Peter Fader, is a professor of Marketing at The Wharton School of the University of Pennsylvania, and the co-founder of Theta Equity Partners. He’s also author of the The Customer Centricity Playbook: Implement a Winning Strategy Driven by Customer Lifetime Value.
In this episode, Peter joins us to talk about how you can maximize a customer’s long-term financial value to your company by aligning the development and delivery of your products and services with their current and future needs. We’ll also dig into how to develop a deeper understanding of the characteristics or your highest-valued customers and from that develop the strategies to find and acquire more customers with similar characteristics.
Andy Paul: Peter Fader. Welcome to the show.
Peter Fader: Hey, good to talk to you. Yeah.
Andy Paul: Yeah. So gosh, you know, we were scheduled to talk last week and you had to go, were recording this in the midst of the coronavirus pandemic. You had to go get on an airplane. So what was that like? You know, we’re all shut down. We’re in New York shutdown and thinks Philadelphia is probably shut down as well. What was that like to have to go get
Peter Fader: Yeah, it was really strange, you know, airport totally empty, something like $35 for a plane ticket from Philadelphia to Denver. Got an upgrade. Yay. there were fewer than, fewer than 10 people on the plane.
Andy Paul: Wow. So you’re spaced out you all socially distanced appropriately.
Peter Fader: no, we really were. And I gotta say the, the flight attendants were wonderful and they were just being really, really careful.
and, you know, no one was coughing or sneezing. A bunch of people were wearing masks kind of wish I did myself. no issues there actually in a, in a weird way, sort of felt good that they’re actually handling these things responsibly. But at the same time, I tweeted a couple of pictures about it.
I’m not sure saying, Hey, this is cool. Everyone should fly. But just merely doing that, got a lot of people in sense. And I actually had to delete those tweets cause people, you shouldn’t be endorsing, flying and so on. So that was kind of, wasn’t my intent. I was just trying to inform, but then we drove back,
Andy Paul: so you did it as a family emergency. You had to go out to
Peter Fader: yeah, we, they’re not, no one’s taken vacations these days. and so I wanted to drive back quickly. The last thing I wanted to do was stay in hotels and deal with rest stops and so on. But as long ride took two full days, this surreal cause it was a lot of the rest stops are closed. Very few cars on the highway. Lots of trucks. but, made it, you know, just this washing up constantly model Purell right there in the driver’s seat, tweeted from the road saying, sort of, you know, taking a car back from Colorado instead of catching COVID in the clouds or something like that to basically say no, no fly people were okay with that one.
So anyway, it’s good to be home.
Andy Paul: so drive through restaurants, basically. I assume
Peter Fader: yeah, a couple of drive-throughs and there were some rest stops. So, but again, they’re taking lots and lots of precautions. You don’t get within 60 of the, of the, of the, the payment systems and so on. so it wasn’t the, the, the most, you know, nutritious or, or sleep filled trip, it was not like a fun family adventure. I wouldn’t want to do it again, but, sometimes, it’s, Iit’s a necessity and I think we dealt with it reasonably well.
Andy Paul: Okay. All right. Well, yeah, I was, I was thinking concerned about you last week when you said you had to fly. And then I was thinking, well, I’m sure, glad I’m not having to do that right now. yeah. My last flight was like two weeks ago coming back from California to New York city. And it was a relatively full flight, but yeah, everybody was on, on edge on the plane for sure.
Peter Fader: indeed. I was on a plane also two weeks ago, and I noticed at that point that the flights were relatively full. I think people were going to wherever they’re going to hunker down. at this point, people have done the hunkering down, so. The few people jumping on planes probably have a good reason to do so. At least I’d like to believe that
Andy Paul: Yeah, I would think so. All right. So, well, good. Well, we’ll, we’ll talk business now. I don’t want to dwell too much on the Corona virus cause this is, that’s certainly, you know, something we’re dealing with now, but you know, these episodes live forever, so we don’t spend a lot of time on them.
So, we’re going to talk about your book, Customer Centricity Playbook, subtitle Implementing a Winning Strategy Driven by Customer Lifetime Value. So, so you wrote before the customer even makes the first purchase from you, that much of their potential value is already there, already evident. So tell us what you meant by that.
Peter Fader: Yeah, it’s a bit of an overstatement. Of course, I’m not suggesting that you’re predetermined to be a good customer or not, but there is some element of truth to that, that you have. There’s so many companies out there that have the idea of, you know, let’s go out and acquire as many customers as we can as cheaply as possible.
