Return On Marketing

RETURN ON MARKETING:
USING CUSTOMER EQUITY TO FOCUS MARKETING STRATEGY
Roland T. Rust, Katherine N. Lemon and Valarie A. Zeithaml

Roland T. Rust holds the David Bruce Smith Chair in Marketing and is Director of the Center for e-Service and Chair of the Department of Marketing, Robert H. Smith School of Business, University of Maryland. Katherine N. Lemon is Associate Professor, Wallace E.Carroll School of Management, Boston College. Valarie A. Zeithaml is Roy and Alice H. Richards Bicentennial Professor and Senior Associate Dean, Kenan-Flagler School of Business, University of North Carolina at Chapel Hill. This work was supported by the Marketing Science Institute, the University of Maryland’s Center for e-Service, and the Center for Service Marketing at Vanderbilt University. Theauthors thank Northscott Grounsell, Ricardo Erasso, and Harini Gokul for their help with data analysis, and Nevena Koukova, Samir Pathak and Srikrishnan Venkatachari for their help with background research. The authors are grateful for comments and suggestions provided by executives from IBM, Sears, DuPont, General Motors, Unilever, Siemens, Eli Lilly and Company, R-Cubed, and Copernicus, and alsothank Kevin Clancy, Don Lehmann, Sajeev Varki, Jonathan Lee, Dennis Gensch, Wagner Kamakura, Eric Paquette, Annie Takeuchi, and seminar participants at the Harvard Business School, INSEAD, London Business School, University of Maryland, Cornell University, Tulane University, the University of Pittsburgh, Emory University, University of Stockholm, Norwegian School of Management, University ofCalifornia at Davis and Monterrey Tech, and participants in the AMA Frontiers in Services Conference, MSI Customer Relationship Management Workshop, MSI Marketing Metrics Workshop, INFORMS Marketing Science Conference, the AMA A/R/T Forum, AMA Advanced School of Marketing Research, AMA CRM Leadership Program, CATSCE and QUIS 7. Please address correspondence to: Roland T. Rust, Robert H. Smith Schoolof Business, University of Maryland, College Park, MD 20742. Phone: 301-405-4300. Fax: 301-314-2831. Email: rrust@rhsmith.umd.edu June 5, 2003

RETURN ON MARKETING:
USING CUSTOMER EQUITY TO FOCUS MARKETING STRATEGY
Abstract We present a unified strategic framework that permits competing marketing strategy options to be traded off on the basis of projected financial return, operationalized asthe change in a firm's customer equity related 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 of the customers in the industry. Each customer's lifetime value results from the frequency of category purchases, average quantity of purchase, and brandswitching pattern, combined with the firm's contribution margin. The brand switching matrix may be estimated from either longitudinal panel data or cross-sectional survey data, using a logit choice model. Firms may analyze drivers that have the greatest impact, compare performance on those drivers with that of competitors, and project ROI from improvements in those drivers. To demonstrate how the approachcan be implemented in a specific corporate setting, and to show the methods used to test and validate the model, we illustrate a detailed application of the approach using data from the airline industry. Our framework enables “what-if” evaluation of marketing ROI, which can include such criteria as return on quality, return on advertising, return on loyalty programs, and even return on corporatecitizenship, given a particular shift in customer perceptions. This enables the firm to focus marketing efforts on strategic improvements generating the greatest return.

RETURN ON MARKETING:
USING CUSTOMER EQUITY TO FOCUS MARKETING STRATEGY
INTRODUCTION The Marketing Strategy Problem Top managers are constantly faced with the problem of how to trade off competing strategic marketing...