The Customer is Always Equitable

By Scott Levine

A Look at Customer Equity, Brand Equity, Retention Equity and Value Equity.

Customer equity is the sum of the lifetime value of a company’s customers. It’s an advanced business concept that was created when the theory of brand equity failed to address certain consumer buying patterns.

Brand equity is the unknown value that is attached to a brand through longevity, marketing efforts, customer satisfaction, current popularity or any other factor that causes the brand to be both well known and trusted. Brand equity can be measured at the firm level, product level, and consumer level.

The firm level attaches a monetary value to the brand by subtracting, let’s say, Hunt’s Ketchup from Heinz Ketchup. The difference in value is Heinz’s firm level brand equity. The premium that consumers are willing to pay for the brand—the difference in price between a Sony 42” TV and Magnavox 42” TV—is its product level equity. And the amount of name recognition a product enjoys is its consumer level equity. Big winners in this category are Kleenex tissues and Scotch tape.

Unlike brand equity, which tries to attach a value to the brand, customer equity quantifies the value of a company’s biggest asset: its customers. Both are important. But sometimes, customer equity turns out to be more valuable.

When Costco introduced their Kirkland line of private-label products, the name had no brand equity—especially when compared to the major national brands it would compete against. But Costco had enough customer equity to convince consumers to try Kirkland products. And before long, Kirkland toilet paper was outselling Charmin and Scott. Ibuprofen, men’s shirts and vitamins soon followed. And today, almost all of Costco’s Kirkland products outsell their name-brand competitors. What’s remarkable is that Kirkland now has brand equity in its own right—built exclusively on customer equity.

The same thing happens when major grocery store chains sell private-label products for less than their brand-name counterparts—which proves that savings sometimes trumps brand equity.

Given its importance, what drives customer equity? A combination of things—including value, brand, and retention equity. In the case of Costco’s Kirkland brand, it took a strong perception of value to get customers to try the products in the first place. And the quality had to be comparable to the name brand products for them to keep buying.

In some cases, retention equity may be worth more than value equity. After all, it’s often easier to acquire new customers than it is to retain existing ones—especially if the product or service is inferior.

But sometimes, devotion to a brand is so great that nothing else matters. Apple fans won’t buy an HP computer regardless of how much less it costs. Brand equity alone drives their purchase behavior.

Advanced marketing can help you regardless of what kind of equity you’re trying to build—or leverage. But keeping a keen eye on customer wants, needs and values should be part of any initiative.

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