And then let’s educate them. Let’s, let’s, let’s show them why and how we’re going to delight them. How are we going to turn them into ugly ducklings, into beautiful swans. And that’s actually pretty hard to do, but there really is some kind of innate component. that, again, I’m not saying the future is locked in, but some customers are kind of basically born to be good. And some many are born to be not so good. And trying to, in a way change, their fate is difficult. It’s expensive. And from a business standpoint, it’s less effective than just being smart in the first place about which kinds of customers you want to go after. That’s basically what we’re coming from.
Andy Paul: And this becomes more, I don’t wanna say relevant, but we’ll say relevant just for the sake of it as more of our economy becomes subscription-based is yeah. Sort of the, the operating assumption is that, yeah, we just want to get people in the door. Cause we get them in the door, then we can increase their usage and we can increase the, just the, you know, the quantity of usage and the number of seats that have and so on and turn these people all into, as you said, from ugly ducklings into swans.
Peter Fader: I feel both ways about that. On one hand, there’s not, there’s no question that once we have a subscription relationship with, with someone, we have the opportunity to be able to kind of track them and do more with them. And we kind of know if they’re active or not.
Andy Paul: Sure we have more insight, right?
Peter Fader: Yeah, exactly. Better data, more insights. and in a way to kind of more easily remind them that, Hey, it’s time to buy underwear or flowers or air conditioning filters, or, you know, any kind of periodic thing that you should be buying, but you usually don’t. So, so there’s a lot to be said for the subscription revolution to really enhance these ideas.
No doubt about that, but at the same time, these ideas are not limited to subscriptions. Against subscriptions, help us shed a light on building relationships, but the same issues arise, even in a non-subscription, even when you’re just buying things on a discretionary basis. It’s just harder for companies to kind of know where you stand to be able to get the data and the insights.
It doesn’t make it any less important. And so I’m trying to win people over about building relationships regardless of the business setting, but no doubt that subscriptions, just make it more salient and a little bit easier.
Andy Paul: Yeah, and this is more of a business to business audience. So yeah, obviously a big component of SaaS and audience here, listening to this, but, but you raised an interesting point, which I think is, is one that, that we’ll get into more as we’re talking about is that a lot of the companies take the approach that we’re just sort of indiscriminately gonna sort of hoover up anybody that’s are relatively fits our ideal client profile.
Peter Fader: That’s right. I know. Number one, we’re not really quite sure what our client profile is. I mean, we’ll sit around and do a whiteboard session. We’ll say our target customer is, or our personas are. but there’s not usually a lot of really good science behind that. It’s it’s more instinct. And even if we think we know who that target client is, the way that we go after them is very often going to be cost based rather than value based.
So let’s get as many of them as we can as cheaply as possible. Now, the problem is that a company like Google, and I don’t mean any disrespect to them, I love them, but they, they make us so aware of what we’re paying to acquire a customer. We know what we’re paying for that click. We know we’re paying for that, a placement on the search page.
And so it’s all about cost, cost cost. The only way we can kind of manage and gauge our acquisition processes, what it costs us. So all I’m trying to do is balance that equation to try to bring value in not to ignore them cost, but to say so what’s the upside potential. That we’ve acquired that we’ve picked up on these customers that we’ve acquired.
And does it justify that the costs that we pay to get them? If we can get companies to focus more on where’s the ceiling, instead of where’s the floor, we can get them to acquire customers more smartly effectively, and then have the subsequent decisions about the tension and development and all the relationship building stuff, happened, more easily.
Andy Paul: Yeah. I mean, you have an interesting phrase in the book. You said that, that, that the term customer centricity sounds like it’s really customer centered, but it’s really not.
Peter Fader: Yeah, I have to admit it was a bad choice of words. I, when I wrote my first book back in 2011 and 12, with that title, customer centricity, it was very clear in my mind. In fact, the subtitle of the book. Was better than the title, which is focus on the right customers for strategic advantage. So let’s figure it out, which kinds of customers we want to be centered around and what we should be doing with them and for them.
So it was very clear, but a lot of people read those two words, customer centricity in this kind of generic way. Yeah. That’s where we’re centered around the customer. No, it’s not what we’re talking about. So I, I didn’t really help myself with that phrasing. but. the good news is that a lot of companies are starting to get it on their own.
