The last article concluded on the triple bottom line (TBL) concept, on the basis of the new wave in business objectives – a transformation from the well-known financial bottom-line to financial accounting, whereby businesses focused on systems to take a more comprehensive approach in measuring impact and success. The theory and application of TBL made some businesses begin to realise the connection between social well-being, environmental health and the organisation’s financial success and resilience – and a just economy.
These emerging bottom line categories are often referred to as the three ‘P’s’: people, planet, and prosperity. It was on this tangent of connectivity that the United Nations (U.N.) created Sustainable Development Goals (SDGs) which “ensure all human beings can enjoy prosperous and fulfilling lives, and that economic, social and technological progress occurs in harmony with nature”.
It has so far been established through the previously published articles that customer satisfaction is fundamental for a company’s bottom-line and value creation; therefore, strategies ought to be focusing on creating a sustainable competitive advantage through value delivered to customers. The expectation is that in the long run this will be highly correlated with shareholder value. For value is created only when companies invest capital at returns which exceed the cost of that capital.
Customer equity is considered one of the very few new useful paradigms in measuring and managing the value of a company’s customer base. This particular model, to all intents and purposes, can serve as a useful guide to best allocate scarce and competing resources; and more importantly, in a firm’s profit estimation.
The first week of October every year is declared Global Customers’ Week. Some companies even go beyond the Week to declare and dedicate the whole month of October to champion and deepen relationship with their customers. The attention top brands gives to commemorations and activities involved echoes the fact that customers are a company’s biggest assets. This is the central concept behind customer equity. It is the customers who bring in the ‘figures’, therefore increasing customer equity is to maximise profit from these assets. This feat can either be achieved by acquiring new customers or improving on the lifetime value of existing customers. Customer equity focuses on the latter, and therefore it is all about customer retention.
Although researchers and practitioners have recently emphasised customer relationships and customer lifetime value (CLV), or the customer capital, as the best route in beating competition and be ahead in value creation, these concepts have had limited impact on businesses and the investment community – for the simple reasons that some complex modelling could be involved, and the fact there hasn’t been strong links between customer and firm value. However, an attempt is herein made to broach the subject.
Drivers of Customer Equity
For emphasis, customers – just like any other assets – are financial assets of a company (IAS 38), and therefore need proper management and maximisation. The drivers of customer equity are: relationship equity, value equity and brand equity. Relationship equity is about customers’ predisposition to be with a brand over and above their subjective and objective judgments of that brand.
This driver concentrates on the link between customers and the firm. The stronger the relationship is built, along with the value provided in business, the more ‘equity’ a company will have developed. Relationship equity actually translates in the real world into bottom-line – impacting tangibles such as partnerships, business deals and referrals. All these hinge on “keeping the promise”. To be a step ahead in value creation is to be knowledgeable and finding more about what the client wants and needs, and investing the necessary amount of time in satisfying such needs and wants.
One cannot boast of deriving benefits from a relationship if such a connection is not yielding any long-term value. Equity in any relationship is where the positives exceeds the ‘liabilities’, if any.
Having positive relationship equity with clients deepens trust, which makes it possible for them to even accept a raise of rates or fees. A clear example has to do with Estée Lauder, the high-end cosmetics company, and Rimmel, a drugstore cosmetics brand. These two companies share manufacturing facilities, and both receive ingredients for their products from the same Chinese manufacturer, Cosmetics Suzhou Co. Ltd.
Though their operating costs and ingredients are more or less the same, Estée Lauder can charge an average of US$28 for a tube of mascara. Rimmel mascara, on the other hand, sells for around US$7. The difference is that Estée Lauder has more brand equity than Rimmel, so they’re able to charge more for their cosmetics. One can only imagine the effect on their bottom-line.
Besides financial gain, another benefit of building brand equity is growing customer loyalty; which means a company won’t have to spend as much time or money on costly acquisitions. According to a survey conducted by conversion rate optimisation company Invesp, it can cost up to five times as much to attract a new customer as maintaining a current one. Brands with loyal customers are also more resilient. Their punters are likely to stick with the company even in bad times.
Companies don’t have to focus on the rising value of the dollar against the cedi in recent times, and hence bet on forex as a store of value. Looking ahead, the currency of any corporate’s future is relationship equity.
When clients are loyal to company or a brand it creates an emotional bond, making them connected and always trying to rationalise the plethora of reasons why they stick to the brand. From this, a churn rate – which is the percentage of clients a company loses in a year – is derived. It can be calculated as the number of clients at beginning of the year minus the number of clients lost (stopped purchasing) at end of the year, divided by the number of clients at beginning of the year.
