Brand equity versus customer equity: one needs the other - Strategic Brand Management

There is a debate about what is most important: customer equity or brand equity. This is a rather vain dispute. Loyalty bought through loyalty cards, rebates and gifts is a cost. Certainly it creates returns, but brands also need to nurture true love. On the other hand, CRM does help brands to demonstrate that they love customers and want to help them, and assist them quickly and efficiently. Both aspects interact.

Even luxury brands have created customer databases so that the travelling shopper is recognised in any shop of any city. CRM also lets companies make sales propositions by e-mail, in a way that is very customised and matches the customer’s personal profile. The financial value of a brand is a function of the amount of its future expected return and of the degree of risk on these returns. A brand can only be strong if it has a strong supply of loyal customers.

This established fact led to a revolution in the practice of marketing, under way since the beginning of the 1980s: the major concern is loyalty and its related factor, client satisfaction. Leaving behind an approach which implicitly concentrated on conquering clients away from the competition, firms now do all they can to keep their own clients. This is to be expected at a time when, as a result of the abundance of offers, buyers tend to jump from one brand to the next, from one manufacturer to the next. Rather than zero defaults, the aim is zero defections.

A lifetime client at British Airways brings on average £48,000 to the company in revenues. Thus under no circumstance should one customer be lost. It is the same for Carrefour where a loyal client brings £3,550 in annual sales.

Besides, loyal clients are more profitable. According to a study from the Bain company, a household spends s330 per month in the supermarket to which it goes most often, 85 in the second most frequent and 22 for the one where it only goes occasionally. And not only do loyal clients spend more, but their expenditure grows with time, they become less sensitive to price and they are the source of positive word-of-mouth reports concerning their favoured supermarket or brand.

Moreover, they are five times less costly to contact than non-clients. That is why, also according to Bain, by lowering the defection rate of clients by 5 per cent, benefits go up 25 to 85 per cent. The example of Canal Plus is significant: this pay-TV channel benefits from an unprecedented loyalty rate: 97 per cent of its 6 million clients are loyal to it. Bearing in mind that a yearly subscription costs s310, if the loyalty drops by as little as 1 per cent, it would mean s11 million less in annual revenues!

All strong brands are currently establishing loyalty programmes. Nevertheless, a cautionary remark is necessary: no programme of this kind will make up for a service that is not adapted or sufficient. The actions required to keep loyal customers have two aims: the first is defensive, to give the customer no reason for leaving the brand or the company; the other is offensive, to create a personalised relationship with the client, the basis of a more intimate and therefore more involving bond, what Americans call ‘Customer bonding’ (Cross and Smith, 1994).

The essential part of the defensive side is the identification of the causes of disloyalty and dissatisfied clients.

Thus, dissatisfaction linked to the food provided induces, because of disloyalty, a loss in revenue amounting to £5 million pounds at British Airways. The dissatisfaction linked to bad seating costs close to £20 million! Paradoxically enough, the company seeks to get as many voiced dissatisfactions as possible. Indeed, the worst thing is a silent dissatisfied client who, saying nothing to the company representatives, spreads negative rumours among his relatives, colleagues and friends.

And there are statistics to prove that a dissatisfied client who is well treated becomes a real proselyte, and even more loyal into the bargain. When asked if they will fly with British Airways again, the rate is 64 per cent ‘yes’ among those that have never contacted the complaints office. It is, however, 84 per cent among those who have. The treatment of complaints with diligence, care and respect becomes a key lever in customer loyalty.

Seeking client satisfaction implies adding a touch of management spirit where spirit of conquest reigns exclusively. This is why l’Oréal Coiffure is nowadays a company with a conquering as well as an innovative and entrepreneurial spirit. It launches new products one after the other. Hairdressers like the l’Oréal products and l’Oréal knows their product needs well. Unfortunately, this led the firm to somewhat overlook the management spirit: some deliveries were wrong, stockouts occurred, discounts were unevenly granted, etc.

The firm responded well to sophisticated needs but somewhat forgot some of the more down-to-earth needs. The hairdresser who put in an order on Tuesday for a tube of light golden brown colouring for a client coming on Friday could not be sure it would be there on time. He could not always count on the company. That is why even when its product launchings were successful, and even if customers were attracted, the sales of l’Oréal Coiffure stagnated for a while. When focusing on client satisfaction, the product alone is not sufficient if the basic service is deficient.

