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Manage Marketing bythe Customer Equity Test

by Robert C. Blattberg and John Deighton

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JULY-AUGUST 1996

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HarvardBusinessReviewGARY HAMEL STRATEGY AS REVOLUTION 96405

JOHN O. WHITNEY STRATEGIC RENEWAL FOR BUSINESS UNITS 96411

W. BRIAN ARTHUR INCREASING RETURNS AND THE NEW WORLD OF BUSINESS 96401

JAMES A. NARUS RETHINKING DISTRIBUTION: ADAPTIVE CHANNELS 96409AND JAMES C. ANDERSON

DAVID M. UPTON THE REAL VIRTUAL FACTORY 96410AND ANDREW MCAFEE

ROBERT C. BLATTBERG MANAGE MARKETING BY THE CUSTOMER EQUITY TEST 96402AND JOHN DEIGHTON

ROBERT D. NICOSON HBR CASE STUDYGROWING PAINS 96408

JEFFREY H. DYER IDEAS AT WORKHOW CHRYSLER CREATED AN AMERICAN KEIRETSU 96403

HENRY MINTZBERG THINKING ABOUT…MUSINGS ON MANAGEMENT 96407

JAMES GRANT BOOKS IN REVIEWTOO BIG TO FAIL? WALTER WRISTON AND CITIBANK 96404

HARRY LEVINSON HBR CLASSICWHEN EXECUTIVES BURN OUT 96406

M Lands’ End, the second-largest clothing catalogretailer in the United States, operates with unusu-ally high inventory levels. Its managers wouldrather inflate inventory than fail to fill an orderand risk losing a customer. “If we don’t keep thecustomer for several years, we don’t make money,”said the company’s CEO at the time, William End,in 1994. “We need a long-term payback for theexpense of coming up with a buyer.”M The main goal of McDonald’s Corporation’s 1995marketing plan was to get its current customers toeat at its restaurants more often. The corporation’smanagers noted the value of what they call “super-heavy” users – typically males aged 18 to 34 whoeat at McDonald’s an average of three to five timesa week and account for 77% of its sales – and theyplanned their marketing efforts accordingly. A se-nior executive offers the general rule that it is “eas-ier to get a current customer to use you more oftenthan it is to get a new customer.”

There is a curious similarity in the way managersat Lands’ End and McDonald’s articulate marketing

goals. They each talk not about selling products butabout keeping customers. The traditional rhetoricof customer orientation has taken on a sharper defi-nition, in which growing the business is a matter ofspending to capture the attention of high-valueprospective customers and then staying with themuntil they are converted and retained in commit-ted – and therefore relatively low-maintenance –relationships. For Lands’ End, this style of talk isnot unexpected; it is the language of direct mail.But it is also becoming increasingly common at busi-nesses whose methods of going to market are by no means limited to the mail.

At a time when marketing methods are becom-ing more interactive, from frequent-user-club ser-vices to ID-card-operated kiosks to Web pages, it isnot surprising that marketing talk is beginning tosound like direct-marketing talk. When most mar-keting communication primarily involved broad-

Copyright © 1996 by the President and Fellows of Harvard College. All rights reserved. DRAWING BY KURT VARGO

Attracting and keeping the highest-value customers is the cornerstone of a successful marketing program.

by Robert C. Blattberg and John Deighton

Manage Marketing by

cast technologies, marketers set goals that broad-cast marketing could achieve: increased share ofvoice or market and higher awareness and recall ofproducts by consumers. As communication toolsbecome interactive, marketing managers talk moreabout goals that pertain to individual relationships,such as share of customer requirements, customer-contact outcomes, and customer satisfaction mea-sures. Managers have begun to think of good mar-keting as good conversation, as a process of drawingpotential customers into progressively more satis-fying back-and-forth relationships with the com-pany. Just as the art of conversation follows twoseparate steps – first striking up a conversation with a likely partner and then maintaining the flow – so the new marketing naturally divides itselfinto the work of acquiring customers and the workof retaining them.

