A true measure of equity.
This statement bears repeating: Brand advocates are the engine of growth and the source of profitability. If you disagree please take the issue up with authors Steve Diller (Blind Spot), Al Ries & Jack Trout (The 22 Immutable Laws of Marketing), Fred Reichheld—a Bain Fellow and founder of Bain & Company's Loyalty Practice (The Loyalty Effect: The Hidden Force Behind Growth), and David G. Thomson (Blueprint to a Billion. 7 Essentials to Achieve Exponential Growth).
Observing data from businesses across categories, price points, and service levels over the past 25 years, the most interesting upshot is the preponderance of contribution dollars (aka profit dollars) among long-term repeat buyers. The cohort of new buyers typically contribute less than 20% of profit contribution while the cohort of loyal customers contribute greater than 80% of profit. And, of course, the newbies usually make up around 80% of buyers and loyal buyers less than 20%. The 80/20 rule is alive and well.
For investors, be they angel, private equity, or venture capital, the quest is value creation. Value is primarily realized through the efficiency in which a business introduces itself to a potential customer (a Prospect) and that individual chooses to be in a relationship with the business, exhibiting a buying habit that repeats consistently over time. And, as a bonus, those same consistent buyers go on to advocate on behalf of the business, recruiting new customers into the fold.
The win then in terms of establishing a metric of success is in measuring how well a business does attracting and accumulating brand advocates, those customers that buy, and continue to buy again and again over time, while initiating legitimate and active recommendations to their circle of influence.
But let’s be clear, a good metric of success shouldn’t just measure outcome, ideally it should measure what creates the outcome. You want profit? Measuring profit doesn’t tell you much about how it happened. You want loyal customers and high lifetime value? Knowing you have those things won’t tell you anything about how they happened. And worse, knowing you don’t have those things doesn’t enlighten you how to make them better. Noting also that all of the granular data such as ROAS, AOV, CR, etc. while important, they don’t dictate or predict value creation.
Business leaders are overwhelmed in a tsunami of data and yet blind to the efficacy of the means by which profit, loyalty, and high lifetime value are created. If repeat buying is the holy grail (again see the authors and researchers listed above), then shouldn’t we be measuring how effective we are at creating it?
It follows then that the 10 most important things to track predicting future value are:
Effectiveness of generating brand advocates
The optimal number of brand advocates sought
The affect the creation of brand advocates has on the brand’s ability to grow
The profit contribution that could be realized if the brand achieved benchmarks for repeat purchase behavior for new and long-term customers
The failure points in repeat purchase behavior
When customers are most likely to switch to another brand
How growth can be accelerated based on the efficacy of creating and keeping brand advocates
Pinpointing exactly what to do and where to allocate resources to maximize LTV
Identifying accessible profit potential based on a brand achieving the optimum balance of segment count, revenue, individual value, and target Migration Rates
Total asset value of the current customer file and the delta between current state and relevant benchmarks
Learn more about The Brand Equity Index here.
Learn more about Migration Rates here.