Customers who last or keep on with the brand after the churn rate is deducted give the Customer Loyalty Index. For example, if a company starts a year with 100 clients and ends the year with 95, the customer loyalty index is 95%. Knowing this fact can help shape a company’s policy; not just in establishing the needed link between company and customers, but also serving as a guide in putting on programmes which will help solidify the bond.
The other driver of customer equity is derived from a customer’s objective evaluation of a particular brand’s serviceableness – otherwise known as Value Equity. Its considerations are how the customer judges convenience in performing business with the firm. If a brand has a number of lines, sales channels or extensions, it tells a compelling story to consumers that the brand stands for a certain quality guarantee that is applicable on a wide scale; the attractiveness of a product or service’s price, and its quality in relation to competing brands, can be reason for its continuous patronage.
Determinants of Customer Loyalty
In certain sectors, price cannot be leveraged (Price takers): nonetheless, there will always be price makers in other areas. Price, however, is not the only determinant or consideration customers look out for. Offering products which are easy to use or services that can be acquired without much stress puts a firm ahead of the competition. There is absolutely nothing better than a one-click application.
In recent times, companies which are socially conscious and pay heed to contemporaneous issues of sustainability grab the attention of customers who are particularly concerned about these. Companies which constantly bring innovation to the table stand to be differentiated by default from the competition.
It is in place for companies to create deliberate loyalty programmes and exclusive offers to get their clients glued to their products or services. The challenge with exclusive offers, however, is the breeding of dissatisfaction – in the sense that non-associates invariably feel excluded, frustrated and even annoyed with segregation of benefits.
The extent to which customers are loyal to a brand can be expressed, among others, in reduced marketing costs. Existing customers are low-hanging fruit which don’t require much effort to be plucked. It is essentially cheaper to hang onto loyal customers than charming potential new ones. It is the loyal customers who constantly keep a brand afloat.
Loyal customers’ trade ought to be leveraged, as they represent a stable source of revenue for any business. Current customers have the propensity to help attract new clients. As ambassadors, so to speak, they not only help a great deal by boosting name-awareness and hence bring in new customers, but also give enough space to allow an appropriate response to emerging competitive threats.
Customer Relationship Management (CRM)
Most prominent brands do have some sort of loyal customers who always make choices in their favour. Nonetheless, it’s essential in business to increase the number of loyal customers; and to achieve this is to zero-in on customer retention. This won’t be achieved accidentally, but through systematic investment toward customer retention. Successful brands do not toil with customer relationship management, because they know very well that attracting a new customer is too difficult and expensive to just lose relationships for not treating existing customers rightly. Top brands understand how vital customer equity is to their business; as such, customer retention is as important to them as acquiring new customers.
Customer Retention is Far Less Expensive than Customer Acquisition
I have also heard Professor Pikay Richardson, a Ghanaian scholar with Manchester University Business School, say that it costs far less to retain a client than to acquire a new one. His assertion is buttressed in Dan S. Kennedy’s book titled ‘Guide to Maximum Referrals and Customer Retention’.
It’s been established that on average it costs approximately five times more to attract a new customer to a business than to retain an existing customer. This reason makes it more imperative for companies to be providing excellent customer service. It does not pay to risk losing a customer. It’s costly, both in man-hours and committal of other resources to finding new customers. This should be the motivation driving businesses to do whatever is required in ensuring the continual happiness of customers to ensure they stay and continue doing business with them.
The most significant way to increase customer equity is not just deepening a company’s relationship with its customers, but also to truly go all out for them and add enormous amounts of value to the equation. In more practical ways, customers ought to be shown that they are valued. Thankfully, we have come of age with digital platforms. It is an interactive way of making customers feel part of and more engaged with a brand. Problem-solving is sine-qua-non to value creation. In the face of stiff competition in the market space, customers who do not get required assistance from readily available response teams will find an alternative – where they will not be helpless.
It is important for companies to find their unique selling propositions and invest through innovation for differentiation purposes. Companies wanting to beat the rest in the game will have to endeavour in generating new ideas that provide customers with the best value for money, in both service and product delivery. Quality is another magic-wand that can set a brand apart from the opposing horde in the game of fierce competition. Good relationships can’t be created with customers without quality products and services.
All said herein sums up to what is generally termed Value equity: It is mainly the attributes or characteristics of products and services, their perceived quality, the right price, the ease of finding a particular service or product, and their exclusivities which count in value equity.
To be continued….
The writer has two and half decades of demonstrable professional working experiences and solid theoretical background in many disciplines such as: Finance, Accounting, Human Resource Management, Risk Management, Philosophy and others. Henry, can be contacted via [email protected] or 0244 65 16 63 / 0208178791
