Bringing it Together: Calculating Total Customer Equity™

To compute total Customer Equity™ simply sum the acquisition, retention, and add-on selling equities. Using our examples based on the survival models, customer acquisition equity is ($592.50), retention equity is $635.03, and the add-on selling equity is $422.67. Thus total Customer Equity™ per customer is $465.20. Table Total Equity-1 summarizes these figures.

Data Requirements for Computing Customer Equity™
Customer Equity™-driven firms need customer databases. An effective database includes: 1) a customer identifier used to track all customer activities; 2) customer purchase histories; 3) customer-level causal data; and 4) incremental cost data.

A customer identifier must be a unique identifier. (Physical addresses generally are not the best choice.) The source of the identifier can be a preferred customer card, a credit card or another type of tracking mechanism. This source needs to capture at least 80 percent of the customer's purchases; if not, conclusions regarding customer behavior may be spurious.

Analysts use customer purchase histories to measure retention rates, sales per customer over time, and acquisition rates. These statistics form the basis for the computation of Customer Equity™.
Causal data by customer comes from tracking marketing communications, special promotions and pricing, and any other relevant marketing activities directed at the customer, such as customer service and returns.

Incremental cost data must be tracked at the customer level. Many firms do not know the true incremental cost of a sale, which includes the costs of goods, warehousing, distribution and other incremental infrastructure costs. The accounting department must determine these costs if a firm wants to obtain an accurate picture of its customers' profitability.