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Building
Customer Equity
By Michael Alan Hamlin
August 18, 2003
Fusion Brand author Nick Wreden was
back in town last week urging executives to focus on building customer
equity and letting go of their traditional notions of brand equity.
The reasoning is straightforward. For too long, corporate strategy
was designed to corner market share, rather than what Wreden calls
customer equity or share of customer or share of wallet. Companies
often found that they were actually subsidizing customers on the
fringe as a result of relentless pursuit of market share.
The pursuit of customer share requires
an overt acknowledgement that market share is no longer the standard
for industry leadership. This reorientation is meant to bring corporate
resources to bear on acquiring as much business as possible from
profitable customers and prospects, and ignoring the rest, even
when they beg to do business with you. If they want you bad enough,
they'll just have to transform themselves into profitable customers.
Aside from the obvious financial
implications of the refocus from market share to customer share,
Wreden believes that the way companies should market and brand themselves
is evolving because, ironically it seems, consumers are becoming
more empowered. He points to the evolution of branding models over
the last century as evidence of this tidy incongruity.
For a very long period in modern
marketing terms, 1920 - 1995, the mass economy ruled, and perception
of the brand was tied very closely to quality of product. During
this period, market research leading to brand positioning and mass
advertising were the hallmarks of powerful brands that dominated
markets. However, when benchmarking product quality was catalyzed
by the Japanese and high quality because a requisite rather than
an attribute, things suddenly changed.
From 1995, Wreden argues, there was
a sudden but what will be a relatively short-lived shift to the
customer economy and empowered consumers who had greater choices,
creating pressure to increase efficiency and lower prices. Quality
of price, rather than product, became the chief determinant of competitiveness
with the result that companies became much more focused on organizational
attributes that contribute to efficient processes, lower costs,
and continual, incremental refinement of products and services.
While Wreden acknowledges that this
model is very much alive today, he suggests that its rapid evolution
is being driven by the dawning of the demand economy. Like product
and service quality, product and service efficiency is becoming
commoditized with the result that companies increasingly must focus
on developing closer relationships with customers in order to be
able to respond quickly and efficiently to their fast-emerging desires.
This requires not just efficient
processes within an organization, but throughout the supply chain,
and the benchmark becomes not product or process, but time, or how
little of it is used to respond in a credible, relevant, and meaningful
way to desirable customers' desires. Of course, the definition of
desirable customer is profitable customer, and considerable effort
is expended on making that customer continually more desirable.
The way to do that is to place more
resources into keeping profitable customers than recruiting new
ones, with the result the organizations develop an intimate understanding
of their customers' wants, desires, and purchasing patterns. That
knowledge is used to manipulate those wants, desires, and purchasing
patterns so that the customer becomes not just more profitable,
but increasingly tied to the organization. The goal is to respond
to these new personalized demands so quickly that customers find
it simply too much trouble to switch to another supplier.
Wreden proposes four tools for gauging
how well an organization is building closer customer relationships,
or what he calls customer equity. They are: 1) Profit/revenue segmentation;
2) Customer equity dashboard; 3) RFM (recency, frequency, monetary);
and, 4) Customer P&L sheets. I'd love to go through each of
them with you, but as you might imagine, that would require significantly
more space than I have available.
But I can leave you with some Customer
Equity To-Dos (The Don'ts will also have to wait, I'm afraid.).
Here they are: 1) Focus on retention, not acquisition; 2) Extend
acquisition offers to existing customers; 3) Track lead generation,
retention, service, and other costs; 4) Segment customers based
on lifetime profitability; 5) Learn benchmarks for customer accountability;
6) Start customer recovery; and, 7) Improve pricing & revenue
management.
Wreden provides a number of real-life
examples of how focusing on customer equity improves profitability,
and because he spent much of his professional career in Asia, he
is able to relate his ideas easily to economic conditions and enterprise
development here. Customer equity is a new idea, but it is a compelling
one. Still, effectively leveraging Wreden's ideas still requires
that corporations demonstrate parity in terms of quality and process
quality. Now, they just have to go much further.
(Michael Alan Hamlin is the managing
director of consultancy TeamAsia and the author of three books on
Asian economies and companies. His latest book is Marketing Asian
Places, of which he is a co-author (Wiley, 2001), and he is
currently at work on High Visibility: The Making and Marketing
of Asian Professionals into Celebrities. Write him at mahamlin@teamasia.com.).
Copyright © 2003 Michael Alan
Hamlin. All Rights Reserved.
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