When going over to the offensive, a brand must become a landmark of personal attention. More emphatically, Rapp and Collins (1994) talk of becoming a ‘loving company’, interested not in the client but in the person. This marks the end of anonymous marketing: attention has to be customised if it is to be efficient. But it has to be acknowledged that even if the terminology of market studies distinguishes between big, medium and small customers, up until recently few companies had developed programmes designed specifically for big customers, who as a rule are also the most loyal.

But the loyal client wants to be recognised. He or she therefore has to be identified, a direct bond has to be established and he or she should be the focus of special attention. This is why what is commonly called relationship marketing (McKenna, 1991; Marconi, 1994) uses databases, customers’ clubs and collective events, which unite the best customers of the brand.

Moreover, realizing that a brand that does not have direct contact with customers becomes further and further out of reach – literally as well as figuratively – many brands have stepped out of mere television advertising and off the shelves to establish a direct relationship with customers. Nestlé offers to its customers a dietician, reachable by phone. Six days a week, Nintendo helps out 10,000 children who are stuck in a video game. As long ago as 1992, IBM France created an assistance hotline working around the clock seven days a week all-year-round. Treating clients as friends instead of accounts is the basis to a long-lasting relationship.

In their efforts to increase brand loyalty, brand companies have realised that they have to care about their customer equity or market share. In other words, these companies should focus not only on augmenting brand preference as a mental attitude, but also on increasing brand usage, especially among the best customer prospects: the heavy buyers. Recent findings, for example, recognise that mass market brand profits come not from the mass market, but from the top third of category buyers. Furthermore, a brand’s greatest potential for additional profit rests on its ability to increase share in this high-profit, heavy-buyer category (Hallberg, 1995).

Unfortunately, advertising misses the mark with these prime prospects. Instead, it reaches mostly non-buyers or small-quantity buyers. On the other hand, promotions do touch the high-profit segment. That is, frequent buyers are more likely to encounter price promotions, coupons, rebates, etc. However, promotions over-sensitise consumers to price and tend to decrease brand loyalty in the highpotential, high-profit segment. As a consequence, most mega-brands are now experimenting with database marketing on a grand scale. The database marketing concept is two-fold:

  • All marketing actions should target the prime segment more effectively. The goal is to increase this segment’s rate of brand use.
  • Effective targeting requires companies to identify each of these customers or households, almost nominally. As a consequence, a by-product of all promotional activities should be a database, ultimately comprising 100 per cent of the high-profit customers.

At this time Procter & Gamble’s database in the USA holds more than 48 million names. Danone’s database in France holds 2 million names. Nestlé is building its own in each major country, as is Unilever. And this ignores all the broker-created databases for rental to smaller companies.

The function of these selective databases is to deliver customised offers to specific targets, to bring the store shelf to the home (thus decreasing impulse buying and distributors’ power), and to promote a ‘private image’ among loyal and heavy-user customers. Generally, these customers are more involved in the brand, so they deserve recognition and special treatment. They also merit specific information to nourish brand image and equity. These activities constitute the nurturing of a ‘private image’, as opposed to a broader, general public image.

Many consumers hold very favourable attitudes vis-à-vis particular brands. Nevertheless, their loyalty is insufficient to inhibit switching within a repertoire of brands. These customers are potential loyals only if a tailor-made programme is devised to increase the rate of purchase of a particular brand.

On the other hand, some repeat buyers are actually pseudoloyals: they do not hold strong attitudes regarding the brand. Perhaps, for instance, they buy the brand because of its price or availability. To increase their brand preference, these buyers require a reinforcement of their choice and an increased perception of the brand’s superiority.

Finally, active and committed loyals should be induced to try more and more new products, whether line or brand extensions. Figure below illustrates Sony’s situation, where committed loyals comprise 19 per cent of Sony’s entire customer franchise. The potential loyals represent 4 per cent, and the pseudo-loyals 35 per cent. Each group deserves a specific marketing proposition.

The customer demand for dialogue

Although most brands claim to put customers’ needs first, this does not extend to creating a dialogue with them. Advertising does not count as dialogue. Neither does a relationship with a seller with clear marketing intentions, and neither do satisfaction questionnaires: they may be very useful in obtaining feedback on perceived quality, but a series of questions does not constitute a dialogue. Do consumer magazines provide a dialogue? Once again, no. And the same is true of direct marketing mailshots from sellers inviting consumers to see or try out a new product, and the like.

Brand capital and customer capital: matching preferences and purchase behaviour

Brand capital and customer capital: matching preferences and purchase behaviour

Why do we say ‘customer demand’? Because customers want to be valued, listened to and heard, and not merely as an averaged out statistic in a market segment, but for themselves as individuals. Furthermore, the new internet firms, with their ability to amass ‘intelligent’ information (which learns from the most recent call, person by person) and use this information in future contacts, have made them accustomed to a responsive reaction and a listening ear.

