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

This paper presents an empirical examination of the relationship between brand equity and customer acquisition, retention, and profit margin, the key components of customer lifetime value (CLV), as well as the role of marketing in this relationship. We 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. We hypothesize and find that brand equity is significantly associated with the components of CLV in expected and meaningful ways. For example, customer knowledge or familiarity with the brand is positively related to all three components of CLV. More surprisingly, however differentiation is a doubleedged sword; while it is associated with higher customer profitability, it is also associated with lower acquisition and retention rates, suggesting that highly differentiated brands address targeted segments whose members exhibit changing preferences. We also find that marketing, 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. We discuss these and other implications for researchers and practitioners.