How should we define customer equity in the short-term and the long-term?

How should we define customer equity in the short-term and the long-term?

How do you define short- and long-term when it comes to customer equity? How should a business determine what's short-term or long-term when dealing with customer satisfaction? Do you think it varies by industry?

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Customer equity is the total of lifetime values of all your current and future customers – the sum total of all the value you'll ever realize from customers. Because customers create all value, this means that customer equity is virtually the same number as the "going concern" value of your business. Strip away all the money you already have in the bank, all your assets and liabilities, and what would someone be willing to pay for your company, as a going concern? That price should be pretty close to the value of your customer equity.

As you can see, customer equity is inherently long-term oriented. It should be thought of as an asset, and this asset can go up and down in value based on how your current actions affect customer attitudes. Make your customers happier, and it's likely that you will be increasing the asset value of customer equity. It's important to try to correlate customer attitudes with quantitative changes in their behaviors, but even in the absence of more sophisticated analytics, it ought to be obvious that a more satisfied customer is more likely to return and do business again, and more likely to recommend others, as well.

Short-term, however, customer satisfaction can cost money. Good service doesn't come without a cost. And yes, the short-term cost incurred, relative to long-term benefit gained, will vary considerably by industry. Service firms will find that customer satisfaction requires training and empowering employees to act in the customer's interest at the point of sale and in pre- and post-sale interactions. Manufacturers, on the other hand, must pay attention to service issues, but must also focus on the quality, reliability, and utility of their products.

The overall goal is not only to continue to make money in the current period by selling things to customers, but to ensure that these customers continue to be valuable over a long period of time – i.e., to maintain and even grow your firm's customer equity.

Hear more in Creating Customer Value, a SearchCRM.com monthly podcast series with Peppers and Rogers.

This was first published in May 2007