They don’t need me to hit them over the head with it. They’re starting to realize that not all customers are created equal and that if we kind of focus differentially on some, rather than others, that we can get better ROI on those efforts. So, so that the revolution is happening kind of naturally, even if I’ve done, you know, I’ve taken steps forward and backwards. I’ll admit it.
Andy Paul: well, sort of the implicit in that statement though, is that, Hey we’ve and you sort of allude to this in the book, is that yeah, we always have sort of known about this 80, 20 parade or distribution, but we’ve just been ignoring it. Has that sort of the, the, the subtext to this
Peter Fader: That’s basicall, right. And it’s such a shame that we’ll, we’ll, we’ll, we’ll talk about these things. We’ll recognize that. Yeah. I mean, there are segments out there. We know that customers are kind of different in terms of their wants and needs and so on. They’re different in terms of how reachable, how cheap they are to acquire.
but the big thing that I want to look at is, is to, first of all, Very carefully quantify those differences. Like, is it really 80 20 or is it, or is it more or less concentrated than that? How does that vary across different kinds of business settings? and what is it that makes that 20, you know, there’s a 20% of the customers who bring is 80% of the revenue profits.
What makes them distinct again, not in terms of stereotypes and intuition, but in terms of hard data, About you know, who they are, how we acquire them, how they differentially use our products and services. So I’m going to try to take that basic notion and do it for real. And in this day and age, as we get better data doing part to subscriptions, but just, you know, in general better technology, it’s, it’s becoming possible to do that. But a lot of old school marketers, either haven’t woken up or they’re somewhat resistant to it, to be honest,
Andy Paul: Yeah, well, I mean, cause you could have an 80, 20 distribution, but you’re 20 could be the wrong 20 for what you’re doing. Right. And this is, I think where a lot of companies get stuck as well, hey, this is who we sell to. But as you all straight with the story about EA in the beginning of the book is that you’ve got data that may tell you something different.
Peter Fader: That’s right. And you know, the ironic part is that a lot of these ideas first emerged and are best practiced in B2B settings. So, you know, if you’re a B2B supplier to a, you know, aircraft manufacturers, you have a very small set of customers, you know, them very, very well. You know how they’re different from each other, you know, who is easier to serve who you can, kind of, deepen the relationship with.
So, so a lot of people have the intuition behind it, especially in a setting when you have a small number of customers and you can kind of, you know, the tag them up pretty easily. The hard part is how do you scale this up? And how do you maintain that, that intuition, that degree of intimacy when you were talking about thousands, if not millions of customers.
And my belief is that when the kind of data analytics and tech that we have at our fingertips today, we can do that. And that’s why, you, you mentioned, our example from the book of electronic arts, the gaming company, they’re basically doing this with the billion customers around the world. And so it’s, so it is possible, but it’s, but it’s best or, or put it this way. It’s an excusable not to do it in a setting where we have a relatively small customer base, you gotta do it.
Andy Paul: Yeah. And B2B, if you’re not going to be dealing with billions or millions, for the most part, like Electronic Arts, But I think at the, it creates its own set of facade barriers, if you will. So we not going to before is that you start get settled into thinking, Hey, the certain ways to do things. I mean, you know, one of the huge, even in the Saas business, they want the key things they always talk about. As you know, let’s identify our personas that we’re going after and you deconstruct personas well in the book, I think I’ve never been a huge fan of them. Cause I think they become too limiting.
Peter Fader: Well, too limiting, but also, as you said before, it’s too much Naval gazing. That if we simply look at the folks who have bought from us and say, well, that’s our best customer.
Andy Paul: Also I think if you look at it from an execution standpoint, though, is as I like to say, we sell to people, not personas. And so when I look at the execution side of things is that we send sellers and turn them loose on personas and they don’t know how to interact and they don’t know. Cause it’s, it’s all that’s supposed to be this way. Right. This persona is supposed to have this answer to this question. And if they don’t answer that way, it’s like, well, what do I do?
Peter Fader: Yeah, that’s exactly right. You know, I, in the old, old days of marketing in the 1950s, when we kind of basically discovered, invented marketing, as, as we know it today, you know, one of the very first steps was, Oh my gosh, the customers are different from each other. No, I guess we’re going to have to come up with different messages for different customers.
Oh. But that’s going to raise our costs. It’s going to add to complexity. It’s going to make it hard to develop and implement strategies. So a lot of companies back then, and still today looked at differences across customers as a burden. Again, it’s something that’s going to create complexity and costs.