Growing a business can therefore be framed as amatter of getting customers and keeping them so asto grow the value of the customer base – the sum ofall the conversations – to its fullest potential. Inthese terms, setting a marketing budget becomesthe task of balancing what is spent on customer ac-quisition with what is spent on retention.

Clearly, not every company wants to balance ac-quisition and retention at the same point. In someindustries, such as low-end, used-car retailing, totake an extreme example, retention strategies haveno leverage, because the intrinsic “retainability” ofcustomers is simply too low. In others, the relativeimportance of retention changes as the industryevolves. How can managers determine the optimalbalance between acquisition and retention for theirparticular companies?

The criterion we propose for determining the op-timal balance is the company’s customer equity.The balance is optimal when customer equity is atits maximum amount. To measure that equity, wefirst measure each customer’s expected contribu-tion toward offsetting the company’s fixed costs

HARVARD BUSINESS REVIEW July-August 1996 137

Robert C. Blattberg is the Polk Brothers DistinguishedProfessor of Retailing at Northwestern University’s J.L. Kellogg Graduate School of Management inEvanston, Illinois. John Deighton is an associate profes-sor of marketing at the Harvard Business School inBoston, Massachusetts.

the Customer Equity Test

over the expected life of that customer. Then wediscount the expected contributions to a net pres-ent value at the company’s target rate of return formarketing investments. Finally, we add togetherthe discounted, expected contributions of all cur-rent customers.

Appraising customer equity is conceptually simi-lar to appraising the value of a portfolio of income-producing real estate. Two of its main determinants

are the cost of acquiring customers and the futureprofit stream from retained customers. But a host ofother factors, including remarketing costs andbrand strategy, can also have significant influence.

Ultimately, we contend that the appropriatequestion for judging new products, new programs,and new customer-service initiatives should not be,Will it attract new customers? or, Will it increaseour retention rates? but rather, Will it grow our cus-tomer equity? The goal of maximizing customerequity by balancing acquisition and retention ef-forts properly should serve as the star by which acompany steers its entire marketing program.

Finding the BalanceTo use customer equity as the criterion that bal-

ances spending on getting and keeping customers,we need to express it as the sum of two net presentvalues: the returns from acquisition spending andthe returns from retention spending. We use a toolcalled decision calculus to build a model of this re-lationship by creating two curves. The first curverelates acquisition spending to the resulting acqui-sition rate, and the second curve relates retentionspending to the resulting retention rate. Thesecurves characterize the company and its industry.

What is decision calculus? It is an approach to de-cision making in which a manager breaks down acomplex problem into smaller, simpler elements,forms judgments about each element separately,and then uses a formal model to turn those smalljudgments into an answer to the larger question.Studies have shown that people can predict simpleevents better than complex ones, and models are

better than people at combining simple predictionsto address a larger issue. The result of using deci-sion calculus is only as good as the managers in-volved in the process, but the tool allows managersand models to do what they do best in the face of a complex dilemma.

In this case, we approach the larger question –What is the optimal balance between customer ac-quisition and customer retention at my company? –

by asking several smaller questionsabout acquisition and retention. Thecurves we will create reveal thepoints at which a company is spend-ing more than a customer is worth to acquire or retain. Those points,along with consideration of severalother factors, show managers howtheir acquisition and retention ef-forts should be balanced.

Let’s look at a practical example,using, for ease of description, a case in which acompany markets a single product that customersbuy once or twice a year. By keeping the case sim-ple, complications – such as the problem of ac-counting for ancillary sales or of allocating the ef-fect of one marketing investment to more than oneproduct – will not distract from the essence of theprocess. Amending the method later to accommo-date refinements will be a straightforward task.

We have chosen to work with a product that ispurchased at least once a year to make it practicalto express retention rates on a per-year basis. If cus-tomers’ purchase cycles are longer than a year, asthey are with automobiles and other durables, it isbetter for managers to estimate retention rates on a per-cycle basis.

Finally, and again simplifying for the sake of ex-position, we gloss over the question of the lapsedcustomer. If a customer is not retained, we will as-sume that the cost of reactivating that customerwill be the same as the cost of acquiring a prospect.In practice, it usually costs less.