A relationship with a brand automatically creates a need of this kind. Take banks and insurance companies, for example. Once the customer has initially been won over, the brand–client rapport will last for years. There are bound to be problems along the way, but if these are managed well, the result may be lasting loyalty.

The problem is that they are often not managed well, and negative word of mouth can be the only means of retribution available to customers who feel ignored, or treated with contempt. Indeed, the retailer is not only the brand’s best ally when things are going well; it can also become its worst enemy when problems arise. It is the enemy of the brand because it is perceived as the enemy of the customer. We believe that at such a time, the customer should have direct access to the brand itself, its ultimate recourse.

Saturn – the recent automobile brand created in the United States by GM as a response to Japanese brands – was a pioneer in customer relations. Following the example it set, every new buyer – whether large or small – should be given the name and telephone number of a brand employee who can if necessary be contacted by the customer in the event of unresolved problems. This is the real one-to-one relationship, and is what customers expect above all else when problems occur. The brand cannot delegate crisis management to third parties.

Without becoming the enemy of its own selective network, the brand must assume a benevolent ‘the buck stops here’ attitude, eager to find a solution for the customer. After all, the customer has bought a brand, not a retailer. Furthermore, what is the point in conducting customer intimacy operations and public relations exercises if, the minute a real need presents itself, the brand suddenly becomes distant and fails to return the customer’s calls? The ‘boomerang’ effect is the only possible outcome here.

This demand for dialogue explains why brands seem as real media themselves. They create blogs, sites, forums not to sell but to let their customers and advocates or detractors speak freely together. They also outsource the many call centres to provide a really quick and relevant answer to all incoming demands.

Is relational marketing profitable?

Customer relations are certainly a good idea, but are they profitable? Here again, we must reconcile the brand (the creation of value) with the economic equation. Convincing statistics abound with regard to the profitability of loyal customers. However, studies also show that most customers who become disloyal to a brand were previously very satisfied with the brand: their requirements have simply changed. Another way of looking at these figures is to conclude that the customers’ attachment – their desire to stay with the brand – cannot have been especially high to start with. This is where relational marketing comes in.

Attachment to a brand is evidence of a customer’s desire to stay in a lasting relationship with the brand. This attachment is characterised by loyalty, which is a behavioural measure of repeat purchasing. Loyalty may be a consequence of attachment, but it can also be generated by means of bonuses and so-called ‘loyalty cards’. Attachment to a brand is a one-dimensional concept of varying strength. Its opposite state is detachment, indifference and non-involvement.

Attachment is a different thing altogether from satisfaction. This is why attachments can be mainly rational (a desire to continue the relationship with the brand because it meets the buyer’s implicit requirements, albeit without generating any real emotional involvement). Conversely, some customers remain very attached despite considerable dissatisfaction with the product or service (the Harley-Davidson/Jaguar syndrome).

Research has identified six sources of attachment. As we shall see, each of these points to specific levers for managerial action:

  • Attachment based on the hedonistic satisfaction conferred by the use of the products and by the quality of the interaction with the brand’s representatives (network, call centre and so on).
  • Attachment based on the quality of the relationship established by the brand: appreciation of the individual and his or her uniqueness, personal recognition, ethical behaviour.
  • Attachment based on shared values which affect the consumer; a shared vision.
  • Attachment based on the increased selfimage generated by the brand through its image, advertising, rallies, behaviour and so on.
  • Attachment based on the pleasure of a lasting relationship. The brand has often played a part in the development of individuals, their family and their children. In a sense, it has become a part of the life of individuals and their ‘clan’.
  • Attachment based on the brand’s association with people to whom the customer isemotively linked. Managers have little power to influence this particular factor, but it is real nonetheless (‘Proust’s madeleine syndrome’) (Heilbrunn, 2003).

Many different types of behaviour result from attachment. A relational brand must respond to them in order to feed attachment:

  • a desire for rituals and participation therein, like a community;
  • a desire for information;
  • a desire for participation in the life of the brand and company;
  • a desire for shared creation and involvement in the process of creating new products;
  • a desire to be heard;
  • a desire for community;
  • a desire for intimacy;
  • a desire for customer involvement with the brand: evangelising, prescribing and acting as an ambassador for the brand;
  • automatic repeat purchasing (loyalty in the strictest sense of the word).

