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S1 E6: Peter Fader - When Customers Don’t Matter

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About Peter Fader

Peter S. Fader is the Frances and Pei-Yuan Chia Professor of Marketing at the Wharton School of the University of Pennsylvania. His expertise centers around the analysis of behavioral data to understand and forecast customer shopping/purchasing activities. He works with firms from a wide range of industries, such as telecommunications, financial services, gaming/entertainment, retailing, and pharmaceuticals. Managerial applications focus on topics such as customer relationship management, lifetime value of the customer, and sales forecasting for new products.

Much of his research highlights the consistent (but often surprising) behavioral patterns that exist across these industries and other seemingly different domains. These insights are reflected in his book, “Customer Centricity: Focus on the Right Customers for Strategic Advantage.”

Professor Fader believes that marketing should not be viewed as a “soft” discipline, and he frequently works with different companies and industry associations to improve managerial perspectives in this regard. His work has been published in (and he serves on the editorial boards of) a number of leading journals in marketing, statistics, and the management sciences. He has won many awards for his teaching and research accomplishments.

In addition to his various roles and responsibilities at Wharton, Professor Fader co-founded a predictive analytics firm (Zodiac) in 2015, which was sold to Nike in 2018. He then co-founded (and continues to run) Theta Equity Partners to commercialize his more recent work on “customer-based corporate valuation.”

In 2017, Professor Fader was named by Advertising Age as one of its inaugural “25 Marketing Technology Trailblazers,” and was the only academic on the list.


Learn more about Peter Fader

Buy Peter Fader's book Customer Centricity: Focus on the Right Customers for Strategic Advantage: Amazon | Barnes & Noble

Follow Peter Fader on Twitter: @faderp
Follow Peter Fader on LinkedIn

Follow Mary Drumond on Twitter: @drumondmary
Follow Mary Drumond on LinkedIn 


Summary

The customer is not always right

“All customers are not right” - Peter Fader

We have been conditioned to believe that the customer is always right. In fact, many stores have prided themselves on that for years. Peter Fader says the “all customers are right mindset” is all wrong. To be truly customer centric is to focus on the right customers at the right time to get the right results.

Admittedly, Peter says in hindsight the title of his book Customer Centricity was a bad choice of words. Too many people have the impression that it means everything revolves around the customer no matter who that customer is and that’s not at all what he meant.

All customers Are not equal

“Every customer deserves the same respect, but not the same attention.” Peter Fader

There are certain customers companies choose to center attention around that are so valuable to them and represent the growth engine in a way that innovation and efficiencies or usual business practices can’t achieve. If companies can find out who their best customers are and extract some value and find more like them, then growth can be achieved. It’s a question of focusing on which customers to be centered around.

The concern is saying you care about the customer no matter who they are even though they may be completely worthless to the company.

Spillover effects of incentivizing customers

Companies are more concerned with transactions than loyalty or retention. You can’t perform your best if you don’t know who you’re performing for.

Peter speaks specifically about incentivizing customers to be “loyal”. There are spillover effects when companies want to evaluate their efforts; how do they do that without knowing what the value of the customer would have been in the absence of those activities and campaigns.

So, companies also need to do customer evaluation at least for the baseline to build an ROI analysis. It’s needed to drive the decisions they make and assess the effectiveness.

Customer Lifetime Value (CLV)

“Customer Lifetime Value has become a box to be checked.” – Peter Fader

With Customer Lifetime Value (CLV), there’s the good news and the bad news.

The good news:

CLV is the working vocabulary of customer facing companies. Everyone kind of gets the basic concepts.

The bad news:

For a lot of portfolio companies, it becomes a box to be checked. The problem is that the rigor, validity, and accountability is really poor. Most companies talking about CLV are basically making things up. They aren’t being calculated the right way and companies are not being transparent in how it’s being done. It’s not an apples to apples comparison.

“I’m concerned that these calculations are the standardized way and it’s all cheap talk. It’s important to get it [CLV] right if it’s going to be used to make decisions.”

In an effort to help companies get it right, Peter started a predictive analytics company called Zodiac that was bought out by Nike in early 2018.

He says, “We did it responsibly and with accountability. It was a watershed moment to show how important it is to do the calculations the right way. It’s nice to be validated by an enterprise.”

Traditional metrics

Traditional metrics must be in their right context to make them shine, instead of having them try to do a job they’re not really capable of doing.” – Peter Fader

If you’re an investor in the consumer-facing company with a handful of metrics, what are the metrics that you want to see that will be truly indicative of the customer equity and overall corporate valuation?

For years, people have pushed the customer evaluation idea, but there was a lot of unfounded skepticism. But Net Promoter Score (NPS) and Customer Satisfaction (CSAT) really caught people’s attention and for the first time created a C-level conversation about a customer metrics and drew attention to how customers differ from one another.

Now companies see the importance of understanding their relationship with each and every customer. A hat tip to them for opening eyes. But now they’ve got to put some meat on the bones.

It’s not to be critical of traditional metrics. There’s a role for it, but the main role is an onramp. CLV metrics are far more predictive and more precise and accountable. So, let’s start to transition or mend the emotional metrics with others.

A customer-centric mindset

This overall conversation is much more rule than exception compared to six or seven years ago. Companies like Nordstrom, Starbucks and Walmart have made great strides since Customer Centricity was written. The mindset is the most important thing. It sounds so obvious in hindsight that customers are people, but employees have to get on board. The right environment makes it flourish.

Peter says, “I’ve changed too. It turns out that you can’t start with the metrics. The stuff that’s more important are things like corporate culture, organizational design, the way you communicate about customer centric strategies. If you don’t get this soft stuff right before the pivot towards customer centricity, then it won’t work.”

Companies read the book and say, ‘Let’s do this CLV’ thing, but they don’t get full traction. You have to start higher in the organization with the soft stuff and then figure out how to get there.

Customer Relationship Management (CRM)

Part of CRM is being better at tagging and tracking to know who’s doing what when. It’s connecting with your customers, their needs, wants, and finding ways to add value to the person, being a true trusted advisor, not just giving discounts or throwing free stuff at them.

It’s using the Lester Wunderman approach of “direct marketing” that places like beauty salons do so well. They know really their customer. It’s life changing. And it’s hard to jam it all into your CRM system and mandate it to frontline employees. But a company that can create an environment to make it easy, natural and rewarding to do that kind of thing will find customer centricity success.

Keeping up with the speed of change

Peter provides advice on how companies can keep up with the speed of change. There are three things companies can do:

1. Recognize that these changes are happening.

Everybody needs to embrace the customer centric ideas. You can’t put it off. Obsessing over innovation and efficiency isn’t enough anymore.

2. Run small experiments.

Don’t just declare change. Pick one small segment, an isolated area and try it there first. Figure out how to do the dance steps from a technical standpoint as well as a a cultural communication one.

3. Don’t be focused on capturing everything.

Start a simple transaction log data before you start layering on.

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