Importance Of Customer Equity

In marketing over the last four decades, there has been a shift from product-centric to customer-centric (Vavra 1997), where more focus is on a long-term relationship with the customers rather than a short-term transactional relation (Hakansson 1982; Storbacka 1994). For this reason, a product-centred concept of brand equity has been challenged by the customer-centred concept of customer equity (Blattberg and Deighton 1996; Blattberg, Getz and Thomas 2001; Rust, Zeithaml and Lemon 2000). This customer-centred concept of customer equity has emerged and influenced the mainstream marketing theories like direct/ database marketing (Hughes 2000), relationship marketing (Hogan, et al. 2002), customer satisfaction (Oliver 1980, 1997), service quality (Brady and Cronin 2001; Parasuraman, Zeithaml and Berry 1988), and brand equity (Aaker 1991; Hogan, et al. 2002; Keller 1993). Each of these streams in marketing has contributed substantially to a more effective approach in managing customer assets, hence giving an entry to customer equity.

Due to the growing importance of customer equity, many definitions can be found in the literature. Some call it, the discounted expected contributions of all customers (Blattberg and Deighton 1996), whereas, others call it, the value of those resources that the customer supply to a retailer (Dorsch and Carlson 1996). Similarly, Rust, Zeithaml and Lemon (2004, p. 110) defined it as, “the total of the discounted lifetime values summed over all of the firm’s current and potential customers.” In a similar manner, Bayon, Gutsche and Bauer (2002, p. 213) defined customer equity as “the sum of the discounted cash surpluses generated by present and future customers (within a certain planning period) for the duration of the time they remain loyal to a company, i.e. the sum of individual customer lifetime values for the company’s point of view”. Hogan, et al. (2002, p. 7) suggested that customer equity is “a combination of the value of a firm’s current customer’s assets (those customers who currently buy from them) and the value of the firm’s potential customer’s assets (those customers who currently do not buy from the firm because they buy from a competitor or because they are not yet in the market)”. Additionally, Hogan, et al. (2002) also mentioned that tangible (e.g., plant and equipment) and intangible assets (e.g., brands, channel relationships) of the firm do not account for the total value of all assets of the firm unless customer equity is included.

The definitions of the customer equity do not end here, but with the passage of time scholars come up with new dimensions and new definitions. Kumar and George (2006, p. 157) consider customer equity as “the asset value of customers which can be measured using different aggregate and disaggregate level approaches”. Dong, Swain and Berger (2007, p. 1243) explain customer equity as “the present value of the expected benefits (e.g., gross margin) less the burdens (e.g., direct costs of servicing and communicating) related to the customers”. Finally, Bruhn, Georgi and Hadwich (2008, p. 1) illuminate customer equity as “the value of a firm’s entire customer-base or the aggregate of the customers’ individual value”

Customer equity is very important for a firm to consider because it is the key to long-term success (Lemon, Rust and Zeithaml 2001). A successful firm is the one which is successful in the eye of its customers (Rust, Zeithaml and Lemon 2000). Hansotia (2004) explains why companies should learn to manage customer equity. First, companies should consider the financial ramifications of understanding and implementing customer equity strategies. Financial theory tells us that the net present value (NPV) of its projected cash flow may estimate the value of the company (Van Horne 2001). The basic concept behind customer equity is that customers are the greatest asset of the business since they are the ones who generate revenue for the business; therefore, managing customer equity means the business should make investments into their customers and determine how they should be made for the greatest benefit (Hansotia 2004). Second, companies should also determine which marketing programmes will increase cash flow and evaluate those programmes to maximise the utility. To continuously increase cash flow, a business either needs to increase the number of customers or increase the equity or lifetime value of some of their customers (Hansotia 2004).

The inevitable importance of customer equity made the researchers identify the actionable drivers of customer equity, needed for a firm’s growth (Blattberg and Deighton 1996; Blattberg, Getz, and Thomas 2001; Bruhn, Georgi and Hadwich 2008; Dong, Swain and Berger 2007; Kumar and George 2006; Dorsch and Carlson 1996; Hansotia 2004; Rust, Zeithaml and Lemon 2000; Rust, Lemon, and Zeithaml 2004; Wiesel, Skiera and Villanueva 2008). Lemon, Rust and Zeithaml (2001), Rust, Zeithaml and Lemon (2000) and Rust, Zeithaml and Lemon (2004) described three drivers of customer equity, namely, value equity, brand equity, and relationship equity, which are important for a firm’s growth. Each of these key drivers within itself can play a significant role to increase customer equity as well as to increase the connection between these key drivers and customer equity, and to provide a strategy for firms to appropriately respond and develop to changing customer needs. Rust, Zeithaml and Lemon (2004) emphasise that organisations should focus their marketing efforts on these key drivers’ improvement and in each stage of customer relationship development process choose the most relevant customer equity drivers. The model presented by Rust, Lemon, and Zeithaml (2004) view value, brand, and relationship equity as strategic investment categories that influence customer equity, and ultimately customer satisfaction (Wu and Batmunkh 2010).

