Customer equity

Customer equity is the total combined customer lifetime values of all of a companys customers. Overview In deciding the value of a company, it is important to know of how much value its customer base is in terms of future revenues. The greater the customer equity (CE), the more future revenue in the lifetime of its clients; this means that a company with a higher customer equity can get more money from its customers on average than another company that is identical in all other characteristics. As a result a company with higher customer equity is more valuable than one without it. It includes customers' goodwill and extrapolates it over the lifetime of the customers. The term is a misnomer since the term has nothing to do with the traditional meaning of equity. There are three drivers to customer equity, all of which refer to three sides of the same thing: Value equity: What the customer assesses the value of the product or service provided by the company to be; Brand equity: What the customer assesses the value of the brand is, above its objective value; Retention equity: The tendency of the customer to stick with the brand even when it is priced higher than an otherwise equal product;

Customer equity strategy

Companies often attempt to gain more customers and increase revenues by improving customer equity. They do this by: improving consumer service improving the value or desirability of the brand improving goodwill improving brand popularity such as by advertisements

customer equity is a result of customer relationship management. Customer equity is the total of discounted lifetime values of all of the firms customers. In layman terms, the more loyal a customer, the more is the customer equity. Firms like McDonalds, Apple and Facebook have very high customer equity and that is why they have an amazing and sustainable competitive advantage. Customer Equity is made up of three components. Value Equity, Brand Equity and Relationship Equity. Value Equity One of the common terms used in marketing is Value for Money also known as VFM. Thus Value equity is the customers assessment based on the offer, its price and its convenience. Thus if all the three match for the customer, the firm is said to have high value equity. McDonalds is a fast food item, it is available in most places and its price is considerable highly reasonable. Thus it has high value equity because it is value for money product. Reebok and Adidas are available at select malls, they are perceived as the leaders in sports shoes and people are ready to go out of the way to get a reebok and adidas shoe. Thus even Reebok and Adidas have value equity. Value equity is especially important in Industrial markets mainly because B2B customers are highly aware of the convenience and pricing parameters for high cost products. Brand Equity A normal pizza might cost you around 100 rupees. But if the pizza is from Pizza hut, or a sandwich is from Subway, you will be ready to shell out more money without even looking at them. This is mainly because of your perception and this plays a crucial role in defining brand equity. Brand equity is the

customers subjective and intangible assessment of the brand above and beyond its objectively perceived value. In essence, on the name of a brand, a customer might be ready to pay more value just because of his trust on the brand. The drivers of brand equity are brand awareness, customer attitude and finally brand ethics and its perception by customers. The tools used in developing brand equity mainly include advertising, public relations and an overall holistic marketing approach. Brand equity is very important in the consumer market. Relationship Equity Relationship equity is what makes a customer stay back with the preferred brand rather than shift to any other. However, True relationship equity comes when a customer is ready to stay with the brand ignoring loyalty programs, special recognition programs and all other programs. An excellent example of a company with probably the highest relationship equity is Harley Davidson. Relationship equity comes to a firm which is good in maintaining personal relations and therefore the customer continues with the supplier our of habit or inertia. Thus these three equities together form the customer equity for an organization. Depending on the type of product it is in, as well as norms in its sector, the company vary in the type of equity it wants to harness most.

Brand Equity & Customer Equity

Brand Equity is defined as value and strength of the Brand that decides its worth whereas Customer Equity is defined in terms of lifetime values of all customers. Brand Equity and Customer Equity have two things in commonBoth stress on significance of customer loyalty to the brand Both stress upon the face that value is created by having as many customers as possible paying as high price as possible. But conceptually both brand equity and customer equity differ. While customer equity puts too much emphasis on lower line financial value got from the customers, brand equity attempts to put more emphasis on strategic issues in managing brands. Customer Equity is less narrow alternative. It can overlook a brands optional value and their capacity effect revenues and cost beyond the present marketing environment. Just as customer equity can persist without brand equity, brand equity may also exist without customer equity. For instance I may have positive attitude towards brands - McDonald and Burger King, but I may only purchase from McDonalds brand consistently. To conclude, we can say brands do not exist without consumer and consumer do not exist without brands. Brands serve as a temptation that utilizes other intermediaries to lure the customers from whom value is extracted. Customers serve as a profit-medium for brands to encash their brand value. Both the concepts are highly co-related. Brand Extensionis the use of an established brand name in new product categories. This new category to which the brand is extended can be related or unrelated to the existing product categories. A renowned/successful brand helps an organization to launch products in new categories more easily. For instance, Nikes brand core product is shoes. But it is now extended to sunglasses, soccer balls, basketballs, and golf equipments. An existing brand that gives rise to a brand extension is referred to as parent brand. If the customers of the new business have values and aspirations synchroniz-

