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Customer Equity Customer Equity

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Customer Equity

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Customer equity is among the several forward-thinking metrics in your business strategy and field measurements, putting it in a class by itself in terms of marketing performance appraisal and marketing strategy.

What is customer equity?

Customer equity is referred to as the sum of the lifetime values of current and prospective customers. It is an estimate of how much money you can gain from keeping a buy-sell connection with a customer.

Customer equity is the lifeblood of a company’s health. It is a statistic that can serve as a catalyst for strategic change. It gives a comprehensive view of corporate performance. It may also be used to forecast future marketing investment returns (ROI). 

A customer equity-based marketing approach entails long-term planning and putting the most valued consumers together with the organization. Customer equity tells you which sorts of consumers are the most lucrative, where their value derives from, and how to grow long-term relationships.

Take, for example, Apple products. They have regular customers who return on a regular basis. Why? Because the products are excellent, the pricing is reasonable for the features, and the marketing techniques are effective. Cultivating a brand image and reputation, as well as a dedicated consumer base, takes time. It is, nevertheless, one of the initial steps toward success.

See how Voxco helped Walmart expand the Online Grocery Pickup and increase product variety on customer demand from 3000 to 7000.

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Importance of customer equity

Relationship equity programs is designed to raise the likelihood and degree of future repurchasing while decreasing the risk of a consumer purchasing from a rival.

According to the researchers, organizations should spend their marketing money on programs that increase and sustain customer equity.

In today’s market, customer equity is crucial since it helps you anticipate the financial profit you may generate from your customers through the course of your collaboration. This helps organizations determine the worth of their client assets and make sound financial decisions regarding add-on sales, retention, and acquisition.

It focuses on each client and leverages encounters with customers to improve communication. Today, a company’s success is determined by its ability to attract as many loyal clients as possible.

During the previous multiple decades, marketing strategy has moved from product-centric to customer-centric. Marketing today suggests a higher emphasis on developing long-term client connections instead of short-term transactional connections. People may acquire your product elsewhere, but if you offer them a convincing reason, they will remain with you.

Customer equity is essential for businesses because it serves as the cornerstone for long-term success. A successful business is one that has satisfied its customers. As a result, client retention and building a respected customer base are critical.

How to calculate customer equity?

Customer equity is computed by multiplying the number of new customers gained by their customer lifetime value (CLV), which may be predicted based on previous purchasing behavior and is often a reasonably steady quantity.

Let us learn in detail the procedure to calculate customer equity. Consider the steps below:

Step 1: Determine how much money the company spends on acquiring one new client. This is determined by your marketing techniques, prices, and response rates. 

Step 2: Determine how much money the company spends on maintaining existing customers through initiatives such as loyalty programs, member discounts, and newsletters.

Step 3: Determine how much money each client spends each year.

Step 4: Determine the annual profit generated by each customer. 

Step 5: Compile the cash flow of a typical client for each year of the analysis period. 

Step 6: To compute the value of the cash flow today, divide the cash inflows from Year 1 by (1 + your discount rate). The discount rate changes according to your situation and other investments.

Step 7: To calculate your company’s customer lifetime value, add the present values of all cash flows during the analysis period.

Customer Equity Customer Equity

Solution:

Average number of customer = 500+450 = 950 /2 = 475

Profit contribution = 475 x $900 = $427500

Present Value (PV) = $427,500 / (1 + 10%)1 = $388,636.36

Customer Lifetime Value for second year = 

  • Step 1: 450 – (450 x 50%) = 225, where 50% is the churn rate
    • 225 + 200 = 425, add the new customers for the year
    • (450 + 425) / 2 = 437.5
  • Step 2: 437.5 x $900 = $393,750
  • Step 3: PV = $393,750 / (1 + 10%)2 = $325,413.22

Customer Equity = $388,636.36 + $325,413.22 = $714,049.58

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Customer equity vs brand equity

Both brand and customer equity seek to quantify the intangible worth of promotional techniques and take customer retention into account as a primary component. However, there are significant distinctions.

First, brand value emphasizes the product, while market value is directly associated with the product. Second, unlike brand value, customer value assesses visible consumer behavior rather than evaluating less tangible attitudes.

Brand and customer equity both highlight a customer’s level of devotion to a brand and the value they provide to a certain firm. Customer equity is quantifiable (number-driven), whereas brand equity is more qualitative (connections customers make with the brand).

Customer equity is important to many companies since it defines a brand’s financial success. The higher a company’s client equity, the more income it collects and the more significant it becomes in the market.

It can exist in the absence of brand equity, and likewise. They may have certain features in common, but they are not necessarily dependent. For example, a consumer may enjoy both McDonald’s and Burger King but prefer McDonald’s.

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