And I see it as an opportunity that, Hey, this is great. It’s kind of nice to know that the customers are different from each other, because if we can figure out who those best ones are, and when I say best, I mean, future value, not necessarily cost to acquire and find ways to deepen relationships with them the week, we can make more money in a sustainable defendable quantifiable way. then trying to either be everybody’s best friend or just guessing at which segments are, are the, are the pretty good ones.
Andy Paul: Yeah, well, there seems to be this sort of preoccupation, certainly in, in the subscription business about, in the B2B world, Saas business about cost of acquisition.
Peter Fader: And again, I’m not saying the companies shouldn’t look at it, but they shouldn’t obsess over. I mean, here’s a specific example.
Andy Paul: is what I’m is they’re obsessing and like, you know, you could have somebody with a customer lifetime value of half, a million dollars, and they’re obsessing about, you know, we can’t afford a plane ticket to send somebody out to close the deal. Let’s let’s just do our inside sales thing. And I’m like, yeah, you’ve got a half million dollar customer, spend a thousand bucks and go close the deal.
Peter Fader: it happen.
Andy Paul: it happen. You’ll beat your competition. They’re all trying to sell inside. Actually go visit the customer and differentiate yourself.
Peter Fader: Yeah. So I found religion about this back in the, in the early two thousands. When I kind of, I don’t even want to say invent it, but kind of stumbled into some really, really good models to calculate, project, understand, act on customer lifetime value. And I’m really happy to share papers and technical details, but that’s almost less important than just understanding the story different way of looking at things. You know, I, I came up with, I was, I did this, this magic wand that we can wave over each customer’s head. And a number shows up say, here, is there a potential? And at the end, if you go with that metaphor, that if we can kind of see the potential of each and every customer, we would act differently, we would be less cost obsessed.
We would find ways say, Whoa, what makes these customers different? And what, what else could we be doing with them? Even if it’s expensive or even if we’ll make no money off of somebody, those auxciliary services. So I found it so frustrating that I was pushing this, the idea of create value, don’t just minimize costs and most companies would ignore it.
They would just basically say, well, that’s just not how we do things. And it wasn’t until writing those couple of books that we’ve referred to, or the couple of startups that I’ve had. And I’m not sure how familiar you are with those. those have started to really change the conversation and happy ways, of course, happy to elaborate on that.
Andy Paul: Well, yeah. Well, we’ll get into that because I want to talk. You layouts are the five mistakes companies make when they calculate customer lifetime value. But it seems like a lot of the issue around that is into your point before about obsessing on customer acquisition costs versus lifetime value is data illiteracy. You know, it is, it seems to be sort of a fundamental issue we have, and I see it in spades, in the sales space, not disloyal about cost factors, acquisition and so on, but lots of things. but it seems like that’s at the heart of it is we just, we get this data and it’s like, well, what’s relevant. What’s not.
Peter Fader: Yeah. And that’s so frustrating because again, the data is at our fingertips. It’s so easy to collect it. In fact, so many companies are already collecting it and then just throwing it away. Cause they don’t know what to do with it. Or they
Andy Paul: they draw the wrong conclusions from it.
Peter Fader: That’s right. That’s the conclusions that I wanted to draw before they even looked.
So, so again, that’s a big part of, of the rant over here is that don’t view all that data and the CRM systems and the infrastructure required to collect some wallets. Don’t view those as costs at all. Those are truly investments. Those are the ways to open the door to just a whole new world. So the magic wand that I mentioned before.
And so, so my job as a professor, I don’t like to say this stuff, but to try to make it as easy as possible. So to kind of, whether it comes to the models to say it’s so easy, here’s the code? Here’s videos. Here’s spreadsheets. Here’s just here. Come on. It’s easy. It’s fun, as well as to. Motivate them through these books and through, up through, through, well, you know, interviews like this one to basically say, not only can you do it, cause I’ve seen other firms like yours who have done it successfully.
But you really have to, and that there’s just no way that you’re going to be able to maintain the kind of growth that you’re expecting or that your external stakeholders are demanding. if you just keep focusing on cost minimization, it’s it’s, it’s the path to the future and I want to help lead you there!
Andy Paul: Well, good. We’re glad you’re here to help. And you sort of see an interim step taking place with, with, within the subscription economy now on the B2B side, as this whole move toward account based marketing, which I’m sure you’re familiar with, but even then I hear very few people that are sort of advocates for that saying, well, let’s calculate this customer lifetime value.
