Turning Ugly Duckling Customers Into Beautiful Swans
Peter S. Fader is the Frances and Pei-Yuan Chia Professor of Marketing at The Wharton School of the University of Pennsylvania and focuses on behavioral data to better understand and forecast customer buying decisions and shopping behavior.
He’s known in the retail industry for validating customer centricity. Fader is the author of “Customer Centricity: Focus on the Right Customers for Strategic Advantage” and is the coauthor with Sarah E. Toms of “The Customer Centricity Playbook.” His latest book was published this past fall and is titled “The Customer-Base Audit: The First Step on the Journey to Customer Centricity.”
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Here, Fader explains the Customer-Base Audit (CBA) and shares insights into using data and how to best create and understand customer lifetime value.
WWD: Can you tell us a little bit about your latest book and the major themes that were presented?
Peter Fader: On the one hand, it’s kind of an old idea, but on the other hand, it’s obviously new. And we come at it from two different directions. Number one, more and more companies, especially in the retail world, are kind of waking up to the idea that customers really should be the kind of atomic unit of analysis. It’s not enough just to say, what will the customer like, but to recognize that there are vast differences across them, and understanding those differences and leveraging them is the key to sustainable success. So, part of it is the customer part and part of it’s the audit part, that not only should we manage by that atomic unit, the customer, but we should be held accountable.
There should be certain standards; there should be some rigor. It shouldn’t be just cherry-picking certain metrics, and let’s just share those to make their shareholders happy; there should be certain metrics that we look at and share all the time, just like a traditional financial audit.
WWD: You had once suggested getting away from generational cohorts. Does the customer-based audit deviate from that, and allow marketers to get more granular?
P.F.: It’s interesting. Yes and no. So yes, it does allow us to get more granular. Again, the idea is that we’re going to treat the customer as the atomic unit and really understand the difference across them, but at the same time, we recognize the limits of getting too granular. Pursuing a lot of super hyper-personalized one-to-one marketing is not feasible; it’s not cost-effective, and we can’t really learn enough about any one customer by ourselves to really manage that relationship. So we will continue to group customers together, but we won’t do it based on when they were born or the color of their skin, their stated identity, or anything like that. It’s going to be much more boring than that.
In the main grouping that we’ll use, you used the word yourself, cohorts, but the way we’ll define cohorts will be based on when and how we acquired you. So, let’s look at all customers we acquired in Q4 2017 and see what happens with them over time, or let’s look at all customers that we acquired through a certain channel.
We do want to group customers together, but we want to do it on behavioral terms, on what they’ve done. Maybe what was the first product that they purchased from us, as opposed to those surface-level characteristics that tend not to be as predictive or as effectively actionable as what a lot of marketers traditionally think.
WWD: What exactly is customer lifetime value? And how are retailers using data? And what’s the best use of the data?
P.F.: I love that question. But I’m going to answer that question by also preempting another question: What are the basic building blocks of customer centricity? Once we kind of understand what it’s all about, how do we achieve success with it? It all happens through three levers: acquisition, retention and development. And to require better customers to hold onto them longer and to make them more valuable.
First, let’s just focus on those ideas. In fact, some companies get this already. Big shout-out to a company like American Express, where for years their mantra, at least their internal mantra, has been, “get, grow, keep.” Get more customers, let’s grow those customers, and let’s keep those good customers. Again, acquisition, development and retention. I’m not saying that there’s news there, but for too many companies, those activities — acquisition, retention and development — are often playing second fiddle to things like the brand. I’m not knocking branding either, but I’m saying branding is a servant of acquisition, retention and development.
Having a good brand helps us do A, R and D more effectively, whereas having a good brand is not an end in itself, unless it’s going to help us bring in better customers and have them stay longer. Who cares if the brand’s any good? So, lifetime value is going to be the North Star that’s going to guide and gauge those activities on acquisition, retention and development.
