Customer equity is a result of customer relationship management. It is made up of three components.
Brand Equity – Brand equity is the customers subjective and intangible assessment of the brand above and beyond its objectively perceived value. In essence, on the name of a brand, a customer might be ready to pay more value just because of their trust in the brand.
Example: A normal pizza might cost a customer around 100 rupees. But if the pizza is from Pizza Hut, the customer will be ready to shell out more money without even looking at them. This is mainly because of the customer’s perception of the brand.
Value Equity – Value equity is the customer’s assessment based on the offer, its price and its convenience. Thus if all the three-match for the customer, the firm is said to have high-value equity.
Example – McDonald’s is a fast food item, it is available in most places and its price is considerable highly reasonable. Nike and Adidas are available at select malls, they are perceived as the leaders in sport’s shoes and customers are ready to go out of the way to get a Nike and Adidas shoe. Thus even Nike and Adidas have value equity.
Relationship Equity – Relationship equity is what makes a customer stay back with the preferred brand rather than shift to any other. Relationship equity comes to a firm which is good in maintaining personal relations and therefore the customer continues with the supplier out of habit or inertia.
Example – One of the companies with probably the highest relationship equity is Harley Davidson.
Customer Lifetime Value
CLTV is the value a customer contributes to the business over the entire lifetime at a company. It is a very important metric and is used while making important decisions about sales, marketing, product development, and customer support.
By applying CLTV managers can easily arrive at the rupee value associated with the long-term relationship with any customer.
Ideally, lifetime value should be greater than the cost of acquiring a customer.
The basic formula for calculating CLTV is the following:(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)
For example, let’s consider a Health Club where customers pay Rs.1000 per month and the average time that a person remains a customer in of the club is 3 years. Then the lifetime value of each customer is: Rs. 1,000 per month x 12 months x 3 years = Rs. 36,000. This means each customer is worth a lifetime value of Rs. 36,000.
Once CLTV is calculated the company will know how much it can spend on paid advertising such as Facebook ads, YouTube ads, Google Adwords etc. high-value acquire a new customer.