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The Impact of Brand Equity on Customer Acquisition, Retention, and Profit Margin

Florian Stahl, Mark Heitmann, Donald R. Lehmann, and Scott A. Neslin, 2010 [10-116]

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Previous research has demonstrated the importance of two key marketing assets: brand equity and customer lifetime value (CLV). Of these, brand equity is logically a precursor of CLV. When brand managers win the hearts and minds of the customer, customer managers have an easier time retaining and acquiring customers.

Quantifying the link between brand equity and CLV provides two important benefits: (1) specification of a tangible basis for valuing the “qualitative” brand manager’s plans for advertising and positioning, and (2) the addition of a deeper interpretation to the dollar values that comprise CLV.

While the brand equity to CLV link is crucial, it does not operate in a vacuum. Marketing actions—advertising, pricing, promotions, product innovation, and market presence—drive both constructs. It is therefore important to understand how these actions impact both brand equity and CLV.

In this report, the authors quantify the strategic relationship between brand management (brand equity) and customer management (the components of CLV), and demonstrate the role that marketing activities play in this relationship. They examine a unique database from the U.S. automobile market, comprised of 10 years of survey-based brand equity measures as well as acquisition rates, retention rates, and customer profitability.

They find that brand equity has a predictable and meaningful impact on all components of CLV, namely customer acquisition, retention, and profitability. Importantly, brand equity is strongly related with retention, consistent with the notion of building brand relationships. Further, familiarity with the brand is positively related to all components of CLV.

“Differentiation”, however, is a double-edged sword; it is associated with higher customer profitability, but also with lower acquisition and retention rates, suggesting that highly distinct brands address fairly narrowly targeted segments whose members exhibit changing preferences over time.

Marketing activities, especially advertising and market presence, exert both direct and indirect impacts on CLV through brand equity. Simulations show that changes in marketing, or exogenous changes in brand equity, can exert important impacts on CLV.

Overall, the findings suggest the “soft” and “hard” sides of marketing need to be managed in a coordinated fashion. The notion that brand managers are in one corner, working with ad agencies to win hearts and minds, while the customer/CRM managers are in another corner, designing direct marketing campaigns for acquisition and retention, is outdated. The two need to work together, because brand equity and CLV work together.

Florian Stahl is Assistant Professor of Marketing at the University of Zurich. Mark Heitmann is Professor of Marketing at the Christian-Albrechts-University at Kiel. Donald R. Lehmann is the George E. Warren Professor of Business at the Columbia Graduate School of Business and 1993-95 and 2001-03 MSI Executive Director. Scott A. Neslin is the Albert Wesley Frey Professor of Marketing at the Tuck School of Business, Dartmouth College.

Acknowledgments
We thank Peter Leeflang, Jacob Goldenberg, Gilles Laurent, Natalie Mizik, Marc Fischer, and the participants in the Tuck Marketing Seminar Series for their valuable comments and helpful suggestions.

Included in the following collections:
MSI Reports 2010

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