Can you put a price on relationships? If you’re a company, you can—and doing so can make those relationships (in this case, the one between brand and customer) even stronger. That value is known as customer equity, a quantitative metric that can help you understand how each stage in the customer journey translates to financial profit.
Learn how to calculate customer equity and how to improve it over time.
What is customer equity?
Customer equity is a useful metric that reflects the estimated total value of the business-customer relationship. If a single customer’s potential is measured by customer lifetime value (CLV), customer equity represents the combined CLV of your entire customer base.
Any measure of customer equity is a snapshot in time, and understanding it can help you dial in other key metrics in your business. For example, you can compare your customer equity against customer acquisition costs (CAC) and customer retention costs (CRC). Measuring what your company spends to acquire andretain customers, whether in marketing costs or customer relationship management (CRM) software, against how much revenue they’re likely to bring in, illustrates how your business is doing, as well as how robust its future prospects are.
Customer equity is considered a strong measure of a company’s total expected profitability (especially if you have plans to go public) and forecasted cash flow, because it reflects a large, loyal customer base that is expected to spend more than it takes to attract or retain them over time.
How to calculate customer equity
Customer equity is the total value of all of your customer relationships over a set period of time, like one year. Time-boxing the data allows you to better track customer equity trends over time, especially as you hone your marketing strategies for future customers and experiment with budget allocation.
While there are many ways to calculate customer equity, the simplest (and quickest) customer equity formula is to multiply the average CLV by the total number of customers. Customer lifetime value uses average order values and purchase frequency to determine a customer’s projected value over their lifespan with your business. Once you know your CLV, you can confidently calculate your customer equity.
Customer equity = average customer lifetime value x total customers
3 pillars of customer equity
Using the average customer lifetime value formula can help put a monetary figure on customer equity, but from the customer’s point of view, equity is influenced by three components: how aware they are of your brand, how much value they see in your offerings, and how loyal they are to it. These three pillars of customer equity provide a more qualitative understanding of the worth of your brand from your customers’ perspective.
1. Brand equity
Brand equity refers to the overall brand association that the public has regarding your brand. Is your brand recognizable in a crowded competitive landscape? Is your offering uniquely compelling? Is it a mainstay in its category or a disruptor?
2. Value equity
Value equity aims to capture the overall value of the brand from the perspective of the customer. Do they see your offering as a worthy investment? Does it bring value to their lives? Customers are willing to spend more with a high value equity brand, especially if you find ways to underscore the inherent value of what you’re selling while justifying a higher price point in your marketing campaigns.
3. Relationship equity
Relationship equity reflects the strength of your customer relationships, best measured in brand loyalty. How likely is it that consumers choose you when given the option between your brand and its closest competitors—and how likely are they to recommend that decision to others? An emphasis on customer relationship management can help bolster relationship equity by prioritizing regular contact with your top customers.
Ways to improve customer equity
There are plenty of ways, through both organizational structure and marketing strategy, to increase customer equity. Here are a few of the most impactful techniques:
Solicit customer feedback
A customer’s unbiased assessment of your products and customer experience can be one of the best ways to identify your strengths and opportunities as a business. Solicit that input often for maximum effect: Think post-purchase and customer service surveys, community events, conversations on social media platforms, focus groups, and customer interviews.
Most importantly, act on what you learn. Making customers feel heard by following through on suggestions and feedback establishes trust—making them more likely to recommend you to their peers—and makes loyal customers feel more invested in the brand’s success.
Personalize the customer journey
Tailoring online shopping experiences to individual customers can increase both conversion rates and average order value, as well as improve the overall customer experience—all of which have big implications for customer equity. Allowing customers to design their own subscription boxes, for example, or using a recommendation engine to surface products they are most likely to be interested in not only helps them find what they’re looking for faster, it shows you understand the need you’re serving.
Provide excellent customer service
Excellent customer service is a fundamental piece of customer equity. Whether that means establishing a painless return policy or having someone on call to answer queries about product features and best practices, great customer service provides and reinforces value not just during the shopping experience, but beyond it.
Customer service teams should prioritize fast response times, friendly messaging, and an ability to solve problems quickly, but also find ways to exceed customer expectations in each interaction.
Offer loyalty programs
Loyalty programs, or reward programs, not only encourage more purchases with discounts and point accumulation, they also make regular customers feel like an important part of the brand’s story. An increase in brand loyalty can increase sales and encourage repeat orders. Moreover, loyal customers may become advocates for your brand, recommending it to their network, an invaluable component of increasing customer equity.
Solve pain points
Friction is the detriment of the customer experience—the motivating factor at the core of customer equity—so wherever possible, strive to make the navigation, discovery, and purchasing processes as smooth as you can. This gives customers confidence in your brand, reduces bounce rate and cart abandonment, and makes them more likely to return in the future.
Customer equity FAQ
What are the 3 types of customer equity?
Customer equity can be improved through three interrelated perspectives: brand equity, which tracks brand awareness and reputation; value equity, the perceived value of your offering in the marketplace; and relationship equity, the strength of your customer relationships and brand loyalty.
How do you create customer equity?
Customer equity is a reflection of how much you can expect your customer relationships to generate during a set period of time, and it is powered by high customer engagement and customer satisfaction. To create customer equity, you not only need a high-quality product and high-quality experience, but you eventually need customers to spend more than it takes to get them in the door.
Why is customer equity important?
A company’s customer equity is important because it is a quantitative measure of financial stability and customer loyalty. Understanding it can illuminate the efficiency of how you allocate various budgets—or speak to the chances of a brand’s survival. If a particular brand is wildly popular, for example, but its marketing budget far outspends its customers, its customer equity would be lower than its acquisition costs, which would bode poorly for its future.
