Once a year, Interbrand publishes a list showing the value of the world’s leading brands. This year it turned out that Europe’s most valuable retail brands are Swedish, H&M and IKEA. They are worth USD 18 168 million and USD 13 818 million, respectively. My question to you as brand manager is, therefore: What is your brand worth?
In all probability you have no real idea. It is probably even less likely that you know whether you have increased or reduced the value of your brand. You almost certainly know whether brand awareness has gone up or down, perhaps along with a few other indicators. In our Agency of the Future survey, 92 percent of CMOs answered a resounding YES, to the question: Will brands continue to be one of a company’s most important assets?
Now you think I am going to question our most sacred of cows, the brand, don’t you? Well, yes, you’re right, I am; just a little.
Is H&M’s brand worth 119 billion?
The stock exchange values H&M at roughly SEK 450 billion. In other words, H&M’s brand accounts for approximately one quarter of the company’s total value. Does that make sense? You tell me.
Obviously brands do have value. Your brand is without a doubt an important intangible asset. But, what if that value lies not in your brand, but in your customers? I meet a lot of consumers in the course of my strategic work. I recently took part in a consumer discussion for a client, where the consumers completely trashed the company’s brand, yet loved the customer service and gave the company a score of 4 out of 5! For a brand they really disliked. How does that work? Well, maybe it works because customer experience carries more and more weight in the digital world.
The difference between Customer Equity and Brand Equity is that the former is forward-looking and useful; both strategically and tactically.
In order to look deeper into this problem, I have devoted the last eight weeks to attending a course at the Wharton School of the University of Pennsylvania (hence my absence from the blog, sorry). The course was about how to calculate the strategic value of customers. It was an eye-opener. To see and learn in detail how to rank companies based on the value of each individual customer has made me believe in a new and better way of measuring the impact of the new marketing.
- CLV – Customer Equity – Firm Valuation
- CLV Customer Lifetime Value — is the present value of future cash flows from customers.
- Customer Equity — is the total value of all of a company’s customers’ CLVs and a substantial part of the company’s value.
CLV is not new but “heterogeneity” is.
What we have learnt over the years is that CLV as an average value is fairly inaccurate and therefore meaningless. If, however, we divide our customer base into relevant segments, calculate the CLV of each segment’s customer group, and then add the resulting values together, we obtain a pretty clear picture of total customer equity.
Imagine if the Agency of the Future can concentrate on charging for increasing CLV. Wouldn’t this mean that lots of bits begin to fall into place?
In marketing, it is extremely difficult to find indicators that is forward-looking. CLV and Customer Equity transforms our whole approach to evaluating and monitoring marketing activities. CLV is useful and practical on a daily basis. The questions you need to consider are: how many customers do we have; how much are they worth (CLV), and; how long do they stay? With a correctly calculated CLV, you, the CMO, will have a clear model that will help you allocate your budget in order to find new customers or retain existing ones.
Imagine if every CMO could report: a 10% increase in customers, CLV +10% and Churn -2%; resulting in Customer Equity up by 22%. This would affect the company’s share value, install the CMO on the board of directors … and, dramatically increase profitability at the Agency of the Future.