ing/matching those of the core business, and if these values and aspirations are embodied in the brand, it is likely to be accepted by customers in the new business. Extending a brand outside its core product category can be beneficial in a sense that it helps evaluating product category opportunities, identifies resource requirements, lowers risk, and measures brands relevance and appeal. Brand extension may be successful or unsuccessful. Instances where brand extension has been a success are Wipro which was originally into computers has extended into shampoo, powder, and soap. Mars is no longer a famous bar only, but an ice-cream, chocolate drink and a slab of chocolate. Instances where brand extension has been a failure are In case of new Coke, Coca Cola has forgotten what the core brand was meant to stand for. It thought that taste was the only factor that consumer cared about. It was wrong. The time and money spent on research on new Coca Cola could not evaluate the deep emotional attachment to the original CocaCola. Rasna Ltd. - Is among the famous soft drink companies in India. But when it tried to move away from its niche, it hasnt had much success. When it experimented with fizzy fruit drink Oranjolt, the brand bombed even before it could take off. Oranjolt was a fruit drink in which carbonates were used as preservative. It didnt work out because it was out of synchronization with retail practices. Oranjolt need to be refrigerated and it also faced quality problems. It has a shelf life of three-four weeks, while other soft- drinks assured life of five months.
Advantages of Brand Extension

Brand Extension has following advantages: It makes acceptance of new product easy. It increases brand image. The risk perceived by the customers reduces. The likelihood of gaining distribution and trial increases. An established brand name increases consumer interest and willingness to try new product having the established brand name. The efficiency of promotional expenditure increases. Advertising, selling and promotional costs are reduced. There are economies of scale as advertising for core brand and its extension reinforces each other. Cost of developing new brand is saved. Consumers can now seek for a variety. There are packaging and labeling efficiencies. The expense of introductory and follow up marketing programs is reduced. There are feedback benefitsto the parent brand and the organization. The image of parent brand is enhanced. It revives the brand. It allows subsequent extension.

Brand meaning is clarified. It increases market coverage as it brings new customers into brand franchise. Customers associate original/core brand to new product, hence they also have quality associations.

Disadvantages of Brand Extension

Brand extension in unrelated markets may lead to loss of reliabilityif a brand name is extended too far. An organization must research the product categories in which the established brand name will work. There is a risk that the new product may generate implications that damage the imageof the core/original brand. There are chances of less awarenessand trial because the management may not provide enough investment for the introduction of new product assuming that the spin-off effects from the original brand name will compensate. If the brand extensions have no advantage over competitive brands in the new category, then it will fail.

What is Co-branding

Co branding is the utilization of two or more brands to name a new product. The ingredient brands help each other to achieve their aims. The overall synchronization between the brand pair and the new product has to be kept in mind. Example of co-branding - Citibank co-branded with MTV to launch a co-branded debit card. This card is beneficial to customers who can avail benefits at specific outlets called MTV Citibank club.
Types of Co-branding

Co-branding is of two types: Ingredient co-brandingand Composite co-branding.

Ingredient co-brandingimplies using a renowned brand as an element in the production of another renowned brand. This deals with creation of brand equity for materials and parts that are contained within other products. The ingredient/constituent brand is subordinate to the primary brand. For instance - Dell computers has co-branding strategy with Intel processors. The brands which are ingredients are usually the companys biggest buyers or present suppliers. The ingredient brand should be unique. It should either be a major brand or should be protected by a patent. Ingredient co-branding leads to better quality products, superior promotions, more access to distribution channel and greater profits. The seller of ingredient brand enjoys long-term customer relations. The brand manufacture can benefit by having a competitive advantage and the retailer can benefit by enjoying a promotional help from ingredient brand. Composite co-branding refers to use of two renowned brand names in a way that they can collectively offer a distinct product/ service that could not be possible individually. The success of composite branding depends upon the favourability of the ingredient brands and also upon the extent on complementarities between them.