We begin by estimating the shape of the compa-ny’s acquisition curve. To do this, we ask the man-ager to provide two points on the curve: first, thecompany’s current level of acquisition and second,the ceiling – the highest possible number of cus-tomers the company could reasonably acquire in agiven time period. (Acquisition and retention donot increase without limit as spending increases.There is a ceiling, which will vary from industry toindustry. For example, the ceiling is much lower fora property and casualty insurance company usingdirect mail to acquire new customers than it is forthe average catalog retailer. Similarly, the retention

CUSTOMER EQUITY

138 HARVARD BUSINESS REVIEW July-August 1996

The appropriate question forjudging new products andcustomer service initiatives is,Will it grow our customer equity?

ceiling for banks is generally high because the rela-tionship between the customer and the bank be-comes more complex over time with the addition ofdirect deposit, loans, and so forth. On the otherhand, in the automotive industry, even the strong-est brands have low retention ceilings. On aver-age, manufacturers seldom induce more than 40%of buyers to purchase the same brand of automobileon two successive occasions.)

We first ask the manager, What did you spend lastyear to attract prospects? To figure out what wasspent per prospect, estimate how many prospectswere converted into customers. What proportion ofthe prospect pool was converted?

The manager answers, We spent $5 per prospectto attempt to induce a first transaction, and we suc-ceeded 20% of the time.

Then we ask, If for all practical purposes therehad been no limit to spending, what proportion ofthe prospects that you targeted over the course ofthe last year could have been converted?

The manager answers, I don’t think we couldever induce more than 40% of our prospect pool tobecome first-time customers.

Those answers are all that is needed to decide onthe optimum amount to spend to acquire a cus-tomer. (For an explanation of the calculations in-volved, see the insert “Calculating the OptimalLevel of Acquisition Spending.”) First, we use theanswers to generate a curve showing how the acqui-sition rate varies with spending on acquisition. The

curve has a characteristic “diminishing returns”shape. (See the graph “How First-Year Value De-pends on Acquisition Spending.”) Second, we usethat curve, with no further information except themargin generated by a customer in a year, to com-pute the U-shaped curve in the upper half of thegraph. That second curve depicts how the averagevalue of acquired customers in the first year varieswith spending on acquisition, first growing as thecompany attracts eager buyers and then decliningas it goes after more reluctant prospects who re-quire more expensive wooing. The peak of thatcurve tells us at what point to stop acquiring.

We now need a second dialogue to elicit the man-ager’s insight into the shape of the retention curve.We begin by asking the manager, What did youspend last year on retention activities? Divide thatamount by the number of customers you had at thestart of that year to get the retention expenditureper customer. What proportion of your customersdid you succeed in keeping for the year?

The manager answers, Last year, we spent at therate of $10 per customer and retained 40% of thecustomer base.

Then we ask, If your budget had been unlimited,what proportion of customers in one year wouldhave remained customers in the following year?

The manager answers, At best, we might retain70% of our customers from one year to the next.

Those answers give us the other side of the bal-ance point between acquisition and retention. (See


Calculating the Optimal Level of Acquisition Spending

Here we describe how to compute an organization’soptimal level of acquisition spending, using the man-ager’s answers to the acquisition questions: Howmuch did you spend, and what is the limit to your at-traction of new customers? The answer to the firstquestion gives us $A, the acquisition expenditure perprospect, and a, the acquisition rate obtained as a re-sult of that expenditure. The answer to the secondquestion gives us the ceiling rate on the acquisitioncurve. If we assume that the curve is exponential (anassumption that is supported by our experience), thenthe curve of the actual acquisition probability as pic-tured in the lower half of the graph “How First-YearValue Depends on Acquisition Spending” is describedby the equation

a = ceiling rate 3 [1 2 exp(2k1 3 $A)]

where k is a constant that controls the steepness of thecurve. Thus, knowing the two points on this curve andthe ceiling rate – as given to us by the manager – wecan solve the equation to find k.

Next, we compute the contribution from an ac-quired customer in the first year after acquisition (seethe upper curve in the graph). If the margin on a trans-action is $m, then

the net contribution from acquiring a prospect in thefirst year = a$m 2 $A.