The value equity driver represents the customer’s objective evaluation of what the organisation or firm has to offer and is the foundation of a customer’s relationship with the firm. It is considered customer’s objective assessment of the utility of a brand based on perceptions of what is given up for what is received (Lemon, Rust and Zeithaml 2001; Rust, Zeithaml and Lemon 2004). Furthermore, value equity can be understood as the perceived ratio between what is received and what has to be sacrificed (Wu and Batmunkh 2010). Researchers (e.g. Lemon, Rust and Zeithaml 2001; Wu and Batmunkh 2010) pointed out that value equity has an impact on a customer’s switching propensity, a measure similar to satisfaction and loyalty intentions.

Another driver of customer equity is brand equity which is the customer’s subjective view of the organisation (Rust, Zeithaml and Lemon 2000). This driver was built through image as a magnet to attract new customers to the firm, and it is a reminder to customers about the firm’s product (Lemon, Rust and Zeithaml 2001). It is, therefore, the customer’s emotional tie to the firm and a positive perception about the products a firm has to offer. Lemon, Rust and Zeithaml (2001) consider it as an important driver to attract low-involvement customers, to increase existing customers re-purchase, and to recommend the products to others who have no experiences with product of the firm. Wu and Batmunkh (2010) explicate that a strong brand can be an umbrella under which new products can be launched so that to satisfy the existing brand loyal customers and to protect the company from competitive attacks or shifts in consumer tastes. Further, Rust, Lemon and Zeithaml (2001) states that brand equity is hopefully to influence customer willingness to stay with the company by satisfying them which will influence them to consider repurchases, or to recommend the brand and company to others.

The last important driver of customer equity is relationship equity that has to coexist with designed brand equity and value equity (Lemon, Rust and Zeithaml 2001). It is the tendency of the customer to stick with a brand, above and beyond the customer’s objective and subjective assessments of the brand (Lemon, Rust and Zeithaml 2001, p. 22). This long-term attachment of the customers with the company’s brand is clearly reflected in both theory and practice of relationship marketing; where focus is to enhance customer satisfaction in order to keep them for longer time (Morgan and Hunt 1994). The primary goal of building programmes for relationship equity was to maximise both the likelihood and size of repeat future purchases, while minimising the likelihood that a customer may purchase from or switch to a competitor (Rust, Zeithaml and Lemon 2000). If the perceived relationship equity is high, the consumers will be satisfied and it will lead to repurchase (Rust, Lemon and Zeithaml 2001).

The impact of customer equity on customer satisfaction has been a topic of high concern for many researchers (see Rust, Zeithaml and Lemon 2000; Rust, Lemon and Zeithaml 2001; Bush, Underwood and Sherrell 2007; Wu and Batmunkh 2010). These researchers found that the customer equity influence customer satisfaction one way or another. Wu and Batmunkh (2010) found that value equity, brand equity, and relationship equity have a direct and significant influence on customer satisfaction. They suggest that the limited budget of marketing activities should be spent on optimal actions and programmes to increase and maintain customer equity. Researchers (Hogan, et al. 2002; Fornell 2003) advocated that growing customer equity is the means of growing shareholder value. Dorsch, Swanson and Kelley, (1998) refer to customer equity management (CEM) as the management of the portfolio of resources that customers invest in their firms, and provide for the calculation of customer equity in terms of the NPV of cash flow generated from present and potential customers. Managers can use this information to determine the optimal balance between acquiring new customers, satisfying them, and retaining them for long time (Blattberg and Deighton 1996; Blattberg, et al. 2001). Strong relationship with the customers is considered the major intangible assets of the company and these intangible assets determine the market value of the firms (Fornell 2003; Doyle 2000) which can be managed and enhanced through customer equity. Hogan, et al. (2002) highlights the link between customer equity and customer satisfaction by stating that focus should be given to individual customer in order to enhance their satisfaction which will contribute to maximising customer equity. Further, Srivastava, Shervani and Fahey (1998) emphasise that the most suitable customer related strategies will lead to increased customer satisfaction and loyalty and then produce a positive impact on customer equity. In a similar manner, Rust, Zeithaml and Lemon (2000) and Rust, Lemon and Zeithaml (2001) mention that customer satisfaction determines customer decision for switching which ultimately effects customer equity.