Advantages and Disadvantages of Co-branding

Co-branding has various advantages, such as - risk-sharing, generation of royalty income, more sales income, greater customer trust on the product, wide scope due to joint advertising, technological benefits, better product image by association with another renowned brand, and greater access to new sources of finance. But co-branding is not free from limitations. Co-branding may fail when the two products have different market and are entirely different. If there is difference in visions and missions of the two companies, then also composite branding may fail. Co-branding may affect partner brands in adverse manner. If the customers associate any adverse experience with a constituent brand, then it may damage the total brand equity.

What is Positioning
February 15, 2011 By Hitesh Bhasin 1 Comment Positioning is defined as the act of designing the companys offering and image to occupy a distinctive place in the target markets mind. For Example What brand occurs in your mind when I say walkman? I guess Sony. Similarly what do you think of when I say photocopies? I think Xerox or Cannon. Thus these brands have positioned themselves in the mind of their customer such that whenever the generic product is mentioned immediately these brands come into our mind. Now if I ask most innovative company I guess you will name APPLE : I agree with you. Thus Positioning can be defined with the following core points Positioning is a final step in the Segmentation Targeting and Positioning step Positioning requires a holistic approach and is one of the most useful tools for marketers. Positioning is almost completely about perception. How the customer perceives your product or brand is what positioning is all about. Thus the best mass marketers like to use marketing tactics which touch the whole market (Example Vodafone Zoozoos) Perceptual mapping is generally used to determine the Positioning of a product in the target market. Positioning can make or break a brand. A rightly perceived product / company gets lots of returns from the market as compared to a wrongly perceived company. Example Airtel vs Reliance telecom Communication is of ultimate importance in positioning. The right communication can go a long way in determining the perception of a product / brand. Finally, Attributes tangible or intangible (in case of services) are necessary to be involved in the product which increase the positioning of the product in the customers mind.

Customer retention
If it is difficult to attract customers, it is more difficult to retain them. Most marketing theories and practices over time have relied on attracting new customers rather then retaining the old ones. A sustainable business however, concentrates on its new as well as old customers equally. Traditionally, the emphasis has been more on new customers rather than customer retention. Customer retention needs more of building relationships and keeping after sales commitments intact. The better the after sales service, the better will be customer retention. Thus companies would be wise to perform customer satisfaction surveys regularly as customer satisfaction is the key to customer retention.

A highly satisfied customer stays longer with the company, buys and self promotes new products being launched by the company, is optimal for feedback on improving the organization and the cost of this customer is much less then attracting new customers. Customer complaints is NOT a measure of customer satisfaction. 95% of people never complain to a company. They just move on to another brand. Thus using toll free numbers and suggestions forms has become a norm in major MNCs as well as retail chains. Just so they can reach out to their customers, and possibly bring back lost customers (Refer cost of lost customers) Effect of complaint resolution on customer retention If a customer complains, The rate at which complains are solved are also important for customer retention. Market research has concluded that after complaint resolution, 50% to 70% customers are retained. However, if the complaint is resolved within optimum time (mostly 24 hours), the rate of retention goes upto 95%. Furthermore, About 30% customers whose complaints were solved recommend the same company to an average of 5 people thereby increasing the word of mouth promotions. Customer Retention programmes Finding the patterns of customer defection is important to devise optimum customer retention programs. If you wanna retain lost customers, then first you need to find out WHY these customers are leaving your brand / product. This can be done by analyzing internal records, sales calls, pricing and product surveys and competition studies. For example Each and every call in a customer service department is recorded so as to improve the quality of customer calls over time. Thus, some key questions to be asked are What is the rate of defection? Does retention vary by office, region, sales executives or distributor? (To find out why customer retention is higher in some places) Does your pricing have a relation to customers and if yes, what is the magnitude of the effect. Where do your lost customers usually go? Which brand / product and why? What are the retention figures for your sector / industry? Which company in your sector retains their customers the longest and why? These are some questions which a company can ask of itself while devising a customer retention programme. Interesting facts on customer retention Acquiring new customers comprises of five times the cost of retaining your customers. An average company loses 10% of its customers each year. Lessening the defection rate by as low as 5% can increase companies profits by 25% depending on industry standards. Customer profits keep on increasing over the life of the retained customer as cost in retaining the customer becomes lower and lower. These facts in themselves explain the need of customer retention Why would you want to spend 5 times your hard earned profits if you can tweak your own organization and thereby retain customers.Some excellent examples over time have been Samsung, Ford, Hyundai, Nike, Aquafina, Apple, McDonalds, Pepsi, Starbucks, Estee lauder and Walmart. What Drives Customer Equity

