It’s about the payoff! How do companies ultimately benefit when they achieve customer-centric maturity? Peter Fader, the Frances and Pei-Yuan Chia Professor of Marketing at the Wharton School of the University of Pennsylvania, joins host Allison Hartsoe in this episode. Pete literally wrote the book on Customer Centricity (Wharton Executive Essentials); he talks about the differences between product-centric thinking and customer-centric thinking. Learn about Pete’s four steps to CLV marketing: identify the value the customer, find ways to enhance their value, execute in a way where people want to share that value, and grow the value per acquisition. Understand how marketing has changed, what companies are achieving today, and what they could soon be achieving tomorrow by focusing on understanding their customers at a granular level. Learn how to leverage that insight to create unique experiences that customers value and want to share.
Key Concepts: customer centricity, product-centric thinking, customer-centric thinking, clv, company equity, value per acquisition
Who should listen: C Suite, CXO, CAO, CDO, analytics team, CMO, investors responsible for company growth, marketing professionals
Do you want to Quantify the impact of every decision and build the most customer lifetime value?
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Allison Hartsoe - 00:06 - This is the Customer Equity Accelerator, a weekly show for marketing executives who need to accelerate customer-centric thinking and digital maturity. I'm your host, Allison Hartsoe of Ambition Data. This show features innovative guests who share quick wins on how to improve your bottom line while creating happier, more valuable customers. Ready to accelerate? Let's go!
Allison Hartsoe - 00:34 - Welcome everyone. Today's show is about the payoff. How do companies ultimately benefit when they achieve customer-centric maturity? Now, if you're not familiar with the maturity curve, you can find a summary and episode number two and more detail on each stage in episodes four, five, and six today to help me discuss what companies are ultimately achieving and perhaps what they could see in the achieving tomorrow. I've invited a special guest, Professor Pete Fader. Pete is the Frances and Pei-Yuan Chia Professor of Marketing at the Wharton School at the University of Pennsylvania, but what his title doesn't tell you is that he has many fans and followers who are converts to CLV Marketing. Pete, welcome to the show.
Pete Fader - 01:17 - Allison. It's always a pleasure to talk to you.
Allison Hartsoe - 01:19 - Thank you. Thank you. Can you tell us a little bit more about your background and how you were drawn to the topic of customer centricity? Because clv marketing is not something that everybody inherently understands.
Pete Fader - 01:31 - Yes, indeed, and in fact I came in through the back door, which is a lot of traditional marketers say, oh, the customer needs to come first. This, no, that's not where I came from. I'm not a statistician. I build all these predictive models. Who's gonna do what? When and for how long and how does it vary across people and how, how did these propensities to do things change over time? I'm doing what you know, a lot of people would consider the boring stuff. Let's just just look at the data, see what the patterns are and see how far we can project it out. And then finally, after we get all these patterns to say, so what and we a lot a kind of stunning observations on the so what side that just once you really look at the patterns instead of is buying into the usual stereotypical notions of how customers behave that a lot of marketing practices basically suboptimal and that we really should be celebrating heterogeneity and really understanding the differences across our customers and how they play out over time
Pete Fader - 02:29 - and we're leaving a lot of money on the table with the traditional one size fits all marketing that goes along with what product centricity. So honestly I kinda got into all the customer-centric stuff more as a way to get people to think about the models and all that, but then I realized just how powerful it is and that even if you're not focusing on the models that these practices really make a difference and folks really should be paying attention to them.
Allison Hartsoe - 02:58 - Otherwise they're leaving money on the table. Right?
Pete Fader - 03:01 - Yeah. Yeah. It's actually scary if you look at the value of your customers in some kind of, you know, aggregate, average way versus recognizing differences from customer to customer segments, the segments, the differences are really, really pig and so if you're in marketing, and you want to take credit for the value of the customers or the increase in the value that you've created or if you're in finance, and you want to sell the company, you want to recognize the full value of those customer assets, and it's just shocking to see how badly companies are doing that. And again, it's just no excuse, and it's not even that much harder to do it the right way. It just has a different perspective.
Allison Hartsoe - 03:42 - Well that sounds like a pretty good reason for why people should care about customer centricity. Do you think they should? You know you started in this a long time ago. I think you wrote the book maybe ten years ago. Is that about right? 10, 11.
Pete Fader - 03:55 - It came out around six years ago, but certainly the idea is we're growing a decade.