Note that this quantity need not be positive; it may bethat the optimum amount to spend to acquire a cus-tomer is more than the contribution generated by thatcustomer in the first year. Whether a marketer shouldacquire a customer at a loss can be judged only whenthe retention returns have been calculated.

the insert “Calculating the Optimal Level of Reten-tion Spending.”) We use the answers first to gener-ate a curve that relates retention spending to suc-cess at retention. (See the graph “How CustomerEquity Depends on Retention Spending.”) Again,the curve reflects the diminishing returns in effortsto retain customers. Next, we generate the curve inthe upper half of the graph, a curve that grows as re-tention spending gives the customer more reasonsto remain loyal, and then declines as customers nolonger value the retention service enough to coverits cost.

Despite the simplicity of this example, it illus-trates how the decision-calculus process – in thiscase, using four small, explicit decisions and a modelto solve one large, messy problem – can pay off. Dothis manager’s actions coincide with his or her intui-

tions? Are the current spending levels consistentwith the curves he or she believes apply in this mar-ket? Here, as we find in many of our real-world ap-plications, breaking down the problem into compo-nents has helped, and either intuition or currentpractice needs to be updated if the manager is to beconsistent. The actual expenditures of $5 per pros-pect and $10 per convert are, given the manager’sown opinions about the market’s responsiveness,both too low. The acquisition budget should be in-creased to $7.50 per prospect; the retention budgetwould be optimal at $15 per customer. At theselevels of spending, the company’s customer equitywould reach its peak.

Maximizing Customer EquityThe balance between acquisition and retention

spending is never static. Managers must constantlyreassess the spending points determined by the de-cision-calculus model, keeping in mind a host ofconsiderations. The following guidelines shouldhelp frame the issue.

Invest in highest-value customers first. In themodel just described, we showed how to allocatemarketing investments between only two groups,prospects and customers, and we used averages tocharacterize the responsiveness of each group. Thislogic should be applied to much finer distinctionsamong the company’s customer base and prospectlist. Instead of using averages drawn across the en-tire customer base, for example, a more subtleanalysis would partition the base into behaviorallyand attitudinally homogeneous groups that spendat different levels, and it would estimate the shapeof acquisition and retention curves for each group.The analysis would then proceed to evaluate thecustomer equity of each group, starting with themost valuable and proceeding to the least. For eachgroup, the analysis first would determine the opti-mal investment required to retain members of thatgroup and then how much to spend to acquire morepeople who fit that group’s profile.

Targets with particularly high equity might jus-tify major investments. Airlines, for example, knowthat a large investment in retention incentives paysoff. One result is the progressive structure of airlinefrequent-flier incentives: The more a customerflies, the easier it becomes for that customer to earnmore generous benefits. Similarly, long-distancephone companies in the United States recognizethat one of their highest-value customer groups isrecent immigrants, who maintain phone contactwith relatives and friends in their countries of ori-gin. The phone companies work hard at retaining


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that segment, serving it with native-languagephone operators and offering special promotions.

Transform product management into customermanagement. The customer-equity perspective fa-vors customer management over product or brandmanagement as an organizing principle. When eval-uating new products and services, keep in mindthat small changes can have a big impact. Indeed,the value of improvements in customer equity is of-ten not fully appreciated until it is expressed as acapitalized amount. Consider what happened whena major manufacturer of durable goods discoveredthat a component of one of its products was failingat a rate of 35% within one year of purchase. Theoperations manager determined that it was lesscostly to replace the component in the 35% of prod-ucts that failed in customers’ homes than it was to

replace it in 100% of the products in inventory. Hiscalculation accurately assessed the single-periodcost to the company of each course of action buttook no account of the impact on customer satisfac-tion or the probability of repeat purchases. Whenthe problem was reframed from the perspective ofthe potential for losing customers, the managerssaw immediately that replacing the component inthe warehouse was the better alternative.