A companys current customers provide the most reliable source of future revenues and profits. By Katherine N. Lemon, Roland T. Rust, and Valarie A. Zeithaml Consider the issues facing a typical brand manager, product manager, or marketing-oriented CEO: How do I manage the brand? How will my customers react to changes in the product or service offering? Should I raise price? What is the best way to enhance the relationships with my current customers? Where should I focus my efforts? Business executives can answer such questions by focusing on customer equitythe total of the discounted lifetime values of all the firms customers. A strategy based on customer equity allows firms to trade off between customer value, brand equity, and customer relationship management. We have developed a new strategic framework, the Customer Equity Diagnostic, that reveals the key drivers increasing the firms customer equity. This new framework will enable managers to determine what is most important to the customer and to begin to identify the firms critical strengths and hidden vulnerabilities. Customer equity is a new approach to marketing and corporate strategy that finally puts the customer and, more important, strategies that grow the value of the customer, at the heart of the organization. For most firms, customer equity is certain to be the most important determinant of the long-term value of the firm. While customer equity will not be responsible for the entire value of the firm (eg., physical assets, intellectual property, and research and development competencies), its current customers provide the most reliable source of future revenues and profits. This then should be a focal point for marketing strategy. Although it may seem obvious that customer equityis key to long-term success, understanding how to grow and manage customer equity is more complex. How to grow it is of utmost importance, and doing it well can create a significant competitive advantage. There are three drivers of customer equityvalue equity, brandequity, and relationship equity (also known as retention equity). These drivers work independently and together. Within each of these drivers are specific, incisive actions, or levers, the firm can take to enhance its overall customer equity. Value Equity Value is the keystone of the customers relationship with the firm. If the firms products and services do not meet the customers needs and expectations, the best brand strategy and the strongest retention and relationship marketing strategies will be insufficient. Value equity is defined as the customers objective assessment of the utility of a brand, based on perceptions of what is given up for what is received. Three key levers influence value equity: quality, price, and convenience. EXECUTIVE Customer equity is critical to a firms long-term success. We developed a strategic marketing framework that puts the customer and growth in the value of thecustomer at the heart of the organization. Using a new approach based on customer equitythe total of the discounted lifetime values of all the firms customerswe describe the key drivers of firm growth: value equity, brand equity, and relationship equity. Understanding these drivers will help increase customer equity and, ultimately, the value of the firm. Quality can be thought of as encompassing the objective physical and nonphysical aspects of the product and service offering under the firms control. Think of the power FedEx holds in the marketplace, thanks, in no small part, to its maintenance of high quality standards. Price represents the

aspects of what is given up by the customer that the firm can influence. New e-world entrants that enable customers to find the best price (e.g., www.mysimon.com) have revolutionized the power of 1 ANNUAL EDITIONS price as a marketing tool. Convenience relates to actions that help reduce the customers time costs, search costs, and efforts to do business with the firm. Consider Fidelity Investments new strategy of providing Palm devices to its best customers to enable anytime, anywhere trading and updatesclearly capitalizing on the importance of convenience to busy consumers. Brand Equity Where value equity is driven by perceptions of objective aspects of a firms offerings, brand equity is built through image and meaning. The brand serves three vital roles. First, it acts as a magnet to attract new customers to the firm. Second, it can serve as a reminder to customers about the firms products and services. Finally, it can become the customers emotional tie to the firm. Brand equity has often been defined very broadly to include an extensive set of attributes that influence consumer choice. However, in our effort to separate the specific drivers of customer equity, we define brand equity more narrowly as the customers subjective and intangible assessment of the brand, above and beyond its objectively perceived value. The key actionable levers of brand equity are brand awareness, attitude toward the brand, and corporate ethics. The first, brand awareness, encompasses the tools under the firms control that can influence and enhance brand awareness, particularly marketing communications. The new focus on media advertising by pharmaceutical companies (e.g., Zyban, Viagra, Claritin) is designed to build brand awareness and encourage patients to ask for these drugs by name. Second, attitude toward the brand encompasses the extent to which the firm is able to create close connections or emotional ties with the consumer. This is most often influenced through the specific nature of the media campaigns and may be more directly influenced by direct marketing. Krafts strength in consumer food products exemplifies the importance of brand attitudedeveloping strong consumer attitudes toward key brands such as Kraft Macaroni and Cheese or Philadelphia Cream Cheese. The third lever, corporate ethics, includes specific actions that can influence customer perceptions of the organization (e.g., community sponsorships or donations, firm privacy policy, and employee relations). Home Depot enhanced its brand equity by becoming a strong supporter of community events and by encouraging its employees to get involved. Relationship Equity Consider a firm with a great brand and a great product. The company may be able to attract new customers to its product with its strong brand and keep customers by meeting their expectations consistently. But is this enough? Given the significant shifts in the new economyfrom goods to services, from transactions to

