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Do You Measure Customer Equity?

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As a business person, executive, or entrepreneur there are many specific measures employed to gauge business success. Some of them are quite familiar to business people; profit, sales dollars, market share, number of customers, and costs among others. However, while those are certainly indicative of success and appropriate to be tracked; they do not give as accurate a picture of FUTURE success if they are not balanced by a measure known as “customer equity.”

Customer Equity is a key measure for determining future business potential

What Most of Us Know

Most business people and financial executives are comfortable talking about standard profit and loss or balance sheet kinds of measures.  Assets and liabilities are understood and easily identified.  Concepts of equity as it pertains to capital or equipment ownership and value attained or retained are commonly discussed.

We also appreciate the notion of tracking costs incurred to acquire new business and/or retain existing business.  Though we do not always follow through on it, we at least understand the concepts and believe we SHOULD be tracking them.

What we Don’t Know

Do we know the following:

  1. How much value is there in “loyalty” (assuming we can even qualify what that means and looks like to begin to put a quantification to it)?
  2. What is the lifetime value of a consumer/customer worth to the organization (LTV)?
  3. What is the Customer Value Proposition (CVP)?
  4. Where does PROFITABLE Volume Growth (PVG) come from?

What We Have

We have large reams of data on our customers (through frequent shopper programs, credit card tracking, email and other online engagement strategies, including social media) that remain often untouched or analyzed.  Other than providing opportunity for discount programs, most businesses struggle with what to do with the information.

Where We Are

We are in a strange quandary.  We collect more information about our customers and shoppers than ever before thanks to “Big Data” and the ability to have computing power at such reasonable costs available to “slog through data.”  However, we often feel like we know less than ever about:

  1. Customer motivations
  2. Customer decision-making
  3. Customer commitments

By recognizing what our customers seek and providing an opportunity to meet those needs or desires by guiding the shopper/customer through their purchase decision barriers to a level of comfort that allows them to make a purchase decision confidently; businesses could improve everything from:

  1. Their “close rates” or conversion of shoppers to buyers
  2. Profitability (upgrading or migrating certain purchases from less profitable options to more profitable ones)
  3. Volume or dollar sales (add-on sales, incremental purchases, etc.)
  4. Margin (typically less expensive to service existing customers than to acquire new ones)
  5. Share (developing loyalty through repeat purchases, more frequent shopping occasions, larger purchases per occasion, etc.).

The focus on the “hard numbers” without recognition and understanding of the relationship aspects that fuel the results reported in the hard numbers will rarely tell the whoe story.  It is only by going back to the dynamics of the relationship and measuring the “customer equity” components that true forecasting will ever be accomplished.  Otherwise, one can only rely on past results and hope that nothing changes today or into the future.  Starting with that false premise can only lead to poor assumptions, missed targets, and becoming bewildered at why projections are so far off expectation levels.

David Zahn

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