Wednesday, April 30, 2014

Improving Shareholder Value Through Customer Equity

Customer equity functions in a positive perspective of the company, its offerings and its employees.  Customer equity has significant worth to companies that desire to encourage customers to continue to pay for products and services that raise shareholder value, firm growth and employment prospects. A study by Shultze, et. al. (2012) found that increases in customer equity have a larger impact on shareholder value. It is this shareholder value that is used for reinvestment for future growth and opportunities. 

Customer equity, marketing practices, and revenue are closely associated. When customers consider their total impressions of a company and its offerings they will naturally consider purchasing or not purchasing the product or service again. Customer equity raises the likelihood that they will make a decision to purchase again…and hopefully again and again. This correlation of marketing metrics, customer receptivity and stock value has been associated in a number of different studies making them loosely tied together (Srinivasan & Hanssens, 2009). 

Customer equity is forward looking trying to determine the financial value of retaining customers into the future. Sometimes this is three years and other times it may be a lifetime. The way in which marketing and the quality of the product/service the customers receives will naturally have an impact on whether they are retainable.  Retained customers are simply worth more in terms of ROI costs than new customers and create a base by which the company can grow. 

 Marketing effectively to important customers, maintaining a relationship with them, and servicing them well are important for retaining their patronage.  Many products and services have a shelf life and cycles that encourage repurchasing. For example, a person who likes cars may buy a new one every three years while a person who enjoys a certain food product may buy it every week. The lifetime value of a customer is its total value calculated out over a certain period of time. 

The researchers found that there is a 1.55 ratio of customer equity and shareholder value from data pulled from 2,000 companies over 10 years. In other words, when customer equity increases 10% it also has a 15.5% impact on shareholder value. Changes in customer equity and shareholder value are impacted by debt and non-operating assets. These concepts should be integrated into their analysis of value contributions from marketing actions. Using stronger customer metrics will help determining improvements in developing customer equity. 

Schulze, C. et. al. (2012). Linking Customer and Financial Metrics to Shareholder Value: The Leverage Effect in Customer-Based Valuation. Journal of Marketing, 76 (7). 

Srinivasan, S. & Hanssens, D. (2009). Marketing and Firm Value: Metrics, Methods, Findings and Future Directions. Journal of Marketing Research, 46 .

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