relationshipsthe answer is no. Great brand equity and value equity may not be enough to hold the customer. Whats needed is a way to glue the customers to the firm, enhancing the stickiness of the relationship. Relationship equity represents this glue. Specifically, relationship equity is defined as the tendency of the customer to stick with the brand, above and beyond the customers objective and subjective assessments of the brand. The key levers, under the firms control, that may enhance relationship equity are loyalty programs, special recognition and treatment, affinity programs, communitybuilding programs, and knowledge-building programs. Loyalty programs include actions that reward customers for specific behaviors with tangible benefits. From airlines to liquor stores, from Citigroup to Diet Coke, the loyalty program has become a staple of many firms marketing strategy. Special recognition and treatment refers to actions that recognize customers for specific behavior with intangible benefits. For example, US Airways Chairman

Preferred status customers receive complimentary membership in the US Airways Club. Affinity programs seek to create strong emotional connections with customers, linking the customers relationship with the firm to other important aspects of the customers life. Consider the wide array of affinity Visa and MasterCard choices offered by First USA to encourage increased use and higher retention. Community-building programs seek to cement the customer-firm relationship by linking the customer to a larger community of like customers. In the United Kingdom, for example, soft drink manufacturer Tango has created a Web site that has built a virtual community with its key segment, the nations youth. Finally, knowledgebuilding programs increase relationship equity by creating structural bonds between the customer and the firm, making the customer less willing to recreate a relationship with an alternative provider. The most often cited example of this is amazon.com, but learning relationships are not limited to cyberspace. Firms such as British Airways have developed programs to track customer food and drink preferences, thereby creating bonds with the customer

while simultaneously reducing costs. Determining the Key Drivers Think back to the set of questions posed earlier. How should a marketing executive decide where to focus his or her efforts: Building the brand? Improving the product or service? Deepening the relationships with current customers? Determining what is the most important driver of customer equity will often depend on characteristics of the industry and the market, such as market maturity or consumer decision processes. But determining the critical driver for your firm is the first step in building the truly customer-focused marketing organization. 2 Article 7. What Drives Customer Equity When Value Equity Matters Most Value equity matters to most customers most of the time, but it will be most important under specific circumstances. First, value equity will be most critical when discernible differences exist between competing

products. In commodity markets, where products and competitors are often fungible, value equity is difficult to build. However, when there are differences between competing products, a firm can grow value equity by influencing customer perceptions of value. Consider IBMs ThinkPad brand of notebook computers. Long recognized for innovation and advanced design, IBM has been able to build an advantage in the area of value equity by building faster, thinner, lighter computers with advanced capabilities. Second, value equity will be central for purchases with complex decision processes. Here customers carefully weigh their decisions and often examine the tradeoffs of costs and benefits associated with various alternatives. Therefore, any company that either increases the customer benefits or reduces costs for its customers will be able to increase its value equity. Consider consumers contemplating the conversion to DSL technology for Internet access. This is often a complex, time-consuming decision. DSL companies that can reduce the time and effort involved in