American Airlines’ introduction of the frequent-flier program in 1981 inspired an astonishing rangeof industries to create membership clubs, includ-ing car rental agencies, restaurants, cosmetics com-panies, ski lodges, photofinishing shops, and over-night package shippers. Some critics argue thatcompetition has negated the influence of the bene-fits. We would argue, on the contrary, that reten-tion programs, if skillfully designed, can be muchmore than volume-discount programs. They can in-spire loyalty from the market’s biggest spenders.The key is to deliver benefits that appeal more toheavy users than to light users, that draw attentionto a brand’s claimed distinction, and that enliventhe buying experience so that the heavy user be-comes an even heavier user. For example, Nintendoand Lego designed clubs that showed members newways for kids to enjoy their games and toys.Through the clubs, children also came into contactwith other heavy users. For adults, Harley-David-son and Corvette have designed clubs with a simi-lar impact on users. And hotels have made clubmembership a source of customer recognition and a way to ease the strains of the traveling life.

Consider how add-on sales and cross-selling canincrease customer equity. The value of a customeris reflected not only in the revenue earned from theinitial purchase but also in the present value of fu-ture revenues contingent upon that purchase. Inother words, if the customer buys product A, willhe or she buy products that supplement or comple-ment product A? A customer who purchases a laserprinter may well buy additional memory, toner car-tridges, special paper-handling devices, and supple-mental fonts in the future. Someone who buys anew car will later need service visits, body repairs,and new parts. An accounting partnership can beconfident that if it wins the contract to perform au-dits for a client, it will probably be able to sell otheraccounting services to that same client. Additionalsales enhance the value of the customer relation-ship over time.

In the terminology used by direct marketers, thecost of marketing additional products and servicesto the installed, or existing, customer base is calledremarketing cost. Customers who like a company’s

CUSTOMER EQUITY


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products and services are less expensive to servewith new products and services. In this way, re-duced costs of remarketing are one of the less visi-ble rewards of investment in customer satisfaction.

Look for ways to reduce acquisition costs. Acqui-sition costs have a strong impact on customer equi-ty. With high acquisition costs, retention rates andadd-on sales must be high to make the product orservice viable. Therefore, if the company can ac-quire customers at a lower cost, the long-term pay-off improves significantly. Despite this potentialbenefit, many companies do not know what per-centage of their marketing budget is being used toacquire new customers and what percentage is be-ing spent on existing customers. Is the company’sgeneral advertising building loyalty, acquiring cus-tomers, or both?

For example, a life insurance company, noticingthat its customer acquisition costs were higher

than normal for the industry, introduced prequali-fication procedures in order to discourage agentsfrom pursuing prospects when the likelihood ofwriting a policy was low. Although the proceduresreduced the company’s rate of sales, they reducedthe cost of acquiring customers by even more andboosted both the company’s profits and its cus-tomer equity.

Track customer equity gains and losses againstmarketing programs. A customer-value flow state-ment – much like an organization’s cash flow state-ment – can highlight problems that the incomestatement conceals. A company that churns its cus-tomer base (acquires customers just as fast as itloses them) can report good sales and profits even asits customer equity is evaporating. As it churns, the company has an increasingly difficult time ac-quiring new customers cost-effectively, and, finally,when it has churned all prospects through the sys-


Calculating the Optimal Level of Retention Spending

Here we describe how to compute an organization’soptimal level of retention spending, using the manag-er’s responses to the retention questions: How muchdid you spend last year, and what is the maximum per-centage of customers you could hope to retain? Theanswer to the first question gives us $R, the acquisi-tion expenditure per prospect, and r, the retention rateobtained as a result of that expenditure. The answer tothe second question gives us the ceiling rate on the re-tention curve. Again assuming that the curve is expo-nential, the curve of the retention probability rate aspictured in the lower half of the graph “How Cus-tomer Equity Depends on Retention Spending” is de-scribed by the equation

r = ceiling rate 3 [1 2 exp(2k2 3 $R)].

As before, k is a parameter controlling the shape of theexponential curve. Knowing the margin on a transac-tion, we can compute the value of a customer in anyyear after acquisition. To keep this illustration simple,assume that we earn the same margin in each year asthe $m we earned in the year in which we acquired thecustomer. (The basic method is the same when model-ing situations in which customers become more valu-able over time.) Then the value of the customer in anygiven year (y) is simply $m, less the retention budgetand discounted by the probability that the customerwill still be around in that year. That is, the value ofthe customer in any given year is the retention rateraised to the yth power:

year y contribution from retention = ry ($m 2 $R/r).

