Customer Values: Q&A with Peter Fader, Professor of Marketing, The Wharton School at the University of Pennsylvania
Peter Fader has written two books, both with “customer centricity” in the title: Customer Centricity and The Customer Centricity Playbook. You’d think he’d be excited when a company proclaims that it’s centered around the customer. Instead, he cringes. That version of customer centricity isn’t what he means at all.
Associate Director at C Space
Dan Sills is the producer of Outside In, a podcast that explores changes in business and consumer behavior and where the two converge. The Huffington Post dubbed Outside In one of “The 7 Best Business Podcasts You Should Be Listening To,” and Entrepreneur named it on its list of “Best Podcasts for Entrepreneurs.” A talented writer and storyteller, Daniel performs on stage in story slams and was a grandSLAM finalist for The Moth.
“Yeah, I wish I hadn’t chosen those words,” he admits, with a bit of a chuckle, about his book titles. “For me, it’s not the customer. There’s this vast heterogeneity, vast differences across the customers. So, it’s a matter of figuring out who are the customers that you want to be centered around — who are the really focal customers, the ones who have incredible profit potential for the future?”
Fader uses a mathematical approach to help companies determine customer lifetime value (or, CLV) and use it to determine their “customer based corporate valuation.” His company, Theta Equity Partners, specializes in understanding how customer behaviors impact company value, and predicting how future customer value will impact future company value.
Fader joined C Space CEO Charles Trevail on the Outside In podcast to talk about customer based corporate valuation and how it allows for greater alignment within an organization, particularly between the priorities of a CFO and the strategy of a CMO.
This interview has been lightly edited and condensed for clarity.
You’ve said you’ve had as much success — maybe more success — working with CFOs than CMOs. Because businesses are about making money, and you’re talking a language that the CFO understands. What accounts for that success?
For years I’ve been saying, “All these models and forecasts — not only the CMO, but the CFO should care about them, too.” But it was always at arm’s length. I never really thought that I’d get a CFO to actually pay attention to what I do.
But just in these last two years, through this notion of customer based corporate valuation, we can do a better job than the traditional Wall Street approaches at making those forecasts, adding them all up, and saying, “We can project your future revenue better than a typical top-down approach.” The CFOs and VPs of Investor Relations are saying, “Tell us more! Let’s do this!” They’re contacting their colleagues in marketing and saying, “Hey CMO, you might like this, too.” And when the CMO hears about it from the CFO, as opposed to hearing about it from the marketing professor, it carries a lot more credibility and it allows for a lot more alignment within the organization.
You’ve taken an ill-defined subject, customer centricity, and put some numbers to it, which CFOs of course like. As soon as you put some valuations around it, have you seen things start to take off?
I have to admit that I was a little naïve about it. As I started developing, refining, and validating these models for customer lifetime value (CLV), it works super well! I’d be going to companies saying, “You’ve got to use these models!” I had this naïve belief that if they waved their magic CLV wand that money would just come raining down from the sky.
Well, it’s not that easy. You really need the narrative around it. You need the motivation of why you should be doing it. You need crisp definitions, not just of the mathematical formulas but of these concepts and of these tactics. You need to figure out ways to change organizational culture. You need to find ways to win over external as well as internal stakeholders. That stuff is hard! And that’s what’s taken a lot of my time over these last 10 years. My first book, Customer Centricity, was more motivational, definitional, aspirational. The new one, The Customer Centricity Playbook, is much more about how do we do this stuff, and how do we win everybody over?
How does CLV work? How do I start to segment a customer base in your terms, and what do I start to have to measure?
I’ve always been interested in making good forecasts over long horizons using as little data and little computation as possible. This is not data mining. This is not machine learning. This is actuarial science to be able to make predictions of, How long will this customer stay? and, How many transactions over that horizon?
The main academic work that we’ve done now for the past 15-20 years is on “buy ‘til you die” models. I didn’t come up with that term, but I’ve done a lot to popularize it. Imagine that you’re carrying two coins: one of them is the buy coin. Every time I flip that coin and it comes up heads, I buy the product. If it comes up tails, I don’t. And then there’s the die coin. Every time I flip that coin, if it comes up heads, then I have the right to flip the first coin. It just means that I’m contemplating a purchase. When the die coin comes up tails, I’m gone, and I’m gone for good.
I’ll be the first to admit that when I first saw these models I thought they were ridiculously simple. But then I put them up against some of the models that I was developing and found that these “buy ‘til you die” approaches — these two-coin models — were actually way better. Their forecasting capabilities, their robustness, their computational convenience, the use cases that arise from them are downright awesome. It’s my job not only to push the math, but to push the motivations and the use cases, which people find much more interesting and relevant than talking about the math stuff.
You’re not the greatest fan of the idea that customer centricity is about looking after all of your customers. Why?
That’s right. Companies should never want to chase folks away. But they have to acknowledge that some customers are better than others. That not only have they been better, but, more importantly, they will continue to be better. They’re going to stay with you longer, they’re going to buy more stuff, they’re going to offer more referrals, they’re going to be cheaper to serve. Companies need to double down on those kinds of customers instead of trying to turn the so-so customers into great ones. I mean, that’s a wonderful thing to think about, but that’s really hard to do! It’s also really expensive and inefficient. Let’s figure out what makes those great customers different and find more customers like them.
I think a really great example is what happens with Net Promoter Score. There’s too many companies out there who say, “We’re going to turn those detractors into promoters!” Again, a noble idea, but hard to do. What I’d rather do is figure out what makes the promoters different and find more of them no matter what it takes. Spend more money on acquisition, because if we can find them the return on acquisition spend is going to be huge.
Do companies need a Chief Customer Officer or someone like that to become an advocate for the customer, or is this the CFO’s job? Because everyone has their own data — marketing, finance, HR — but the customer doesn’t show up anywhere in the data at the moment.
That is the problem. I look at all these books on my shelf about corporate valuation, and I flip to the index to the letter C and there’s just nothing there! We need to change that. It starts with the CEO. They need to do more than just lip service about, “Oh, we love our customers!” They need to break things down in the manner that I’m suggesting.
It would be great if CMOs got it, too. We’re seeing movement in that direction, but it’s been way too slow. This is one of the reasons why I love a lot of the digitally native companies — because they tend to get this. And their leaders are now starting to take positions in established companies. I think the rise of the digitally native is going to help marketing catch up with, have a meaningful conversation with, and for the first time earn genuine respect from, the CFO.
What’s your most important message for CEOs and CMOs today?
Embrace customer lifetime value. Find that magic wand. Use it carefully and think about all the use cases that arise from it. Again, I recognize that just a formula isn’t going to do the trick. So, build a culture to not just tolerate but appreciate these customer metrics, the differences across customers, and the non-conventional thinking when it comes to marketing. And, lastly, build a meaningful bridge with the folks in finance.
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