Allison Hartsoe - 03:59 - Okay. So that was a long time ago. And these patterns, they remain, but I think what's interesting is that in the course of the growth of the Internet and the growth of mobile and the growth of social digital has really changed the power of the customer. Do you think that companies should be caring more about customer centricity today than they did when you started looking at this space? Or is it equally powerful and you just have more signals?
Pete Fader - 04:26 - I think it's the latter actually, that I think it's as powerful as ever, but it's harder to achieve, and I'm going to take exception with the point you made just before that. That is to say that changes in customer behavior. This is something that is greatly overstated, greatly overstated. If you look at basic customer behavior, if you strip away all the kind of nonsense and just say who's buying what, when and for how long and so on. The patterns aren't that much different today than they were 10, 15, 20 years ago. It's actually interesting to see how models built even in the mid-nineties are just as effective today. So the behavior is not different. It's just that we see it and it's just so much easier to track individuals and to be able to, to watch them play out their behavior over time and to tie it to other things like social, mobile and all that, but it all starts with just the flow of transactions. Let's not even worry about that other stuff until we squeeze all the value that we can out of just the transaction history.
Pete Fader - 05:24 - So indeed the patterns aren't that different, but we just can't ignore them anymore. And the competitive pressure on growth is great as ever, and you just can't achieve it through just let's innovate faster, let's get more efficient. So there's been just more of a not only better technology to enable us to tag and track customers, but more of a competitive imperative to, uh, to, to like force ourselves to do so.
Allison Hartsoe - 05:52 - I see, I see. Can you tell us a few stories about companies that have picked up the customer-centric focus and have really run with it?
Pete Fader - 06:02 - I love that because too often when I talk about this stuff, people say, oh, you're just a professor, your ivory tower stuff. Come on. We're running a real company. It's been so great at so many levels to see some companies kind of from an arm's length that I have no particular relationship with that have been starting to make a pivot. Others that I have had occasional conversations. So let's get real specific. Uh, no company is better at this stuff, and it's gone through such an amazing transformation than Electronic Arts. I love to talk about them, and you know, it's fun sometimes to talk about the eCommerce firms. They have it easy because they're kind of born with, with all the data, but a firm like Electronic Arts, that's just this old-school blockbuster oriented product from. But the way that they've pivoted around the data around the customers, the way that their Chief Analytics Officer, Zach Anderson went from running a team of a handful of analytics people and now has over 250,
Pete Fader - 06:59 - but more importantly, the range of decisions that he has a direct impact on. Some of which are not at all obvious as a model for every company to follow, and then you get companies like Starbucks and Nike. Again, companies with these beloved brands that for decades we're able to just kind of ride on that brand and the kind of religion around it, but starting to wake up and say, you know, our brand is great, or brand is as strong as ever, but that by itself isn't enough anymore and we need to start doing some of the tagging and tracking and we need to start thinking about how our customers are different from each other. And I love what Nike announced recently were in their new flagship store in New York. They're going to have a members-only floor that you're not going to be allowed to go on this floor at all unless you have a certain level of status with Nike. I think that's amazing. I mean that's the kind of thing that would've never happened some years ago, and you'd be just kind of laughed out of business for doing something like that.
Pete Fader - 07:57 - But now that you have both the ability to identify who those customers are and the need to create some kind of unique experience for them, we're going to see these kinds of things happening more often. We're going to see more companies kind of outdo each other, not just with glitzy experiences and fancy ads, but through the ways that they better understand their customers are granular level and try to leverage it.
Allison Hartsoe - 08:21 - That makes perfect sense. Now I want to call back to two things. One, I love Zach too. He's amazing, and he's going to be a keynote speaker at our upcoming conference, customer centricity conference, and you can see customer centricity conference.com. You can see all of our speakers, and he will be talking specifically about that story of how he went from an analyst trying to get some traction in the organization and not being at the upper levels to someone who really started driving the way the organization makes decisions. It's a really great story and the. The second thing I want to call back to is when we talk about customer-centric thinking, I think it's important to compare it to what we've talked about in the past, which is product-centric thinking and one of the things that seem to be happening at this time is that you've told me before is that product centricity is plateauing. Can you talk a little bit about the difference between product-centric thinking and customer-centric thinking?
