Abstract
Organisations are increasingly under pressure to meet financial and other objectives
in dynamic and competitive markets, that are being driven more by services than by
products. Marketing as a function needs to become more accountable with respect
to the marketing investments that are made and the returns generated from these
programmes, and hence to increase shareholder value. Intangible assets are
comprising a growing proportion of this shareholder value, to the extent that 75% of
the value of the organisation is currently made up of intangibles such as Human
Equity, Brand Equity and Customer Equity. Thus the marketer needs to build the
marketing-based intangible assets of Brand Equity, the inherent value of the brand,
and Customer Equity, the sum of the lifetime values to the organisation of its current
and future customers. To be able to monitor and manage marketing’s contribution,
these assets need to be measured, and the effectiveness of marketing programmes
needs to be determined ideally in financial terms, e.g. ROMI – Return on Marketing
Investment.
The purpose of this research study was to develop and test a framework of
Customer Equity in the financial services sector, to guide marketing spend so that
shareholder value is built by leveraging the marketing intangibles. Consequently, the
objectives were to develop a model of Customer Equity, to calculate Customer
Lifetime Value of customers in a segment, to determine the value drivers and the
elasticity relation of Customer Equity, and finally to provide guidelines to
organisations to improve their Customer Equity.
The first area of research was in the field of Marketing metrics, the set of measures
that helps organisations to understand their marketing performance. The
recommendation for organisations is to develop a marketing dashboard, or range of
key marketing indicators, which would include short-term performance measures,
e.g. market share or customer satisfaction, as well as long-term planning measures,
e.g. Brand Equity and Customer Lifetime Value.
Brand Equity was then reviewed as a valuable intangible asset. Various models
have been developed to explain the different sources, components and outcomes of
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Brand Equity, as it is a multidimensional construct. The measurement and valuation
of Brand Equity was also researched, and its link to shareholder value.
Customer Equity, an alternative market-based intangible asset that can be a driver of
shareholder value, was also reviewed. The conclusion from a review of the models
is that there are two schools: the Blattberg, Gupta and colleagues school, which
tends to focus on internal analysis as typically used in direct marketing applications;
and the Rust and colleagues school, which tends to focus externally on the customer
and the competition. Both schools have something to contribute: the internal
school, on accurate understanding of Customer Lifetime Value, and the external
school, on the relative importance of the drivers of Customer Equity. This research
also makes a contribution to the Brand Equity / Customer Equity debate, analysing
similarities and differences, and developing a model to explain the trade-off between
the two concepts.
A combination of the two schools was used to develop a model of Customer Equity,
including supply side inputs (for accurate CLTV calculations) and demand side
inputs (for determining drivers and their elasticities). Using input from the databases
of a financial institution, Customer Lifetime Value and Customer Equity for customers
in the SME market sector were calculated. A convenience sample of 251 SME’s
was interviewed on the demand side using a structured questionnaire, to develop
data on the drivers of their importance and the relative performance of banks. A
statistical model was then developed, using Principal Components Regression
(PCR) analysis, to determine the drivers of Customer Equity, the factors influencing
these and the relative sensitivities. A key contribution of this research was the
development of the Probability of Defection as a measure of the dependent variable
in the multiple regression. The model was tested by determining the ROI of two
marketing programmes from the financial institution, to guide their marketing spend.
Finally, a Customer Equity Management Process was developed to assist
organisations in implementing a Customer Equity focus.
Prof. Chris Jooste