Senior managers and boards of directors are increasingly demanding that the marketing function contribute to financial performance and show some return. They expect the marketing spend to be linked to company profitability.
Customer equity contributes toward making the marketing function more accountable, writes IESE Prof. Julián Villanueva in the latest issue of IESE Insight magazine.
By aligning customer management with corporate objectives and the investor perspective, marketing has a better chance of being heard at the board level.
The article, "Reading the Signs of Your Customer Value," is based on Villanueva’s research into the different models available for measuring customer lifetime value, as well as his observations of seeing customer equity dashboards being used across a wide variety of firms.
Companies that don’t pay attention to customer lifetime value risk making some bad choices. They may spend too much on acquiring customers who are ultimately unprofitable or who do not remain loyal to the brand. They may waste money on activities that have little or no influence on consumer behavior or buying decisions. They focus exclusively on overall revenue, without considering the impact of customer acquisition and retention on the bottom line.
Executives need tools to measure how much their company’s customer relationships are worth. Many companies use financial reports or dashboards that contain relatively little marketing information, partly because the reports and metrics provided by marketing managers often omit the language that senior executives understand: the concept of value.
Villanueva’s article includes "The Customer Equity Tree" depicting how customer acquisition and retention are branches that, taken together, affect the profitability and growth of a flourishing business.
IESE Insight is a quarterly research-based magazine, published in separate English and Spanish editions. IESE Alumni Association members can enjoy free access to premium articles like this one, using their usual IESE login details. All others can subscribe online.