Customer relations increases the effectiveness of brand promotion. An offer is never perceived as ‘touting for business’ when it arrives at the right moment! Only a relationship with – and deep understanding of – customers, informed by an awareness of their recent requests, can transform what is usually perceived as commercial harassment into an impression of genuine service. There is thus no real contradiction between increasing client profitability and nurturing a relationship.

A fan will be delighted to be able to download historic advertising for the brand. A young mother will be pleased to receive childrelated ideas, services or products from the many brands aimed at parents and children. It all boils down to the timeliness of the offer.

How can this synergy be achieved if there is no information; no ongoing relationship with the customer; no means of listening to that customer’s needs and being able to store and update the information thus received through a variety of media (e-mail, text messaging, telephone, fax, post)? As we can see, welltargeted, relevant business offers that come at just the right time create satisfaction because of the service they provide and the understanding they demonstrate of the client’s needs. They are thus one of the key ways of creating attachment.

Having said this, we should not deny the power of the service in creating loyalty and repeat purchases. For example, Courtepaille – the European high-quality fast-food restaurant chain – has no loyalty programme. Certainly, the customer will find very few other restaurants with such friendly service and hearty fare at prices of under s10. But margins are so tight that the benefit of a loyalty card is still uncertain: happy customers will come back anyway.

Such examples are rare: in mature countries, bad brands scarcely exist any more. The competition is divided between very good brands and merely good brands. An in-house engineer will say that his or her product is the best: the customer and retailer will not see things in this way. However, the brand will have played a successful part in influencing preferences if it has been able to draw alongside the customer and promote a relationship based on service, communication and community – a source of affective involvement.

Segmenting loyalty programmes

Does this mean that the concept of loyalty is outdated? The conceptual explanation above clearly shows that loyalty behaviour (automatic repeat purchasing) continues to be relevant because it concerns information of critical importance to the company: it is based on observation. Even so, there may be many reasons behind a lack of loyalty (as we have seen above), which should be linked to the level of satisfaction.

The modern nature of competition is such that the issue is no longer ‘or’, but rather ‘and’. It is therefore essential to avoid neglecting strategies for increasing loyalty (repeat purchases) that operate at the strictly behavioural level. They have an immediate effect: they raise the brand’s share of requirements and create an exit barrier – as has been shown by airlines and store-card promotional offer coupons.

In the sphere of commodity sales, given the competition from low-cost sources, loyalty cards are – along with service – an essential component of the economic equation. In petrol stations, for example, nearly 40 per cent of petrol by volume is sold to customers with loyalty cards.

However, the real aim is to shift clients from behaviour towards attitudes. In traditional marketing – symbolised by the AIDA (attention, interest, desire, action) model – purchase follows desire, and thus attitudes. Given the number of competitors, and the degree to which products resemble one other, the priority is now to stand out from the herd. Creating a well-known, high-profile brand with emotive impact is one way of doing this.

Another way is to introduce a surprising, tempting innovation. A third way is to provide direct purchasing and repeat purchasing incentives. However, this last approach has meaning only if it creates longterm value: that is, if behaviour initially motivated by the lure of an incentive issubsequently transferred to the brand and its products or services. Repeat purchasing is the customer’s way of giving the brand a unique chance to prove itself.

In terms of loyalty management, Accor, the European hotel sector leader, offers an interesting and rare example. A hotel chain’s profitability is based on the occupancy rate in its hotels, and particularly in cases where prices are tight, such as the budget hotel sector. Accor has a strong presence here, with a brand portfolio which covers all segments: zero-star (Motel 6, Formulae 1), one-star (Etap hotels), two-star (Ibis), three-star (Novotel and Mercure) and four-star (Sofitel), not forgetting the new luxury Suit’Hotels segment.

However, despite its customers’ sensitivity to price, Accor charges for its loyalty cards. It has created an entire range of cards, each addressing a different client segment and governed by its own precise terms of use, acting as a replacement for single-brand cards. An additional service is being offered to customers by allowing them to move freely between the various brands of the group as dictated by their own wishes, budget and situation. This is the competitive advantage of having a portfolio of brands.

The premier card is Accor Hotels Favourite Guest, an individual card sold at the high price of s270/year. It offers significant advantages to customers, and is therefore aimed at ‘heavy stayers’ who spend more than 20 nights a year in a hotel. It offers guaranteed reservation up to three days prior to the stay date, as well as immediate reductions and loyalty points – and can be used at Ibis, Mercure, Novotel and Sofitel hotels.

