Why Customer-Centric Isn't Enough: Measuring Customer Equity

Too few leaders know the value of their customer relationships. A company cannot call itself customer-centric if leadership cannot accurately measure and manage customer base value.

Allison Hartsoe, author of The Age of Customer Equity, has spent years working on this problem. Her concept of customer equity shares a lot of similarities with my own work on customer base value. One of the building blocks of customer equity, of course, is customer lifetime value (CLV), and Allison believes that developing accurate CLV estimates demands a forward-facing and analytics-driven approach.

“When I talk about ‘customer equity,’ I'm thinking of the properly calculated CLV, meaning each customer’s calculated potential rolled up into a number that is reflected as customer equity,” Allison says.

It can be difficult, however, for organizations to develop good CLV modeling. Organizations can get tripped up by debates over inputs, assumptions, and analytics. To get started, sometimes it’s better to keep it simple. Allison says a calculation that doesn’t rely on agreeing about margins can get you going. She says that way, “you don't worry too much about muddying the number or getting access to information that may be dynamic in its own nature.”

Importantly, she emphasizes the meaning behind customer equity and customer lifetime value. CLV goes up when you’ve earned customer loyalty by making sure you have the right customers and deliver the right value. In her experience, it’s important not to let the analytics and calculations dominate the dialogue.

“The fundamental belief for me behind customer equity is that there is a happy crossover where the company is productive and generating lots of revenue and the customer base is satisfied and happy,” she says. “We’re trying to shift the language from distancing, financial terms into people.”

I’ve always found that the decisions a company makes about which customers it invites through the front door can be among the most important. Allison says that getting the right customers can make all the difference. “It’s the sweet spot for a company.” To attract the right customers, you need to understand the customers and why they buy.

“I understand that there's always a need to sell more product. But by getting behind the person, who are they and what do they need, I think we develop a stronger sense of durability in the customer base, which is reflected in the lifetime value.”

In this episode, Allison and I discuss how to develop a high-quality approach to customer equity and how having a better understanding of customer behavior can help generate more accurate revenue forecasts.

In the following excerpt, we discuss how a people-focused approach can help solve businesses’ greatest customer equity challenges.

Rob: When you think about the future of customer equity as a framework for organizations to make better decisions, to focus their strategy, what do you see as the primary obstacles that have to be overcome?

Allison: You’re not going like this answer, but I'm going to say humans are the primary obstacle.

Our world is getting people on board, and those relationships have to be built. And the critical fact of that is as you get those relationships built, you see things that extend into the model. You see things that you wouldn't have seen otherwise.

We have to get the heart of the customer, the heart of our businesses, into the data set in order to have the ultimate promise of customer equity come together.

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