Pete Fader - 09:21 - Yes, indeed. It's so important. We should have probably lead with that because there's a lot of firms out there that say that their customer-centric customer comes first, but they're not honest about it. They're just saying, we're thinking ever more about the customer as we push, push, push the product, and let's face it, most companies begin with the product and end with the product and the customers are just the entities out there that kind of create the demand for it, but they're not truly at the heart of what the company is doing. So for most companies, it really is all about innovation and efficiency. Let's come up with really great ideas and all that. Sell the hell out of them, and that sounds a little kind of oversimplified or even crass, but it's true. Whereas if we're talking about true customer centricity where first of all, tagging and tracking, our customers were actually calculating forward-looking customer lifetime value for every one of them and basically saying who are the most valuable customers, and then-then we start saying, so now what business should we be in?
Pete Fader - 10:24 - Once we see who these valuable customers are, what are the products that we should be delivering instead of coming up with products that will be kind of big, broad sellers that everyone will buy, let's disproportionately focus both product development, product delivery, customer service on those better customers, of course, hoping that other customers will continue to buy the products and services as well, but recognizing that they don't have as much invested in us, we shouldn't have quite as much invested in them.
Allison Hartsoe - 10:54 - Well, that's a really interesting principle of reciprocity, and that brings me to the point of impact. At the beginning, we talked a little bit about the competitive pressure on growth and the fact that patterns haven't changed. Can you talk a little bit more about the kind of impact that companies are getting or you think they can get by using this system?
Pete Fader - 11:11 - Oh, because growth has plateaued with product centricity, but the demands or growth are as great as ever, and it turns out that we have some low hanging delicious fruit. Recognize these differences across customers. So it all comes down to four things. First and foremost, identifying the value of customers that are granular level, and I really do mean that. Let's go back to our friend Zach Anderson. Every single day he's looking at a billion customers around the world and saying how they're clv is greater or less than it was the day before. Having that kind of discipline, that kind of regularity and using this stuff. So that's step one is first being able to do it, but that by itself doesn't create value. So number two is then for those valuable customers, let's find ways to enhance their value. Let's find ways to really help them achieve their full potential regarding the value of their relationship with us. Let's not only cater our products and services to them but let's surround them with a variety of other products and services, some of which we make no money on, to try to again, enhance the value of that relationship,
Pete Fader - 12:14 - but step three, do so in a way that they will happily willingly share some of that value back with us. The example I love to use is Amazon. That whether it's you, Alison, or anyone listening, you have no idea what you paid last time. You bought something from Amazon, and that's wonderful. That shows the way that they built just an amazing relationship with the customers that you know you're getting a reasonably good deal, but you're in it for all kinds of reasons other than price. This is customer-centric marketing. So again, it's creating that value, extracting it in a kind of happy and mutually beneficial way from the customers and very importantly, using the differences between our best costumers and are not as best customers as a source for new customer acquisition.
Pete Fader - 13:00 - So instead of just going out there and trying to bring in as many customers as cheaply as possible of the kind of the CPA mentality, we want to focus more on the VPA, the value per acquisition, and really invest in the right customers right from the beginning instead of this ridiculous belief that we can train customers to become really good at. That's a really hard thing to do.
Allison Hartsoe - 13:23 - Yeah, that's a fantastic acronym. A little three letter acronym there. A VPA value per acquisition that I don't think I've ever heard a marketer use. So that's a great way to twist the metrics that are usually what I find very quantitative volume metrics, you know, how much volume did we get to a different basis of what was the value of that volume, right?
Pete Fader - 13:48 - Yeah. And of course, VPA is no different than CLV. It's just that when we frame it that way as a direct contrast to or even compliment with CPA, that I think helps people understand kind of where in the mindset where on the dashboard it belongs.
Allison Hartsoe - 14:06 - Yeah, exactly. Now I'm going to say that most of what you ran through there, those four steps sound a lot like what I normally ask people, which is what should I do next, so I'm going to come back to that question of impact because I think there's a really good case study for connecting the value of the customer portfolio to what Wall Street might value and that this is something marketers don't always think about. You know, as an entrepreneur, I'm trained to think about boards and investors and equity from the get-go, but most people who work inside a company don't think like this. Tell me more about the Customer-based Corporate Valuation Angle that you've been pursuing.
Pete Fader - 14:46 - CBCV. I want everyone to know what those letters stand for. You know, this has been awesome. This has been just an amazing chapter and we're right in the middle of it right now for years and years, not just me, but a lot of people who just are interested in customer or this and that have been saying kind of in a conceptual aspirational way that, hey, if we could figure out the value of all of our customers and just add all that up, well that's the value of all the operating assets for the enterprise and for many companies that's the value of the whole enterprise. And so we'd kind of put that out there just as a way to wake up and smell the CLVs, but where been taking it very, very seriously. And when I say wait, I'll take the backseat to my former Ph.D. student, Dan McCarthy, now a professor at Emory who has made this the focus of his life both through his dissertation and the work that he's doing now at Emory.
