What Is Customer Equity? Why It’s A Key Metric For Business Success?

Customer shopping from a specific brand
Loyal customers help brands increase their customer equity

What do the most prominent brands have in common? They all have loyal customers who always choose them. These brands make sure that they invest in customer retention heavily. Aspects of their business such as customer relationship management become extremely important. And the top brands understand how vital customer equity is for their business.

Have you calculated your company’s customer equity? Every company has certain loyal customers. The trick is to increase the number of these loyal customers. And to increase the number of loyal customers, you need to start working towards customer retention.

As a business owner, you should understand that customer retention is as important as acquiring new customers.

But here, we will talk about customer equity. What does it mean? How important a marketing metric is it? And how can you increase your brand’s customer equity? We will answer all these vital questions for you! Read on.

What’s Churn Rate?

Churn rate is the percentage of clients your company loses every year. Let’s say you start with 100 clients on January 1st. Fro these 100, 10 stop buying from you. Your churn rate is going to be 10%.

The formula is:

Number of clients at the beginning of the year – Number of clients lost at the end of the year (who stopped purchasing from you) / Number of clients at the beginning of the year.

What’s Customer Loyalty?

The customer loyalty index is what lasts after the churn rate is subtracted. If the company starts the year with 100 clients and, from this 100 clients, it ends the year with 95, The customer loyalty index is 95%.

The formula is:

Number of clients at the beginning of the year – Number of clients who keep buying from you at the end of the year / Number of clients at the beginning of the year.

What is the Most Direct Cause of Customer Loyalty?

There are many reasons customer would buy from you again, and not always is related to price, as you probably know.

Here we list a few of them, they probably cover the great majority of businesses, but there is always something specific for an industry.

  • Brand loyalty: some people love the brand they purchase. If you ask why they buy Adidas or Apple, instead of Nike and Samsung, they can tell you many different reasons, trying to rationalize each one. Still, these brands created an emotional bond that made them connected at the end of the day.
  • Customer attention: Costco gives you 90 days to return a product. In some cases, if you lost your invoice, they can check through your customer associate card if the purchase was made within these days. This gives the customer the safety to retreat in the next purchase that they will be protected. No questions asked!
  • Loyalty program: how many times have you chosen American Airlines, or United, or Delta, just because of its miles program? A type of loyalty program certainly attracts you. This is a usual way to keep customers close and protect them from choosing the competition.
  • Exclusive Offers: When you go to certain supermarkets, there are promotions for associates. Having an exclusive offer can be crucial for increasing your loyalty. However, some insatisfactions come along. Those who are not associates can feel excluded and get annoyed for this separation of benefits.
  • Easy to Use, Easy to Purchase: Nothing better than a one-click purchase from Amazon or a one-click application from LinkedIn, right?
  • Sustainability and Social Consciousness: buying on Wholefoods implies that eggs are cage-free and meat is grass feed. Also, they have sustainable practices to help the environment, which certainly grabs attention from many customers concerned about contemporary issues.
  • Innovation: some people buy Tesla because they are at the forefront of technology.
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What is Customer Lifetime Value?

The customer lifetime value is calculated using the customer average purchase value, the number of transactions per year, and the customer lifetime (the average number of years the customer purchases from you).

Let’s say the average of loyal customers is 6 years. They purchase $100 per transaction. They make 3 transactions per year. Your customer lifetime value will be 6 times 100 times 3, which is $1800. If your profitability is 20%, you know each customer generates $360.

Why is this important? Knowing your CLV will let you know how much you can pay per customer acquisition and how long it will take them to pay you back.

Therefore, the formula is:

Customer average purchase value x Number of transactions per year times the customer lifetime.

What Is Customer Equity?

Customer equity is the sum of customer lifetime values of every client of a particular company. In layman's terms, it is the potential profit a company will earn from all its customers during the customer-company relationship.

The biggest brands across the globe have very high customer equity. It is because these big brands have the most loyal customers.

People standing near the self service kiosk of McDonald's
McDonald’s has a firm hold on its consumers.

For instance, a regular person at McDonald’s is unlikely to stop going there suddenly. This is because that person feels a sense of loyalty towards McDonald’s. And he or she must like the burgers served and the way the staff at McDonald’s treats them. This is how customer equity plays out in real life.

Every company has loyal customers. The higher the number of loyal customers, the higher your company’s customer equity. So, one can safely say that customer equity is all about customer retention. Calculating customer equity also lets you determine your company’s value.

Customer equity is indeed a helpful marketing metric. It reinforces the idea that customer relationship management is key to business success.

Furthermore, companies personalize interaction with every one of their customers to determine their consumer base’s loyalty. The information companies gain from these interactions helps in retaining existing customers and acquiring new ones.

Customer Equity and Brand Equity

Customer Equity vs Brand Equity
They are not the same

People often confuse customer equity with brand equity. Customer equity and brand equity are two different marketing metrics. And as a business owner, you should understand and utilize both. There is little doubt about the importance of both these metrics.

Similarities Between the Two

But before understanding the difference, we should understand what the similarities between the two are:

  • Both emphasize the importance of customers as assets to the company.
  • And both reiterate the importance of customer loyalty.

