Using customer equity models to improve loyalty and profits

Abstract

Purpose

The purpose of the paper is to teach the reader how to compile a customer equity model in order to calculate the true profitability of customers. The reader can use the information to make better business decisions across their organization.

Design/methodology/approach

Transaction data (as much as can be collected) on individual customers is needed to build the customer equity model. An analyst is needed to devise an algorithm and discern the best way to allocate costs. The goal is to build the best representation of profitability for the company. Once a process is in place for assigning revenue and costs to customers, tables must be programmed to calculate profitability. The final step is to take what is learned in the customer equity model and test ideas for retaining best customers and converting unprofitable customers into profitable ones.

Findings

It was found that customer equity models are important tools for describing past behavior, predicting a customer's next‐year profitability, and exploring other variables that factor into marketing decisions.

Practical implications

Identifies the need for companies to do a more thorough job of identifying their “best” customers, that is, their most profitable customers. Provides direction on putting together a customer equity model that will help companies reach the above‐mentioned findings

Originality/value

This paper is valuable to anyone who could benefit by better understanding past behavior of customers, and by predicting a customer's next‐year profitability. The reader can use the information to make better business decisions across their organization.

Citation

Stevens, K. (2006), "Using customer equity models to improve loyalty and profits", Journal of Consumer Marketing, Vol. 23 No. 7, pp. 379-381. https://doi.org/10.1108/07363760610712894