Pete Fader - 15:35 - It's been amazing. So look at the publicly traded company. So again, this is not just an ivory tower exercise and from their own disclosures project to the number of customers that are going to acquire. How long those customers are going to stay, how many transactions are going to make, how much little spend each time doing this for real, and then projecting it over long horizons using appropriate discount rates, weighted average cost to capital to say what are the value of those customer assets and then link it up with the presumed value with the firm. So we've done this in some cases now. We have two papers, one published one hopefully about to be a ton of attention from Wall Street as an example. We wrote a recent paper where we looked at wayfair.com and overstock.com, and I'm happy to talk about all the details, but it was really interesting that Jim Cramer from Mad Money picked up on it and one of his segments this past fall, he was talking about some of the work and the impact that it had on Wayfair, which is in their case it was rather negative.
Pete Fader - 16:33 - And he said, you know, what is it that these professors did? He said they figured out the value of the customers and what the company paid to acquire them. And boom, that did it, and I'm looking at this segment and saying, well that's kind of obvious. That's kind of dumb, like who wouldn't do that? But his point is in the valuation world, in the finance world, they don't do that in the finance world. They just look at, you know, a dollar's a dollar. We don't know. We don't care if it's from a new customer or an old one. So it's been, it's kind of a wake-up call both for me to realize that as a marketer I can bring a lot to the finance conversation and of course wake up call to the finance people to recognize again that not all dollars are equal. So it's been a nice kind of collaboration now, not to say there aren't people pushing back, but for everyone who is pushing back, there are five others who were saying, tell me more.
Allison Hartsoe - 17:25 - Okay. So here's the question. At the top of our conversation, we said that at the behavioral models really haven't changed over the past ten years since they've been coming up yet Wall Street has consistently ignored them. What is it that allowed Wall Street to get away with this before and it's holding them accountable to it now? Is it simply that the customer has more power or is it something else?
Pete Fader - 17:48 - Well, I think it comes back to the growth equation that, that everyone's looking like how are we going to find growth? How are we going to measure it? How are we going to anticipate where it's going to be next? So, so part of it is the Wall Street's just looking for kind of the next thing. They don't really care what it is, and I think that they just have an inkling that some of these customer metrics and the customer, a date underneath them, um, could be a source of bonafide value. You know, the VCs have kind of known this for awhile. The VCs have made a bigger deal about having clv something to be looked at for companies that are investing in. So it, it's kind of a generational thing is my overall answer that old school Wall Street people, they just never had to think about this stuff. They would just find other growth opportunities through more traditional metrics. But you know, the new kids on the block, both are looking for new ideas, but also they're more open to these ideas that hey, there could be value in these customer assets in a way that our fore fathers would have never even looked for it.
Pete Fader - 18:51 - So I think that's where the change is going to occur is as much as we've seen rapid changes over the last couple of years, it's going to be when kind of today's kids are running the show. I know just going to be looking at customers' valuation and overall strategy very differently.
Allison Hartsoe - 19:08 - Yeah. Isn't that true? How are such creatures of habit? The next new thing? Growth Equations. I love that. So Pete, if somebody wants to reach you in the future, what's the best way for them to get in touch?
Pete Fader - 19:20 - Well, you can tell everyone you tell I'm really passionate about this. So my life's an open book. So you know, obviously email firstname.lastname@example.org. But I really like to drive people to Twitter. Not only tweeting and retweeting a lot but having lots of interesting conversations with others. Sometimes agreeing, sometimes disagreeing, I'm really trying to build a community of folks who are either passionate about or at least interested in these ideas of customer centricity and in that way I have to give you Allison and all of Ambition Data, a lot of credit for doing so much work to be kind of spreading the gospel about it. I'm doing more than just talking, but helping companies really achieve it.
Allison Hartsoe - 20:01 - We love it, you know, it's my entrepreneurial background that helps me feel that at a very personal level. I'd love to see companies succeed and it's like you've handed us the keys to the kingdom and just said, here, go make it happen, and that's just been so gratifying. Thank you. Pete.