Peter Fader: Indeed
Andy Paul: It, they put it, they put a dollar amount, they can sort of hypothesize to it, which doesn’t really have to do with value because they assume value is just purely the monetary aspect of it. And they’re doing it a brute force way is, yeah, we’re going to target these 10 accounts because there’s big companies.
Peter Fader: That’s it. That’s it that’s it. That’s it. So, so you’re talking about lifetime value. The, the, the amount that we really can expect from you is very, very different than just kind of just an overall potential measure. They’re a bigger company, so therefore let’s go after them. Now, I’m not saying we should ignore from size either, but, but if the chemistry isn’t there, then let’s go back to the very beginning. If they weren’t kind of born to love us doesn’t really matter how big they are. so, so we really care about, just, more, when I waved my magic wand, it’s not just telling me about the size of the account. It’s telling me about the strength of the relationship.
and that’s ultimately more important.
Andy Paul: Right. And you define that as customer goodness. Right? As sort of this value, that’s got these three, three characteristics, you talk about preference, propensity and potential. So let’s, let’s walk us through an example of that, of those three things. What it looks like if you’re evaluating an account?
Peter Fader: Well, first, I want to give the history behind it, because again, I’m just really good at stealing people’s ideas and then kind of assembling them together and coming up with some math to support them. I think the real father of these, I just released the person I give the most credit to, is a gentleman by the name of Frederick Reichheld.
And I don’t know if that name is familiar to you, you or, or, or your listeners. but it’s actually real famous guy and, you know why, I’ll tell you why in a second. so basically in 1996, which is, you know, 500 years ago, he wrote a book called The Loyalty Effect that some of your long in the tooth listeners might remember basically said these ideas it’s that basically customers are born with a certain amount of goodness and if you could find those just right customers, then they’re gonna stay with you longer. They’re going to purchase from you more often. They’re going to spend more when they do, they’re going to be cheaper to serve. They’re going to, make more referrals and referrals to better customers. If we can just find those just right customers then there’s this loyalty effect. This virtuous cycle kicks in.
And so it was the idea that not all customers are created equal 80 20 rules. Apart. Want me to just finish the Reichheld story? I’ll give you a lot from Naples. So he spent the late 1990s and early two thousands, trying to find a way, how do we identify. companies that are doing this well or, or very at him, if we’re working with a company, can we come up with a metric to help them identify how good a job they’ve been doing at finding these just right customers versus the many, many, many so-so ones who just happened to be cheap to acquire, but that’s the best we can say for them.
Andy Paul: Or just happened to be there.
Peter Fader: And so Reichheld basically, again, I’m stealing his ideas. He’s stealing ideas from, from other companies, such as enterprise rent, a car and, and others, you and many people will remember him as the father of net promoter score.
Andy Paul: Got it. Okay.
Peter Fader: So, so it’s really important to recognize, and I’m sure that everybody out there knows NPS and uses it in different ways. It’s origins, go back to this idea that if we can find companies that have them much higher proportion of promoters versus detractors. That’s a good company that not only might be doing well today, but has tremendous potential for the future. And a lot of codes work. That’s what it was all about is that NPS scores are changing.
The NPS scores are indicator of future profitability. Very much aligned with some of the things I’m talking about with lifetime value. So, so let’s give credit where it’s due. and, and every time folks are out there doing the net promoter score thing, and sometimes companies grow to hate it because it’s now, you know, sort of imposed on them.
Andy Paul: And they’re doing it on a transaction by transaction basis with customers is drive the customers nuts. But yeah, go ahead.
Peter Fader: And that’s not the point of it. It’s just to kind of gauge the overall health of the customer base. And so basically there’s a number of companies out there that either got this initially. And that’s why I want to point to the ones that, that Reichheld, and now his kind of more recent partner in crime, Rob Markey, also of Bain. So they’ve been doing just a fantastic job of both pointing to companies that have been doing it well of talking about how to create the right kind of internal corporate culture to make this happen. And as case studies of companies that have gone through that transition. So, so they’re, they’re doing it in a, in a, in a kind of a broad NPS way.
I’m doing it in a, I don’t know, let’s say now we’re more technical CLV way. but they’re very much aligned with each other. and in fact, the way that you would create that corporate culture and the organization structure and so on would be pretty similar. Regardless of which one of those metrics you’re talking about.
