Department of Hospitality and Tourism Management, Virginia Tech, Blacksburg, VA 24061, United States

ABSTRACT

The purpose of this research was to create and test a model of customer equity for chain restaurant brand formation. It has long been acknowledged that managing and enhancing customer equity inﬂuences a companyrsquo;s shareholder value, which is a reﬂection of long-term ﬁnancial performance. A review of the current literature revealed three key determinants of customer equity: (1) value equity, (2) brand equity, and (3) relationship equity. Six hypotheses were derived and, based on data analysis, all six were supported. Value, brand, and relationship management were all conﬁrmed to be important factors in enhancing customer equity in the chain restaurant industry. Further, brand equity has the strongest impact on the development of customer equity in this particular industry. Relationships among value equity, brand equity, and relationship equity were also identiﬁed. Managerial implications are discussed.

Keywords：Customer equity，Value equity，Brand equity，

Relationship equity， Customer lifetime value， Chain restaurant

1. INTRODUCTION

The fundamental goal of a business is to increase shareholder value (Kaplan and Norton, 1992). Shareholder value forecasts future cash ﬂows and discounts them into an estimate of current value, representing the long-term value of the company (Rappa- port, 1986). As the business environment becomes ever more competitive, business managers need to know how various investments, including product value improvement, branding strategies, and relationship marketing strategies, relate to share- holder value increase (Day and Fahey, 1988; Rust et al., 2004). Business managers need a practical model for linking marketing investments and shareholder value.

With the evolution of relationship marketing, researchers have, in recent years, proposed the concept of customer equity as an overall measure of marketing success and the concept is directly related to shareholder value (e.g. Berger et al., 2006; Gupta et al., 2004; Rust et al., 2004; Srivastava et al., 1998; Wiesel and Skiera, 2005). Deﬁned as the total discounted lifetime value of a ﬁrmrsquo;s customers (Blattberg and Deighton, 1996), customer equity attempts to measure customer relationship value based on not only a customerrsquo;s current proﬁtability, but also the customerrsquo;s long-term proﬁt value. Because of its direct ﬁnancial impacts, maximizing customer equity is important to businessesrsquo; success (Rust et al., 2000).The chain restaurant industry is no exception in this regard. To maximize their customer equity, chain restaurant brands invest in various marketing expenditures, such as menu development, advertising, and relationship management.

For example, Apple- beersquo;s invests $126 million in advertising annually to improve their brand awareness and customer equity (Advertising Age, 2006). Cheesecake Factory annually spends $500,000 for menu develop- ment (Nations Restaurant News, 2006). A large number of chain restaurants, such as T.G.I. Fridayrsquo;s and Benniganrsquo;s, have developed such relationship marketing programs as frequent diner programs, the purpose of which is to build a long-term customer relationship and enhance the customer equity of the chain restaurant brand (Kim et al., 2006). However, chain restaurant owners/managers do not currently have a practical model demonstrating the link between their marketing investments and customer equity. There are a number of existing customer equity models (e.g. Rust et al.rsquo;s formula proposed in 2000) focused on calculating customer equity itself; however, those models do not provide practical link between marketing investments and customer equity. Therefore, chain restaurant owners/managers have been under constant pressure to ﬁnd more effective marketing strategies that can maximize customer equity, but have no practical guidelines to do so (Doyle, 2000).

While current research clearly indicates that a companyrsquo;s customer equity is a major factor inﬂuencing long-term proﬁt, shareholder value, and relationships with customers, our under- standing of the factors that inﬂuence customer equity is relatively weak in the chain restaurant industry. No previous study has covered how customer equity for a chain restaurant brand is formed, so there has been no agreement about the parameters of the concept of customer equity for a chain restaurant brand. It is critical to the success of chain restaurants to create a model explaining the formation of customer equity. After engaging in an in-depth literature review, this study deﬁnes customer equity for a chain restaurant brand as the total of the discounted lifetime values, summed over all of the chain restaurant brandrsquo;s customers. This study thus sought to create and test a model of customer equity for chain restaurant brand formation.

Literature review

1. Customer equity

Customer equity is deﬁned as the total of the discounted lifetime values summed over all of the ﬁrmrsquo;s customers (Blattberg and Deighton, 1996). Customer lifetime value is one of the most critical measures in assessing the performance of business companies (Sargeant, 2001).

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