($R gets divided by r to allow for the fact that retentioninvestment is spent on the number of customers we attempt to keep, not on the number we succeed in keeping. The number we succeed in keeping is onerth of the number that we had attempted to keep.)

We then sum up the annual values for each year ofthe customer’s projected life, add the value of a first-year customer, discount to a present value at a rate ofreturn appropriate for marketing investments, d%,and so obtain the amount of customer equity at-tributable to that customer.

The top half of the graph plots this customer equityagainst the retention budget for the retention curve il-lustrated in the graph’s lower half. It is a simple matterto read the value of $R, which takes the retention rater to its optimum level.

Alternatively, the relationship between retentionspending and return can be expressed algebraically. Ifwe define r* = r/(1 + d), then the customer equity gener-ated from investments of $A in acquisition and $R inretention is given by

customer equity = a$m 2 $A + a($m 2 $R/r)[r*/(1 2r*)].

We can find the value of $R that, when substitutedinto this expression, yields the greatest value for cus-tomer equity. The result is the expected customer eq-uity of an average customer acquired by spending $Aand retained by spending $R each year.

tem, acquisition costs become impossibly high.Whereas an income statement gives no indicationof churning, a customer-value statement reportswhether the company’s marketing programs arebuilding or eroding the customer base.

When American Express Company acquired IDSFinancial Services, a company that markets insur-ance and mutual fund products through a 5,000-member sales force, it found that behind IDS’s at-tractive rate of sales and profit growth lurked a highrate of churning. IDS was losing a client almostevery time it gained one. And marketing programsimplemented at headquarters were fueling thechurning. IDS was spending $16 on marketing pro-grams to generate leads for the sales force for every$1 that it spent on programs to strengthen the rela-tionship between the company and existing clients.When an American Express study found that IDSwas managing only 15% of a typical client’s finan-cial assets, the company immediately shifted its focus from acquisition marketing to retention mar-keting. The key was to encourage sales representa-tives to open up a relationship with a customer byselling a personal financial plan as the first transac-tion, rather than an insurance policy or a single in-vestment. By promoting personal financial plans,IDS made it easier for reps to make additional salesto existing customers than it had been. The resultwas not seen in annual sales, which continued attheir steady clip, but rather in much more rapidgrowth in the lifetime value of the customer base,which promised a more secure future for IDS.

Relate branding to customer equity. Brands don’tcreate wealth; customers do. Despite the fashion-able concern with brand power, few would disputethat highly visible brands are justone instrument among many withwhich to build customer equity;they are a magnet to attract new cus-tomers and an anchor to hold exist-ing customers. Brands are nevermore important than the customersthey reach. Once Sears reanalyzed its transaction records – asking not,What are our most valuable brands?but rather, Who are our most valu-able customers? – the company began to seek shop-pers for new clothing much more vigorously thanever before.

Managers should watch for signs that brand man-agement is impeding customer management. Con-sider a Canadian manufacturer that makes prod-ucts in three distinct markets under the same brandname. One product is strong; the other two areweak. Several years ago, each was managed by a dif-

ferent brand manager bent on maximizing share inhis or her market, and the manager of the strongbrand resisted allowing the weaker siblings to rideon its coattails. But research showed that the strongbrand had as much to gain from cooperation as theother two. When experiments were conducted tomeasure the response to coupons for one productdelivered only to users of the other two, all threebrands showed impressive results. It was easier topersuade a user of two of the products to try thethird than to persuade a nonuser of any of the prod-ucts to try one. Brand-management myopia hadbeen preventing the company from discovering thatit could be good at customer management; it couldcross-sell to increase a customer’s equity more effi-ciently than it could acquire a customer three timesover – once in each market.

Monitor the intrinsic retainability of your cus-tomers. Intrinsic retainability is determined by theway the customer uses a product or service. Whenthat use changes, retainability changes at the sametime, and companies must scramble to adjust theirallocation of marketing funds.

