Return on Marketing: Using Customer Equity to Focus Marketing Strategy

TLDR

The change in a firm’s customer equity equals the sum of its customers’ current and future lifetime values across the industry. The study proposes a unified framework that lets firms trade off marketing strategies by projecting changes in customer equity relative to incremental spend, enabling analysis of driver impacts, competitor comparison, and ROI forecasting, illustrated with an airline industry case. The framework calculates customer lifetime value from purchase frequency, quantity, and brand‑switching patterns (estimated via a logit model from panel or survey data) and supports what‑if ROI analyses across quality, advertising, loyalty, and corporate citizenship initiatives. The model allows firms to prioritize marketing initiatives that yield the highest return.

Abstract

The authors present a unified strategic framework that enables competing marketing strategy options to be traded off on the basis of projected financial return, which is operationalized as the change in a firm's customer equity relative to the incremental expenditure necessary to produce the change. The change in the firm's customer equity is the change in its current and future customers’ lifetime values, summed across all customers in the industry. Each customer's lifetime value results from the frequency of category purchases, average quantity of purchase, and brand-switching patterns combined with the firm's contribution margin. The brand-switching matrix can be estimated from either longitudinal panel data or cross-sectional survey data, using a logit choice model. Firms can analyze drivers that have the greatest impact, compare the drivers’ performance with that of competitors’ drivers, and project return on investment from improvements in the drivers. To demonstrate how the approach can be implemented in a specific corporate setting and to show the methods used to test and validate the model, the authors illustrate a detailed application of the approach by using data from the airline industry. Their framework enables what-if evaluation of marketing return on investment, which can include such criteria as return on quality, return on advertising, return on loyalty programs, and even return on corporate citizenship, given a particular shift in customer perceptions. This enables the firm to focus marketing efforts on strategic initiatives that generate the greatest return.