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Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy
Roland T. Rust, Valarie Zeithaml and Katherine N. Lemon The Free Press New York 2000 292 pp. $28.00 (hardback)
In fast-moving and dynamic industries that involve customer relationships, Rust, Zeithaml, and Lemon write that: "products come and go, but customers remain." In such a business landscape, brand equity alone cannot ensure the market value of a firm. Customer equity should be the metric to evaluate a firm's market value. The authors identify four shifts in the business environment that justify the transition from brand equity to customer equity: the shift from goods to services, the shift from transaction to relationships, the shift from customer attraction to customer retention, and the shift from product focus to customer. In this new landscape, customer profitability, not productivity is the key to long-term performance.
In such an environment, a focus on product profitability may lead to a disastrous outcome the authors call the Profitable Product Death Spiral. They illustrate this death spiral with a case example. In 1997, Opryland Hotel in Nashville, Tennessee was a thriving convention hotel with revenues of $231 million, and an 85 percent occupancy rate. However, the adjoining theme park was far less profitable. The solution to the problem appeared clear to the managers. The hotel was profitable, but the theme park was not. Therefore the theme park had to be shut down. One year later, Opryland's convention room nights were down 22 percent from the previous year. It was evident that Opryland's hotel business had been badly hurt by the closing of the theme park. In retrospect, what happened seems obvious. For individual customers, the presence of the theme park increased the value of the hotel. Opryland has been the victim of the Profitable Product Death Spiral. The spiral is the result of a short sighted, product-focused way of thinking that should be substituted, according to the authors, by the more customer-focused customer equity framework, which is the real driver of a firm's long-term profitability.
However, if it is easy to understand that customer equity is important, it is more difficult to determine exactly how to increase a firm's customer equity. Of all the potential levers that a finn could pull, e.g. advertising,...