For too many companies, when it comes to acquisition, the obsession is often around acquisition cost, CPA, or cost per acquisition. What too many companies try to do is try to acquire as many customers as they can as cheaply as possible. How little do we have to spend to get customers to come in through the door? I’m saying, “No, that’s all wrong.” The question should be the exact opposite — is what do we have to do to bring good customers in? How much should we be willing to spend to bring those folks in? Of course, that’s what lifetime value is. It’s that upper bound on how much we should spend to acquire.
Likewise, the same thing on retention. Too many companies out there just obsess over every lost customer. They take it very personally; they view it as a failure of them as a manager. The fact is that a lot of those customers, most of those customers are, they’re kind of flighty, they don’t really feel that they have a relationship with you, even if you feel you have one with them. They’ll come back and buy from you again two years later, but they’re never going to evolve from ugly ducklings to beautiful swans.
WWD: And how does lifetime customer value play into this?
P.F.: Lifetime value helps us understand who the beautiful swans are and how much we should be willing to pay to keep them, and what we can expect to get out of them in terms of development. Lifetime value has lots and lots of different applications, and they also go outside of marketing. So, a lot of the work that I’ve done recently has been on customer-based corporate valuation. Let’s get the folks in accounting and finance to care just as much about this stuff as marketing does. There are lots and lots of use cases, many of which fit naturally with the company’s DNA, but some of which go against the grain. They’re difficult to achieve but very, very important and valuable.
WWD: How do you decide, as a brand or retailer, what data to use?
P.F.: That’s such an important question because there’s a lot of data around, and as you alluded, there’s a lot of technology around, a lot of different kinds of fancy shiny things we can play with, whether it is loyalty programs or personalization programs and so on. So, how do we have the discipline to know what we should be looking for and what we should be doing?
Well, of course, I like to say that anything related to lifetime value will get a higher priority. As I said before, focusing on behavior, focusing on past purchasing history, who bought what when. Whereas our forefathers in direct marketing told us decades ago, long before I was stringing together customer centricity or customer lifetime value, the rubric of R, F, M — recency, frequency, monetary value. That’s the kind of data that should be at the top of the list. Again, it’s boring, but it’s very, very predictive.
Whereas a lot of the other data, like how often you use social media or where you’re located in the social graph, or things like neuroscience or things like how your pupils dilate when you see a certain product on the shelf. A lot of that other stuff is cool and really interesting, but it’s not as predictive. We don’t know how to manage it as effectively, and so a lot of that data, and again, a lot of the technology associated with it, really do have this kind of shiny object problem.
I’m saying, let’s walk before we can run; let’s take the easy data. Transaction logs, again, who bought what, when, and let’s squeeze all the insight we can out of that before we start going crazy and worrying about all that other stuff. That takes us right back to the beginning of the conversation, right back to the customer-base audit, which is looking at nothing more than who bought what when, but doing so in a very disciplined, very structured way, so we can start to squeeze those insights, so we can start to make predictions, and we can start to bring in all of that other cool data and technology to layer on top of these simple descriptives to better understand why certain customers are more valuable, or how we can create even more value with them.
WWD: Do investors and Wall Street understand the importance of this?
P.F.: They are starting to, and that’s been just a really gratifying direction for me personally and for companies who have been following my stuff. Mentioned it before, and I’ll say it again loudly, “customer-based corporate valuation.” It turns out that many of the retailers out there are more valuable than Wall Street thinks. I mean, Wall Street very often hammers retailers much more harshly than they’ll look at, say, tech firms or health care and other areas that sometimes are overvalued. Yet, retailers can build these strong relationships with customers and find really valuable ones who will stay with them forever, and who will get their logos tattooed on their body parts.
So, we want Wall Street to see all that value. We want to enable retailers to go to Wall Street and say, “Look at all these sticky customers that we have here. Here, these are the metrics that should be used to judge us by, not cost per acquisition, not the number of likes we’re getting on social media.” Again, not to say we’d ignore that stuff, but knowing how many customers were active with us this period, what’s the average number of purchases they made? How much should they spend on those purchases? Those are the kinds of metrics, of course, that are part of the audit. But more than just using them to compare how we did over the last period, we can directly relate those things to overall corporate valuation.
