Customer Equity is the Net Present Value of a customer from the perspective of a

supplier. It can - and should - also include customer goodwill that is normally not
expressed in financial terms, eg a customer's level of loyalty and advocacy

• the total asset value of the relationships which an organization has with its
customers. The term was coined by Robert C. Blattberg and John Deighton in
their article, "Manage Marketing by the Customer Equity Test," Harvard Business
Review, Jul/Aug, vol. 74 no. 4, pp. 136–144. Customer equity is based on
customer lifetime value, and an understanding of customer equity can be used to
optimize the balance of investment in the acquisition and retention of customers.
It is also known as customer capital and forms one component of the intellectual
capital of an organization.

Customer Equity: A New Approach

The concept of customer equity, which unifies customer value management, brand management, and
relationship/retention management, has recently emerged from the work of Professors Roland Rust (Univ.
of Maryland), Valarie Zeithaml (Univ. of North Carolina) and Kay Lemon (Boston College). They view
customer equity as the basis for a new strategic framework from which to build more powerful, customer-
centered marketing programs that are financially accountable and measurable.

Quantitatively speaking, a firm's customer equity is the total of the discounted lifetime value of
all of its customers. In their new book Driving Customer Equity: How Customer Lifetime Value is
Reshaping Corporate Strategy, Rust, Zeithaml and Lemon state that customer equity has three
drivers:

1. Value equity, "the customer's objective assessment of the utility of a brand, based
on the perceptions of what is given up for what is received"
2. Brand equity, "the customer's subjective and intangible assessment of the brand,
above and beyond its objectively-perceived value"
3. Retention equity, "the tendency of the customer to stick with the brand, above and
beyond the customer's objective and subjective assessments of the brand."

The customer equity model enables marketers to determine which of the three drivers—value,
brand or retention equity—are most critical to driving customer equity in their industry and firm.
Using this approach allows marketers to quantify the financial benefit from improving one or more
of the drivers.

For example, if a regional grocery chain wants to evaluate whether or not they should spend $2
million on an advertising campaign that will improve ad awareness by 1 percent, the customer
equity model translates the percentage improvement in ad awareness into the percentage
improvement in brand equity (a component of customer equity). The percentage improvement in
customer equity then translates into dollar improvement. Comparing the advertising expenditure
to the dollar improvement allows the company to calculate its return on the advertising
investment.

When Brands Are Commodities, Owning the Customer is Essential

Recently, our firm Copernicus Marketing Consulting undertook a joint research study with leading
researcher Market Facts that investigated whether brands are becoming more similar and commodity-like
over time. The study examined consumer perceptions of similarity in 48 pairs of leading brands and 51
different product and service categories-from both the Old and New Economy.
Our research found that in categories as diverse as hair care products and rental cars, a
nationally representative sample of adult consumers perceives the leading brands (#1 and #2)
becoming more similar rather than more distinct. Of the 48 categories evaluated, the leading
brands in 40 of these categories are perceived as becoming more similar. Moreover, in 28 of 37
categories, consumers indicated price was more important than brand when making a purchase.
In six categories, price and brand were about equally important, and in only three categories was
brand more important (automobiles, liquor and beer).

Given this research, it is clear that brand equity alone is becoming an increasingly weak measure
for marketing efforts. The customer equity model provides a basis for projecting the ROI of any
strategic investment that improves customer equity whether as a function of value, brand or
retention equity. It provides a catalyst for companies to become truly customer-centric and to
make marketing programs more successful and accountable.

It's a mystery to us why managers seem to spend millions of dollars on marketing programs
without knowing if their investment produces a fair return. One possible explanation, however, is
that managers simply do not know how to project the return on investment for their marketing
programs. They have lacked a basic model that links marketing actions with customer spending
actions, and instead use intuition to make decisions. The customer equity model has the
potential to forge that missing link.

Becoming Truly Customer-Centric

There is no question that customer-centrism is essential for a business to thrive-customers, after all, are
what keep companies in business. But customer-centrism must be much more than something that
managers talk about. Companies claiming to be customer-centered should evaluate whether they are
practicing what they preach and use the customer equity model as a check on their actions. Rust,
Zeithaml, and Lemon's customer equity model enables companies to understand the drivers which are
most important for influencing the buying behavior of their customers and will help make managerial
actions accountable to their ultimate impact on customers.

Customer Delight
Definition:
Measure or determination that a product or service exceeds a customer's expectations,
considering requirements of both quality and service.

Business Definition for: Customer Satisfaction

• the degree to which customer expectations of a product or service are met or
exceeded. Corporate and individual customers may have widely differing reasons
for purchasing a product or service and therefore any measurement of satisfaction
will need to be able to take into account such differences. The quality of after-
sales service can also be a crucial factor in influencing any purchasing decision.
More and more companies are striving, not just for customer satisfaction, but for
customer delight, that extra bit of added value that may lead to increased customer
loyalty. Any extra added value, however, will need to be carefully costed.