The second card is targeted at lighter users who spend an average of 13 nights a year in hotels, and costs s45 a year. To make it more attractive in terms of points earned, it is a combined payment and loyalty card thanks to a partnership with Amex.

This left the loyalty of ‘small users’ to be secured. An ordinary free card would be of no benefit here, since a quick calculation shows that it would take a customer who spends three nights a year in a hotel 15 years to earn enough points for a free night. One option might have been to take part in a Smiles-type frequent buyer programme – that is, a card allowing the user to accumulate points at a large number of sales outlets of all kinds (department stores, hypermarkets, supermarkets, specialist stores such as Delheze and Kaufhof and so on).

But how much benefit does such a programme actually bring to the individual brand? None. Naturally, the aim of loyalty is to increase the brand’s share of requirements, but also to feed its own values. The Total petrol company positions itself on its service, and so the main thrust of its loyalty programme is to provide access to additional quality service (such as Total Assistance breakdown cover); points are a secondary consideration.

It is for this reason that, with its so-called ‘small-user’ clients in mind, Accor joined forces with a number of partners, each of which shared the same client philosophy and operated in the same line of business (journeys and travelling) to create the Accor Compliments Mouvango card. This improved the services offered to customers and allows points to be accumulated more quickly than would have been possible if they had visited hotels even five or six nights a year.

This partnership has its own brand – Mouvango, the sign displayed by partners to show that the card is accepted. It includes restaurants, Total service stations, Carlson- Wagons Lits, travel agencies and so on. Total’s version is called the Club Total Mouvango card, and so on. As we can see, the brand remains pre-eminent among all partners in this scenario, for it is here that the customer contact and relationship exists: Mouvango is an exclusive additional service to sweeten this relationship.

From the product to attentions: from the client to the VIP

Segmentation leads rapidly to the realization that not all customers carry the same sales potential. It is also true that not all customers have the same interest in an involvement with the brand and becoming its ambassadors. A brand cannot survive without loyal followers and ambassadors, especially if it has premium positioning in its segment: there are women who will spurn all washing powders other than the top-dollar Tide or Ariel brands. This is even more true in high-involvement markets such as automobiles and cosmetics.

Such markets have traditionally been driven by a product-oriented approach: this is why l’Oréal, the world leader, relies totally on research. The goal of its 1,000 PhD-holding researchers is to invent new products which will inspire dreams of beauty and youth among women of all ages and all countries. The l’Oréal Group’s flagship brand, l’Oréal Paris, only discovered relational marketing fairly recently, in 2002 – the date when it launched its first advertising campaign aimed at building a relational database as a way of offering services to women.

The same is true of the luxury brand Lancôme, which took its first steps in this direction in South America at a time when a brutal economic recession had had a colossal impact on purchasing power. It was essential to retain existing customers and thus enable the business to survive. Clearly, it was not enough merely to expound the virtues of the products themselves: this was necessary, but insufficient under such circumstances. This is why Lancôme’s local teams reacted by innovating – not with new products, but with the attention it paid its customers. This example is even more pertinent in that it involved retailers, and thus also created a trade relationship tool which generated business.

Lancôme instructed its authorised retailers to distribute a small smart card – the Lancôme beauty card – and to use equipment that would store the client’s last few transactions when the card was presented. This was a revolutionary approach, since the retailers believed that a client record was their own property. In order to ‘earn’ the card, the client had to make an initial purchase of US $100.

All subsequent purchases – regardless of the store, as long as it was a participant in the scheme and had an electronic recorder – would earn points. These points could be exchanged for Lancôme products, lingerie, jewellery and famous-name bags. Cards were also given to journalists and top fashion models. Once a database had been created, it became possible to create campaigns targeting VIPs, who are generally also big spenders, making repeated visits to their local sales point.

The company’s first act was to produce and mail to these clients a woman’s beauty magazine, paid for by advertising (from airline, jewellery, lingerie and similar companies). ‘Sneak preview’ announcements were also made of new products, and specific samples were provided, along with access to a dedicated, interactive MyLancôme.Vip website. The VIP card was accepted in selected restaurants and shops. Lastly, selective invitations to public relations events and fashion shows, offering meetings with leading figures, were issued regularly.

The database also becomes a tool for building a relationship between the brand and the sales outlets, for coordinating the promotion of new products, or performing a ‘diary’ function (reminding store clients of key dates – such as birthdays – appearing in the database, and prompting post-purchase calls). The aim of this is not only to make customers visit sales outlets, but also to enable them to be recognised as special and unique – receiving personalised attention to increase the pleasure of their visit. A VIP wants to be recognised as such.

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