To reap the benefits of customer equity, organisations need to put efforts to ensure long-term customer relations by up-selling and cross-selling to its customers, the way they want and to satisfy them in the best possible manner (Ivanauskiene and Auruskeviciene 2010). Customer satisfaction and the length of relationship with the organisation is one of the fundamental prerequisites of customer life time value increase, resulting in a positive impact on customer equity (Payne and Holt 2001). Reinartz and Kumar (2003) state that the quantity of purchased products, cross-buying, purchase frequency, focus-of-buying, quantity and frequency of returned goods, the extent of customer satisfaction, loyalty instruments used by customer and customer demographic characteristics are the key factors that have effect on customer long-term profitability and hence on customer equity. Now, to measure the length of customer relationship with the organisation, the analysis of customer behaviour and customer perceptual measures like; customer satisfaction and intentions to recommend the product, needs to be kept in mind (Ivanauskiene and Auruskeviciene 2010). The extant literature shows a direct positive effect of customer satisfaction on the length of relationship of a customer with the organisation and on customer equity along with customer’s intention to repurchase (Villanueva and Hanssens 2007). Further, Gupta and Zeithaml (2006) note that customer satisfaction and commitment constructs can have an effect on customer initiative to continue relationship with organisation, whereas, Villanueva and Hanssens (2007) emphasise that customer future intentions, i.e. the intention to purchase and to recommend the products to other, and the intention to stay in a relationship with the organisation must be measured in customer equity patterns. They further explain that the main purpose of customer equity surveys is to see the role of marketing efforts and cost factors in enhancing customer satisfaction and increasing customer retention.

Survival of organisations is highly dependent on customer satisfaction and customer loyalty (Che-Ha and Hashim 2007). Customer satisfaction is considered as a necessary condition for customer retention, and assists in realising economic goals like sales turnover and profit revenue (Parasuraman, Berry and Zeithaml 1991; Zeithaml 2000). Likewise, customer loyalty is also considered by many organisations as the key to long term profitability (Che-Ha and Hashim 2007) and is defined as “a deeply held commitment by customers to re-buy or re-patronise a preferred product/ service consistently in the future” (Oliver 1997, p. 213). Customer equity, therefore, impacts customer satisfaction and customer loyalty which attracts the customers not only to buy the products in future but also recommend to family and friends (Che-Ha and Hashim 2007). Bush, Underwood and Sherrell (2007) also agree and consider customer satisfaction, trust, commitment and customer loyalty important facets impacting customer intentions to use the product and to recommend it, thus effecting customer equity. Further, Vogel, Evanshitzky and Ramaseshan (2008) adds to the link between customer equity and customer loyalty by stating that loyalty and past sales directly influence future sales and customer equity.

In researches related to customer equity and customer satisfaction, there has been seen a growing popularity of the concept of share-of-wallet (Zeithaml 2000). According to Cooil, et al. (2007), share of wallet is the percentage of money a customer allocates in a category that is assigned to a specific firm. In the extant literature different names can be found to depict the concept of share of wallet. For example, financial services companies call it “share of wallet”; the auto industry calls it “share of garage”; the fashion industry calls it “share of closet”; the media industry calls it “share of eyeballs” and the non-profit industry calls it “share of heart” (Du, Kamakura and Mela 2007). Similarly, different papers in marketing have been published emphasising on the factors that can affect share of wallet. For example, Bhattacharya, et al. (1996) explore the relationship between marketing mix variables and brand level share of category requirements. Bowman and Narayandas (2004) assess the impact of customer-initiated contacts on share of wallet requirements. Verhoef (2003) investigates the differential effects of relationship perceptions and marketing instruments on customer retention and share of wallet. Baumann, Burton and Elliott (2005) use survey data to identify customer characteristics that are associated with high share of wallet in retail banking. Garland and Gendall (2004) use share of wallet as a factor in predicting customer behaviour.

Researchers have also shown keen interest in exploring the link between customer equity and share of wallet, as well as, a firm’s profitability and its impact on one another, one way or another (Cooil, et al. 2007; Rust, Lemon and Zeithaml 2004; Zeithaml 2000). For example, Garland (2004) examined the role of share of wallet in predicting customer profitability, Bowman and Narayandas (2004) and Keiningham, et al. (2005) propose that share of wallet mediates the relationship between satisfaction and profits, Reinartz, Thomas and Kumar (2005) use share of wallet as a covariate when balancing acquisition and retention efforts to maximise customer profitability, and Zeithaml (2000) proposes a conceptual model in which increased share of wallet is one of four factors mediating the effect of customer retention on firm profits, impacting customer equity. In a similar manner, Rust, Zeithaml and Lemon (2004) identified that increasing customer retention, attracting switchers, increasing customer profitability, and increasing share of wallet are the basic actions that form the basis for driving customer equity. Especially in business to business environment, attracting the customer and increasing the customers’ lifetime value is directly related to increase in the share of wallet (Rust, Zeithaml and Lemon 2004), hence influencing customer equity. In another study, Reinartz and Kumar (2003) argue that longer relationship and customer equity does not necessarily mean larger share of wallet, but should be considered as two separate dimensions of customer relationship. Cooil, et al. (2007) further suggest that the level of influence of various customer segments on share of wallet needs to be uncovered so that the resources can be appropriately allocated to those areas, thus proving the greatest impact.

Finally, Du, Kamakura and Mela (2007) recommend that marketers need to monitor the impact of customer equity on share of wallet and vice-versa, on an ongoing basis and decreasing share of wallet should be viewed as an early warning signal that a relationship is steadily putrefying. They further suggest that compared with marketing interventions aimed at preventing erosion, marketing efforts that attempt to stop share of wallet from decreasing should be more proactive and effective in order to have a positive impact of share of wallet on customer equity.