this conversion will have the value equity advantage. Third, value equity will be important for most businessto-business purchases. In addition to being complex decisions, B2B purchases often involve a long-term commitment or partnership between the two parties (and large sums of money). Therefore, customers in these purchase situations often consider their decisions more carefully than individual consumers do. Fourth, a firm has the opportunity to grow value equity when it offers innovative products and services. When considering the purchase of a really new product or service, customers must carefully examine the components of the product because the key attributes often may be difficult to discern. In many cases, consumers make one-toone comparisons across products, trying to decide whether the new product offers sufficient benefits to risk the purchase. New MP3-type devices that provide consumers with online access to music are examples of such innovative products and services. Consumers will seek out substantial

information (e.g., from the Web, friends, and advertisements) to determine the costs and benefits of new products. Firms that can signal quality and low risk can grow value equity in such new markets. Finally, value equity will be key for firms attempting to revitalize mature products. In the maturity stage of the product life cycle, most customers observe product parity, sales level off, and, to avoid commoditization, firms often focus on the role of the brand. But value equity also may grow customer equity. By introducing new benefits for a current product or service, or by adding new features to the current offering, firms can recycle their products and services and grow value equity in the process. Consider the new Colgate bendable toothbrush. It seeks to revitalize the mature toothbrush market with a new answer to an ageold problem. The success of this new innovation increases Colgates value equity. Clearly then, the importance of value equity will depend on the industry, the maturity of the firm, and the

customer decisionmaking process. To understand the role of value equity within your organization, ask several key customers and key executives to assess your company using the set of questions provided in the Customer Equity Diagnostic on the following page. When Brand Equity Matters Most While brand equity is generally a concern, it is critical in certain situations. First, brand equity will be most important for low-involvement purchases with simple decision processes. For many products, including frequently purchased consumer packaged goods, purchase decisions are often routinized and require little customer attention or involvement. In this case, the role of the brand and the customers emotional connection to the brand will be crucial. In contrast, when product and service purchase

decisions require high levels of customer involvement, brand equity may be less critical than value or relationship equity. Coca-Cola, for example, has been extremely successful making purchases a routine aspect of consumers shopping trips by developing extremely strong connections between the consumer and the brand. Second, brand equity is essential when the customers use of the product is highly visible to others. Consider Abercrombie & Fitch, the home of in-style gear for the Net Generation. For A&F aficionados, the brand becomes an extension of the individual, a badge or statement the individual can make to the world about himself or herself. These high-visibility brands have a special opportunity to build brand equity by strengthening the brand image and brand meanings that consumers associate with the brand. Third, brand equity will be vital when experiences

associated with the product can be passed from one individual or generation to another. To the extent that a firms products or services lend themselves to communal or joint experiences (e.g., a father teaching his son to shave, shared experiences of a special wine), the firm can build brand equity. The Vail ski resort knows the value of this intergenerational brand value well. The resort encourages family experiences by promoting multigenerational visits. Fourth, the role of the brand will be critical for credence goods, when it is difficult to evaluate quality prior to consumption. For many products and services, it is possible to try before you buy or to easily evaluate the quality of specific attributes prior to purchase. However, for others, consumers must use different cues for quality. This aspect of brand equity is especially key for law firms, investment banking firms, and advertising agencies, which are beginning to recognize the value of strong brand identities as a key tool for attracting new clients.

3 ANNUAL EDITIONS Customer Equity Diagnostic How much do your customers care about value equity? Do customers perceive discernible differences between brands? Do they focus on the objective aspects of the brand? Do you primarily market in a B2B environment? Is the purchase decision process complex in your industry? Is innovation a key to continued success in your industry? Do you revitalize mature products with new features and benefits? How are you doing? Are you the industry leader in overall quality? Do you have initiatives in place to continuously improve quality? Do your customers perceive that the quality they receive is worth the price they paid? Do you consistently have the lowest prices in your industry? Do you lead the industry in distribution of your products and services? Do you make it most convenient for your customers to do business with you? How important is brand equity? Are the emotional and experiential aspects of the purchase important? Is consumption of your product highly visible to others? Are most of your products frequently purchased consumer goods? Is the purchase decision process relatively simple? Is it difficult to evaluate the quality of your products or services prior to consumption or use? Is advertising the primary form of communication to your customers? How are you doing? Are you the industry leader in brand awareness? Do customers pay attention to and remember your advertising and the information you send them? Are you known as a good corporate citizen? Active in community events? Do you lead your industry in the development and maintenance of ethical