And so it’s been really interesting to watch companies go through that transformation or stick their heads in the sand and say, nah, I’m good. I’m just going to focus on cost minimization. so in my first book, I took to task a bunch of retailers. for being how did as customer centric, but really being that way.
and in the 10 years, since then, it’s been wonderful to see how some, but not all of them have actually changed their ways. So a really great one was with Starbucks, for instance, where, you know, for them, it used to be all about coffee. You know, their founder, Howard Schultz. He was a coffee guy. It was all about what’s the right roast we should be using or.
Maybe should we have a breakfast sandwich or not, but there really was no detailed view of how the customers differ from each other. So just be nice to the customer and to watch the way that they’ve transformed. And as many, many, many of the listeners would know. The things that they do with their, with their mobile app.
there’s a lot of the changes to the overall customer experience, the way that they’ll kind of reward and inform you. A lot of that is by understanding, appreciating, celebrating the differences across customers and to try to be differentially appealing to the ones who have truly the most value. So, so a lot of really good examples.
So of, of companies going through the transformation, others struggling. and many, many, many others who were just starting to take the baby steps down that path. And it’s, it’s really interesting to see where it will all go and how all this COVID stuff will either accelerate it or inhibit it for different kinds of companies.
Andy Paul: Yeah. Well, I think, I think one of the big disconnects is when people talk about customer centricity or being customer centric. I think about it from the perspective of the buying experience, almost exclusively rather than, as, as you described us, is how do we take this data and use it to inform how we develop new products, how we implement our services in a way that is a value to the higher value customers.
Peter Fader: Such an important point. You know, so much of it, the customer centricity stuff ends up being just locked within the marketing organization, and, companies either unwilling or unable to talk to their partners and other parts of the organization, such as R and D such as supply chain and in particular, such as finance.
To get them on board with it. So it ends up being the marketers and I don’t, I’m not being critical. I’m just lamenting the fact that it’s not done more broadly. So it’s the model kind of doing the right things with the things that they have direct control over, but there’s still a big disconnect with the other parts of the organization and its operations.
So that’s, that’s really big. If we can’t win over the other C level people within the organization, I don’t want to say it’s not worth trying, but we’re not going to have the kind of success that we might want to achieve. So, so that’s it. It’s how do we win over the other C-level people? And so, for instance, I’m happy to talk more about it, later on. But, the thing that I’m focused most on these days is the idea of customer based corporate valuation.
Let’s win over the CFO. In fact, let’s start with the CFO. And if we can show the CFO that these 80, 20 rules are real, and that there’s all this potential value locked into our customer base. It’s not showing up on the balance sheet or the income statement, but it’s there it’s real, it’s tangible. We can actually take you to the bank. If we can win over the CFO, then winning over the C M O and everybody else is actually going to be pretty easy. And so that’s the angle I’ve been focusing on most recently.
Andy Paul: Which is a great angle. Cause when you think about the way most companies approach this in terms of deciding what they want to do from a product standpoint, it’s like, well, let’s look at the Tam, right? Let’s look at the total value total available market and what you’re really saying as well. No, our total available market really should be driven by the needs and desires of our most valuable customers.
And that’s a much narrower segment than our Tam, but yet, you know, I work with a lot of companies, startups and so on. It’s that’s always the thing that, well, the VCs, same thing, right. Or am I gonna invest in this company? It’s never the conversation about the highest value of customers and how we exploit those, it’s yeah we want to know what the best use case that’s great. But then how many people have that use case?
Peter Fader: That’s right. That’s right. End of the, so the VCs, here we go again, baby steps. you’ll see some VCs talk about that. Something like the LTV to CAC ratio. So what’s the average lifetime value relative to the average cost per acquisition. And I’m not criticizing that. That’s actually a, it’s a nice step forward compared to where we were 10, 20 years ago.
But the problem is not all customers are created equal. So you can’t just tell me what the average LTV is, right? I got to know what the distribution is back to the 80 20, you know, is there this, this big, is there a spike of customers way out there who would go through the Gates of hell to stay with us?
Even if every other customer is just kind of air, as long as you have enough of those customers. Here we go again, the promoters, don’t tell me about the average. Tell me about the size, the nature of that group. and that that’s going to be so informative to me. So I really need to have statistic. It sticks on how the customers differ.
More so than just telling me about the average one. And that’s a really hard concept for marketers to get, you know, averages is pushing it far enough, not things like spreads and variances, but.
