A Beginner’s Guide to Customer Equity (and Why It Matters)
by Jimmy Rodela | Published on May 18, 2022
Exceptional customer support, effective customer acquisition and retention, and the many initiatives you run in your business all require a considerable investment. That’s why you need an evidence-based way to determine how much value your customers generate so you can make better financial decisions.
If it takes six figures to acquire and retain customers, yet the revenue you generate is only a fraction of the amount you invested, you’d be suffering massive financial loss.
That’s why understanding customer equity is essential. It enables you to quantify your customers’ value, giving you a better landscape of your business’s state.
Overview: What is customer equity?
Customer equity is the total of all customer lifetime values (CLVs) for your business. You can calculate each customer’s CLV and total the values to determine customer equity.
From a 30,000-foot perspective, the customer equity concept is the value your existing and future customers will generate for your business during the entire lifespan of your relationship. This makes it a vital aspect of your customer analytics process.
To get the CLV, consider the amount spent to acquire one customer, the amount you need to retain that customer, and the cash flows and profit the customer returns over a specific time frame and estimated retention period.
The 3 drivers of customer equity
To understand customer equity better, let's look at its main drivers.
- Value equity: This is the customer's assessment of your brand’s value based on your price, offer, and perceived convenience. If these three aspects match your customer's expectations, your company is perceived to have high-value equity, improving your equity marketing initiatives.
- Brand equity: This refers to the customer’s subjective perception of your brand beyond its objectively perceived value. For instance, customers might pay more for products from established brands because their names alone instill trust.
- Relationship equity: This creates customer loyalty to your brand. Good relationship equity results from excellent customer relationships. Thus, customers buy from you out of the relationship, rather than buying out of habit.
How to calculate customer equity
Customer equity is the total of customer lifetime values within a time range. It's the total expected profitability from customers over time. Even without aggressive marketing campaigns, your business should attract customers through social media platforms and your website. Due to the time value of money, customer equity is calculated with a compounding discount rate to determine the profitability using today’s dollar value.
The best way to understand the calculation is through a two-year customer equity example, with these assumptions:
- A customer base of 500 at the beginning of the first year
- The company acquires 200 new customers each year, with no marketing campaigns
- An average profit of $900 per annum per customer
- A 10% discount rate
- A customer retention rate of 50%
Step 1: Compute the average number of customers based on retention and acquisition rates
Assuming the company has 500 customers at the beginning of the year, it retains 250 customers, based on the 50% retention rate. Then, add 200 new customers for the first year. That’s 450 customers at the end of the year. The average number of customers for the year is computed as follows:
[500 (number of customers at the start of the year) + (450 customers at the end of the year) / 2 = 475 (average customer base for the first year)]
Step 2: Compute the profit contribution of the customers
Based on the assumed average profit of $900 per annum per customer, the profit contribution looks like:
475 customers x $900 = $427,500
Step 3: Compute the profit value based on the discount rate compound
To determine the present value (PV) of money using the discount rate and the cash flow, use the following formula:
PV = CF / (1 + r)n, where r is the discount rate, and n is the year
That means for the first year, the customer lifetime value or the customer profit contribution is computed as follows:
PV = $427,500 / (1 + 10%)1 = $388,636.36
Step 4: Compute the customer lifetime value for the second year
The company starts the second year with 450 customers. Applying the assumptions above, the average number of customers for the second year is as follows:
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
The customer lifetime value for the second year is about $325,413.22.
Repeat these steps for the next years as needed (i.e., computing the customer lifetime value for the next 10, 20, or 50 years).
Step 5: Add all customer lifetime values
To get customer equity during the next two years, add up the customer lifetime values.
$388,636.36 + $325,413.22 = $714,049.58
The customer equity without marketing for the next two years is $714,049.58.
3 ways to increase customer equity
Your customer equity generally increases when you raise the CLV. Below are several strategies to help improve your average CLV.
1. Build customer relationships
Fostering customer relationships is a great way to establish a loyal customer base, which will raise your CLV.
Nurture healthy bonds with your customers across all interactions by making them feel appreciated and heard, from your customer equity marketing efforts to the sales process.
Below are more tips for developing customer relationships.
- Send surveys to discover your customers’ needs and feelings. Surveys give the information you need to send relevant offers and provide exceptional support to your client base.
- Keep an eye on your customer satisfaction ratings. Be mindful of both the positive and negative things your customers are saying about you. Leverage these insights by considering them during your product development and marketing processes.
2. Provide valuable and engaging content
The key to building customer loyalty and increasing the value they bring to your business over time is to keep them engaged with your brand. Email marketing is a proven method to pull this off. Be sure your email marketing content is valuable to your potential and current customers, whether you’re offering automated drip campaigns or weekly email newsletters.
The tool helps you manage leads, via its contact segmentation features, while viewing and adding email tasks, conversations, and notes simultaneously, streamlining your email marketing efforts.
Leverage CRM with email integration to gain insight into your audience and segment them into groups. This lets you send timely and highly relevant content that boosts engagement and loyalty down the line.
3. Deliver top-quality customer service
Outstanding customer support is a crucial aspect of the customer equity model because it breeds customer loyalty. If you provide poor or sub-par support, your customers won’t think twice about switching to your competitors even if you offer above-average quality products.
Use the tips below to deliver top-notch customer support.
- Offer 24/7 customer support. Provide round-the-clock customer support so you can help customers whenever they need it. Nothing frustrates customers more than to call your support desk, only to be told no one is available to help them.
- Provide a live chat option. Offer live chat on your social media page and website to provide quick responses to customer queries and issues in real time. The faster your customer service agents respond and resolve the customer's problems, the better.
- Allow omnichannel support. Make your company more accessible by offering multiple contact channels. Zendesk omnichannel support connects customer channels from various platforms to ensure seamless client conversions. This allows for easy sharing of customer service-related information, helping your agents to be more productive and efficient in delivering resolutions, regardless of the channels your customers use.
Harness the benefits of customer equity
Get a better outlook of your business’s health by calculating your customer equity. This data will help you determine which marketing initiatives are bringing you meaningful results, allowing you to optimize your marketing campaigns.
By understanding the value your customer segments bring, you can improve your sales, customer service, and other client-facing aspects of your business to draw in more customers, increase retention, and boost revenue.
About the Author
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