 Do customers feel a strong emotional connection to the brand? How does relationship equity weigh in? Are loyalty programs a necessity in your industry? Do customers feel like "members" in your community? Do your customers talk about their commitment to your brand? Is it possible to learn about your customers over time and customize your interactions with them? Do your customers perceive high switching costs? Are continuing relationships with customers important? How are you doing? Do customers perceive that you have the best loyalty program in your industry? Do you lead the industry in programs to provide special benefits and services for your best customers? To what extent do your customers know and understand how to do business with you? Do customers perceive you as the leader in providing a sense of community? Do you encourage dialogue with your customers? Therefore, brand equity will be more important in some industries and companies than others. The role of brand equity will depend on the level of customer involvement, the nature of the customer experience, and the ease with which customers can evaluate the quality of the product or service before buying it. Answering the questions in the Customer Equity Diagnostic will help determine how important brand equity is for your organization. When Relationship Equity Matters Most In certain situations, relationship equity will be the most important influence on customer equity. First, relationship equity will be critical when the benefits the customer associates with the firms loyalty program are significantly greater than the actual cash value of the benefits received. This aspirational value of a loyalty program presents a solid opportunity for firms to strengthen relationship equity by creating a strong incentive for the customer to return to the firm for future purchases. The success of the worlds frequent flyer programs lies, to some extent, in the difference between the true value of a frequent flyer mile (about three cents) and the aspirational valuethe customers perception of the value of a frequent flyer mile (Im that much closer to my free trip to Hawaii!). Second, relationship equity will be key when the community associated with the product or service is as important as the product or service itself. Certain products and services have the added benefit of building a strong community of enthusiasts. Customers will often continue to purchase from the firm to maintain membership in the community. Just ask an active member of a HOG

(Harley-Davidson Owners Group) to switch to a Honda Gold Wing; or ask a committed health club member to switch to an alternate health club. Individuals who have become committed to brand communities tend to be fiercely loyal. Third, relationship equity will be vital when firms have the opportunity to create learning relationships with customers. Often, the relationship created between the firm and the customer, in which the firm comes to appreciate the customers preferences and buying habits, can become as important to the customer as the provision of the product or service. Database technology has made such learning possible for any company or organization willing to invest the time and resources in collecting, tracking, and utilizing the information customers reveal. For example, Dell has created learning relationships with its key business customers through Dells Premier Pagescustomized Web sites that allow customers to manage their firms purchases of Dell computers. The benefit: It becomes more difficult for customers to receive the same personal attention from an alternative provider without training that new provider. Article 7. What Drives Customer Equity Finally, relationship equity becomes crucial in situations where customer action is required to discontinue the service. For many services (and some product continuity programs), customers must actively decide to stop consuming or receiving the product or service (e.g., book clubs, insurance, Internet service providers, negative option services). For such products and services, inertia helps solidify the relationship. Firms providing these types of products and services have a unique opportunity to grow relationship equity by strengthening the bond with the customer. As with value and brand equity, the importance of relationship equity will vary across industries. The extent to which relationship equity will drive your business will depend on the importance of loyalty programs to your customers, the role of the customer community, the ability of your organization to establish learning relation- ships with your customers, and your customers perceived switching costs. Answer the questions in the Customer Equity Diagnostic framework to see how important relationship equity is to your customers. A New Strategic Approach We have now seen how it is possible to gain insight into the key drivers of customer equity for an individual industry or for an individual firm within an industry. Once a firm understands the critical drivers of customer equity for its industry and for its key customers, the firm can respond to its customers and the marketplace with strategies that maximize its performance on elements that matter. Taken down to its most fundamental level, customers choose to do business with a firm because (a) it offers better value, (b) it has a stronger brand, or (c)switching away from it is too costly. Customer equity provides the diagnostic tools to enable the marketing executive to understand which of these three motivators is most critical to the firms customers and will be most effective in getting the customer to stay with the firm, and to buy more. Based on this understanding, the firm can identify key opportunities for growth and illuminate unforeseen vulnerabilities. In short, customer equity offers a powerful new approach to marketing strategy, replacing product-based strategy with a competitive strategy approach based on growing the long-term value of the firm.