness of the offers Loyalty mechanism
Ease of purchase Product availability
Purchasing convenience
Customer service
Exit barriers
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Tools for Retention
Data base Marketing
Type of Information Source
Customer Complain Customer service
Sales information Accounting
Communication Marketing and sales
Delivery and transportation Logistic
Products Quality Control
Invoice and Payment AccountingThird party channels Accounting
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Tools for Retention
Measurement Number of Existing customer
Number of Defector
Retention rate
Defector Rate
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Customer Equity Balance sheet
2007 2008 2009
Revenue
Profit
Total number of customer
Number of newly acquired customers
Number of retained customers
Average order size (value) of a first time buyer
Average order size (value) of a retained customer
Acquisition expense for one customerRetention expense for one customer
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Customer Equity Balance sheet
2007 2008 2009
Profit from first time buyers
Projected Future profit from first time byers
Profit from retained buyers
Projected Future profit from retained byers
Total customer equity
Top Class Gym
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Top Class Gym
Top Class Gym is a new, high class gym, located in a building
in District 1 with a total area of 800 m2. The rent is
16USD/m2/month. This rent will hold unchanged for the firsttwo years and will subject to 10% increase each year from 3rd
year. The total invested capital for equipments and decoration
is 1.5 millions USD. In average, the equipments will be
depreciated in 5 years (straight line depreciation). The owner of the Gym is now looking for outstanding Marketing
Manager with excellent Marketing Plan to Market Top Class
Gym services to target customers.
Work with your teammates to: Identify Target customers
Setting Marketing Objectives for the firt 3 months, 6 months, 1 year,
and 2 year.
Outline your action plans to meet the above objectives
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