Andy Paul: it’s funny, you bring that up because I’m just, at this time I’m rereading Daniel Levitans book, Field Guide to Lies, which is, you know, talking about the disaster of relying on just purely mean and median distributions as a making decisions. Well, so these three categories of customer goodness, cause we’re, you know, keep talking about the promoters.
So, you know, the preference which you talk about is the degree to which your offering aligns with the customer’s needs. propensity, which obviously is the promoter and then potential future value. How do you, if you’re relatively new to the market or you’re, you know, you’re introducing a new product or whatever is, is, how do you, I understand how you measure those in retrospect. Right. But how do you measure them proactively?
Peter Fader: Yes. Yes. Well, well let’s, let’s, let’s start. So, here we go again, net promoter score. It’s kind of a nice way to begin before we have.
Andy Paul: What if you have no history, what if this is, you know, I’ve got a new product launch and we’re, you know, we think we’ve targeted a new set of customers. I don’t have a history of net promoters NPS with them.
Peter Fader: Sure. Sure. So, and so what I’ve seen a lot of companies doing, there’s a lot of really good research on it, at B2B, as well as B2C, would be looking at different kinds of purchase intention scores. This is something that all companies would do all the time, whether or not formal informal basis.
So. No, would you buy this or what would you pay for this? and once again, the problem is they’ll, they’ll look at that. They’ll average it out and they’ll say, you know, version a seems to be more broadly appealing than version B. But what they’re failing to do is to, is to find out, is there this kind of, you know, core solid group of people that would do anything to have it.
So, so it’s, it’s great to do different kinds of purchase intention, types of assessments, but it’s really important to look at the spread among them. Not just the mean, so we could have some kind of a product that’s slightly less preferred than another one. but it’s, it’s, it’s, it’s beloved by that, that, that core segment.
So, so looking at the spread of these things, then using that to try to identify, so who are those customers out there who would do anything would line up around the block to have this? What makes them different in terms of their demographics and their behaviors? And then what other kinds of features should we be thinking about to bake into this product that would be.
Disproportionately appealing to, to those kinds of customers. So it’s not that hard. It’s just that most companies don’t really have the, I don’t say the discipline, they just don’t have the training to think along these launch.
Andy Paul: The whole idea about the distribution though, is if you’ve got something that’s, that’s seems slightly out of the main focal point or focal range of, of what they’ve been thinking about. Yeah. There’s no supporters for it. Right. Cause everybody’s in love with sort of hey, we just developed this great feature set and you know, everybody’s gonna love it and here’s the TAM and let’s go March down the path to it.
And, but your point is, yeah, we’ve maybe over in this side of the range and the right side of the range, yeah, we’ve got this one thing that these people killed to have this product and yeah. Maybe it’s not as big of a group, but yeah, we want go after the big one.
Peter Fader: Yeah. And so I’m going to tell it’s very important to tell the electronic arts story. And even though it’s a, it’s a pure B2C company, mobile gaming, and it’d be really easy for listeners to say, well, that’s not us, but if you had just have the, the, the, the perspective that, that EA and other companies have had. And again, the discipline to actually follow through it. It’s multiple story. So they calculate customer lifetime value again, for now. Let’s not even worry about the technical details, even if you did net promoter or just, you know, some kind of customer happiness, fine, whatever. But, but let’s look very carefully at those customers who are either most valuable or most happy or whatever, say what, what makes them different and then start to do everything. So for instance, when EA develops a new game, You know, for most companies it’s how many copies of this thing did we sell? That’s how we judge success of a new product. You just say no, no, no, no, no, no, no. And the analogy that their former chief analytics officers, Zachary Anderson gave me, cause he said, suppose we come up with a new game and we sell a ton of copies of it, but it’s also a bunch of people have never bought from us before and never buy from us again, how much ongoing value have we created for our shareholders? Nothing. Whereas we come up with another game, we still have as many units, but it’s the people who will then buy more stuff from us, or it helps us acquire customers. So great ones that we wouldn’t have known about otherwise. Then the value of that game is going to be, you know, 10 times greater than the first one. So let’s take into account this customer goodness, happiness value when it comes to R and D. So instead of going to the R&D people and say, Hey, R&D people come up with the next cool thing that everyone I was going to buy it’s Hey, R&D people, we have the sense that these are better customers over here. Come up with something for them. That goes against the grain of every company on the planet. In fact, for most companies, the R&D people would be offended by that. If senior management told them to try to narrow down their creativity. So, so much of the success of EA or the other companies has been to get the kind of buy in that alignment with R&D people for them to understand. Why they really ought to redouble their focus on certain kinds of customers. It’s not easy to do that, but when you get it right, great things can happen
Andy Paul: Well, I think that the key thing that came out of that story for me is in the passage I underlined when I was going through that was that they created a new set of standardized metrics that basically gave them this information they could make decisions from, right? And that, to me, that was like, okay, well, that’s it. Right? That’s what you’re really trying to strive for is if you want to be able to identify who these customers are and what you can do for them, you have to have the right metrics.
