Thursday, December 24, 2009

Customer equity

Customer equity:
It is the total combined customer lifetime values of all of a company’s customers.
In deciding the value of a company, it is important to know of how much value its customer base is in terms of future revenues. The greater the customer equity (CE), the more future revenue in the lifetime of its clients; this means that a company with a higher customer equity can get more money from its customers on average than another company that is identical in all other characteristics. As a result a company with higher customer equity is more valuable than one without it. It includes customers' goodwill and extrapolates it over the lifetime of the customers.
The term is a misnomer since the term has nothing to do with the traditional meaning of equity.
There are three drivers (factors) to customer equity, all of which refer to three sides of the same thing:
Value equity: What the customer assesses the value of the product or service provided by the company to be;
Brand equity: What the customer assesses the value of the brand is, above its objective value;
Retention equity: The tendency of the customer to stick with the brand even when it is priced higher than an otherwise equal product.

Reference: http://en.wikipedia.org/wiki/Customer_equity

My opinion: 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.

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