These two factors remain the core of both customer equity and brand equity. Both lay massive importance on customer retention.

In a nutshell, both of these marketing metrics deal with the relationship between the customer and the brand. And as a business owner, the relationship your brand has with your customers is exceptionally vital!

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Differences Between the Two

Now that we understand the similarities between the two, it is time to move on to the differences. Despite the common core, customer equity and brand equity differ in the practical sense. Let us find out how:

  • The most significant difference between the two is how they are measured. Customer equity is quantitative and is measured purely in financial terms. And brand equity is primarily qualitative and concentrated more on the connection between the brand and the customer.
  • Customer equity provides financial insight into the relationship between your company and your customers. And brand equity helps you manage your brand’s image and perception.
  • Customer equity and brand equity do have things in common. But the two are not dependent on one another in any way. For example, a person might like both Nike and Adidas but purchase more often from Adidas.

Despite the similarities, customer equity and brand equity are conceptually different. But both of them are important marketing metrics that can help your business succeed. Here, we are mainly talking about customer equity.

So, let us now move on to the importance of customer equity as a marketing metric.

Why Is Customer Equity Important?

Kids playing with money
It impacts the financial profit of a company

In today’s market, competition is high. Numerous companies spend day and night trying to beat this competition. They try every trick in the marketing playbook to attract new customers and retain old ones. In such a business environment, customer equity becomes vital.

Customer equity helps companies estimate the financial profit they will obtain from their customer base. This data enables them to make sound business decisions for the future. With brand equity calculates, companies can concentrate on factors such as add-on selling.

Customer equity focuses on every single customer and their interactions with the company. This fuels the brand-customer relationship and inspires trust.

Customers Are A Company’s Biggest Assets

A happy customer behind a smiling balloon
It’s always important for any business to focus on customer satisfaction

Customers are a company’s biggest asset. This is the central concept behind customer equity. After all, it is the customers who generate revenue for the businesses. And increasing customer equity is a way to maximize profit from these assets.

To increase revenue, a company has two options. They can either acquire new customers or improve the lifetime value of the existing customers. Customer equity focuses on the latter and is more about retention.

Companies calculate customer equity and invest towards customer retention. And customer retention, in turn, increases customer equity.

If you are a business owner, there is no denying the importance of customer equity. It allows you to plan with surety and take firm marketing decisions. It also gives you valuable insight into your marketing efforts up till now. This way, you can better prepare your marketing efforts as well.

Furthermore, factors such as the level of loyalty in your customers are also known. All this makes customer equity a vital marketing metric.

How to Increase Customer Equity?

Ways to increase customer equity
Strengthen your company’s relationship with your customers

There is no given route for increasing customer equity. After all, it is a metric that depends on the customer-brand relationship. But there is one thing you can do as a business owner. And it is strengthening your company’s relationship with your customers. With this in mind, let us now go through the ways to increase customer equity.

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Show your customers that they are valued.

The one thing that customers hate is feeling left out of the conversation. Creating polls is the best way to get your customer’s opinions now and then.

Social media platforms are a great place to put these polls out. Instead of blindly implementing an idea, it is always good to first take your customer base’s opinion. It makes your customers feel included in the company’s plans. And making your customers feel valued is key to increasing customer equity.

Always be ready to solve your customer’s problems.

The last thing you want is customers feeling helpless. There is great competition in the market today. And if a customer does not get the required assistance, they will stop coming back.

Ensure that your customer response team is always on its toes to help. Quick customer care service is sure to go a long way in increasing customer equity.

Provide your customers with resources that bring value.

These resources can be anything ranging from discounts to services. To have a lengthy list of loyal customers, you must serve value in every way possible. Not to mention, you need to provide solutions better than your competitor. Falling behind the competition can hurt your customer equity numbers.

Quality Is the Key

Nothing can satisfy your customers more than quality products. In ensuring smooth interaction with your customers, do not forget the importance of what you produce. No matter how good your customer care services are, they can never compensate for the wrong products.

Ensure that your product is solving the problems better than your competitor’s.

Customer equity is all about building a relationship with your customers. And you cannot create a good relationship with customers without quality products. Want to increase your company’s customer equity? Ensure that you do not lag in terms of product quality!

Serve Well and Prosper

An attendant serving a customer at a restaurant
Serve your customers very well

There are several ways to increase your company’s customer equity. We have mentioned some of the easy steps above. But you must innovate and come up with your own ideas. After all, you know your customers better than anybody else. And if you do, you can develop new ideas that provide them the best value for money. And if you manage to do that, you will see your company’s customer equity shoot through the roof!

But remember the many things we talked about here. Especially the fact that customer retention is as necessary as acquiring new customers. Ensure that your efforts are not limited to finding new customers.

The goal should be to gain new customers while retaining as many existing customers as possible. Only by taking such an approach can you build on your company’s customer equity.

Also, the biggest brands have a lengthy list of loyal customers. We have talked about how these brands reap the rewards of having a loyal consumer base. It is high time you start building a loyal customer base of your own and maximizing customer equity!

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