For years, marketers in the air freight industry re-quired expertise in customer acquisition. An effi-cient acquirer earned a higher return than a skilledretention marketer because customer satisfactionwas out of the hands of the shipper and in the con-trol of the airlines that carried the freight. FederalExpress’s innovation, the creation of an airline ded-icated to nothing but freight, gave shippers morecontrol over customer satisfaction and sharply in-creased the returns that could be earned through re-tention marketing. Suddenly, the successful com-panies were successful retainers.

Traditionally, IBM ran its mainframe computerbusiness as a retention business, training its salesforce to follow the initial sale with attempts to sellperipheral equipment, software, a contract with itsservice bureau, and so on. Customers were prizedbecause they became lifetime IBM users. But asmicrocomputers displaced mainframes for many ap-plications, the company was compelled to deploymore of its marketing funds for acquisition. The

CUSTOMER EQUITY


A customer-value statementreports whether a company’s

marketing programs are buildingor eroding the customer base.

pace of technological evolution weakened brandloyalty, and a new consumer emerged who ascribedmuch less value to relationships. For a time, IBMtried to exploit past loyalties by endorsing selectedsoftware and attaching its brand name to peripher-als, but the game had changed. Today the companyhas cut back on its famed sales force in favor of lessexpensive retention tools such as database technol-ogy and catalog-based direct sales.

When the time is ripe to change direction, thesignal usually comes from the environment, notfrom the organization. The winner is the companythat reads the signal first.

Consider writing separate marketing plans – oreven building two marketing organizations – for ac-quisition and retention efforts. Locating customers,attracting them, and then managing the ongoing re-lationships are very different tasks. They requiredifferent kinds of market research, different costanalyses to calculate the return on investment, anddifferent measures to monitor compliance. There-fore, we recommend that once managers have de-termined the most appropriate ratio of acquisitionand retention spending, they plan for each task sep-arately. In direct-marketing organizations and in in-dustries with a large customer-service component,such as airlines, it may in fact be advantageous toplace acquisition activities under separate controlfrom retention activities.

Separate marketing teams to manage customeracquisition projects and retention projects haveproved effective in many companies, especiallywhen the projects can be sharply defined by theneeds of particular customer groups. British Air-ways, for example, identified U.S. residents who

used the airline to fly within Europe but did not useit to fly from the United States to Europe. The com-pany then formed a team to address acquisition ef-forts for that customer segment. Next, it charged aretention team with the task of finding what itwould take to keep those customers. The teamcame up with a fast track for arriving transatlanticpassengers that included accelerated processing ofcustoms and immigration documents, private

suites, and valet services.An organizational structure built

around getting and keeping cus-tomers, not simply selling products,has some significant benefits. It al-lows the marketing organizations touse tactics that are appropriate fordifferent customer segments. Mar-keting research can be used to under-stand the needs of existing cus-tomers as distinct from the needs of

prospective customers. And the performance andcompensation of marketing managers can be linkedto increases in the customer equity between thesetwo groups.

When managers strive to grow customer equityrather than a brand’s sales or profit, they put thecustomer and the quality of customer relationshipsat the forefront of their strategic thinking. Productsales, brand strength, and short-term financial per-formance are mere secondary indicators of success.

Furthermore, when managers ask how much amarketing investment will increase a company’scustomer equity, the interests of the marketer andthe company’s shareholders are precisely aligned.Just as an investment firm’s interests are served ifits investment managers are judged by the changein portfolio value from one period to the next, so acompany is well served if its marketers are judgedby the increase in the company’s customer equityover time. If a marketing organization backs awayfrom the challenge to link its fortunes to the cus-tomer-equity criterion, it either misunderstandsthe purpose of the marketing function or lacks theauthority to carry out that purpose.Reprint 96402 To place an order, call 1-800-545-7685.

CUSTOMER EQUITY


When managers strive to growcustomer equity, they put thecustomer at the forefront of theirstrategic thinking.

manage marketing by the customer equity testweb.nchu.edu.tw/~jodytsao/cma_old/manage marketing by...

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