Pete Fader - 20:17 - I'd have to say that watching my students and recent alums, same things you just said. You know, a lot of them would be going to traditional banking or consulting or product management role, but some of them who've been trying out some of this kind of data-driven customer-centric strategy stuff and come away with that same degree of, wow, this is fun. Wow. I'm so glad I did it. I'm really making a difference and kind of just changing the world. It really is cool to be part of that, and you know, one day when everyone's customer-centric to will become old and boring, but it's still many many years. There's a long runway where it's going to continue to be exciting.
Allison Hartsoe - 20:54 - Oh fantastic. I know that feeling and I also just want to mention your Twitter handle is very similar, I think you said it was Famer Pete, which is your Twitter handle and then you also gave your email. You can also connect with Pete on LinkedIn, but those are like you said that Twitter is the best way to reach out to Pete if you want to have a better conversation about clv and I think that'd be fun because then we could all participate.
Pete Fader - 21:16 - That's right. And that's really important because there are a bunch of companies out there that are reinventing the wheel on the road sometimes when that doesn't roll quite as smoothly. So I think at this point we need to have a big, broad conversation about what works, what doesn't, what are the barriers we're going to encounter, what are the resources we can bring to the party? Even though I've written a book on Customer Centricity, I dare say that the book on customer centricity still hasn't been written. I think there's still a lot for us to learn.
Allison Hartsoe - 21:45 - Absolutely. So let's summarize a little bit. First, we talked about why should I care about the outcome of customer centricity? And we talked about the fact that the patterns haven't changed over time, but what has changed is that there's a lot of competitive pressure on growth, helping companies trying to innovate faster. They can't innovate faster. So looking for ways that they can get an edge or the growth edge is kind of a new way of handling marketing, but not just marketing the entire operations of the company. So most of the people who listen to this podcast come at it from the marketing perspective. I find that that is an excellent place to start, but it's not the end of the story by any stretch and electronic arts is a great example of that. Then second, we talked about what kind of impact. Actually we talked about that third, so let me switch that around a little bit. The third thing we talked about was that we-we know you can get the impact that Wall Street is starting to pay attention.
Allison Hartsoe - 22:44 - We talked about customer-based corporate valuation. Now I will link to the papers that Pete mentioned that he wrote with Dan McCarthy and these are fantastic papers. They are very academic, so Pete, if there are maybe a couple of links we can include alongside that that is maybe a little more summary level, that might be helpful as well. Maybe.
Pete Fader - 23:07 - Yes. Dan and I just did a very nice interview. We'll just kind of just break it all down. What does it all mean?
Allison Hartsoe - 23:07 - Fantastic!
Pete Fader - 23:12 - Really will share plenty. I think it's really important to get these ideas out there and we appreciate people's interest.
Allison Hartsoe - 23:17 - Great. Well, we'll link that, and then we talked about what should you do next, and Pete gave us four steps. The first thing is you have to identify the value of the customer. You know, you have to know if the 80/20 rule applies, you have to know your numbers, so you need a starting place. The second step is to find ways to enhance the value of those groups. So once you've identified, you need to get to know them a little bit more and figure out what is it that they find valuable. And then the third step was to take that value and execute on it in a way that people want to share the value back with you. So the example that we talked about was Amazon's trusted relationship where we trust Amazon to not just sell us on price but to kind of know the products that are best for us to make good recommendations. And also along the way we feel that the price is already appropriate. So the fourth step was using differences to bring more customers in.
Allison Hartsoe - 24:15 - And that's where we talked about a heterogeneity, which is a big concept of pizza, and then there's great acronym of value per acquisition, which is changing your denominator not to be just volume, volume, volume, but actually the value that you've acquired, not just in behavior but in the actual customer level value. Pete, did I miss anything there
Pete Fader - 24:38 - that sums it up really well, Allison, and again, it could be so much credit for kind of drawing out a lot of these great points and keeping the conversation going.
Allison Hartsoe - 24:46 - Wonderful. Thank you so much for joining us today. Remember everyone, when you use your data effectively; you can build customer equity. It's not magic. It's just a very specific journey that you can follow to get results.
Allison Hartsoe - 25:12 - Thank you for joining today's show. This is Allison. Just a few things before you head out. Every Friday I put together a short bulleted list of three to five things I've seen that represent customer equity signal, not noise, and believe me, there's a lot of noise out there. I actually call this email the signal things I include could be smart tools. I've run across articles, I've shared cool statistics or people and companies I think are doing amazing work, building customer equity. If you'd like to receive this nugget of goodness each week, you can sign up at ambitiondata.com, and you'll get the very next one. I hope you enjoy The Signal. See you next week on the Customer Equity Accelerator.