Peter Fader: And now I want to talk about the metrics. This is so important. So important is for me the metrics. Again, I I’m fine with net promoter score, but I want them to be metrics that you can actually put on your balance sheet in your quarterly filings, if you’re a public company or things that if you’re private, but you’re thinking one day of going through a little bit of M&A dance, the kinds of metrics that you ought to be showing to your investors, that they ought to be demanding from you.
So, as I mentioned a few minutes ago, I’m really pushing on this idea of customer based corporate valuation. CBTV in fact, we just got a trademark on those words, and we actually wrote a letter to fast speed, financial accounting standards board, you know, today’s financial statements look like they did fine 500 years ago in an era where we couldn’t tag and track or recognize the value of individual customers. Lets change that let’s come up with specific, easy to measure universally sensible, metrics that ought to be included, in, in, in filings. and it was really cool that just last week, the FASBI folks called us off and said, let’s talk more about this.
Andy Paul: so give us an example, what that would
Peter Fader: starting to take these ideas seriously, which is great. Right. And so, so, so I’ll just give you an example.
Some of these metrics are not mindblowing. Things like how many active customers did we have this quarter? Oh, there was how many customers bought something from us? It doesn’t mean that’s our entire customer base. The B2B setting. Sometimes the purchases are really spread out. How many active customers did we have each and every quarter.
And among those active customers, how many total orders did they place? How many, what’s the average number of orders they placed? These are two very innocuous measures, most them, so you’re sure fine. If you want that. I’ll give that to you. I can get that right out of my transactional apps. No problem. turns out that if you give me those two metrics over a number of quarters, it’s surprisingly easy for me to reverse engineer the future lifetime value, and the distribution of them across the customer base.
It might sound like magic, but it’s, that’s my job is just to kind of do the math to show that if you give me the right inputs, the right customer metrics going in that I could give you the right outputs that will let you better drive your business and evaluate the success of the campaigns that you’re running.
So I’m really pushing hard on the metrics conversation, trying to get companies, investors, and regulators to start bringing some of these marketing metrics into the picture. It’s too early to declare victory, but I’m really pleased by the progress we’ve seen so far.
Andy Paul: Yeah. Well, a company like Apple would hate that. Cause the way they report iPhone sales is on a cumulative basis as opposed to a period basis.
Peter Fader: It’s so funny, you talk about that because that’s another one of the companies that I was kind of critical about in book number one, say to everyone, you know, Apple loves us, but the factors that Apple does, I don’t really know much about their customers. You know, they have plenty of good data available, but they don’t really make it a priority to do much with it.
And so I’m actually going to be releasing a new version of that original book, I mean, out in a couple of months. And, and I basically say Apple has made effectively no progress, over the 10 years since then every other company that I mentioned again, focusing on retailers, not to say it doesn’t apply more broadly, has, has made progress. Walmart, Nordstrom, Costco, all these other companies that are, that I talk about. Apple is kind of in a rut. And that’s a problem because they’re, they are a great company. I’m not denying that. It’s just that they’re not doing any kind of best practice work in this direction of customer centricity.
And so too many companies aspire to be Apple. Right. They want customers lining up around the block for the new product that they know nothing about, but they’re never going to be Apple. And so instead they should be chasing after the companies that are being a little bit more open-minded, data savvy and thinking about these kinds of issues, maybe not made obsessed with them, but being at least cognizant of.
Andy Paul: Alright, well, I want to touch before we run out of time, here is, is been alluded to earlier, said there are five mistakes companies make in creating their customer lifetime value, calculating their lifetime value. And there are a couple there that I thought were really interesting, but we’ll just run through them all quickly.
You just had the first one was not accounting for the status of the customer. So what did you mean by that?
Peter Fader: So it’s something that we referred to at the outset, which is, are we in a contractual well setting or not, or is it some kind of hybrid setting where it’s part contractual part, not like Amazon prime. so like you said before, it’s kind of easy to think about this stuff in a, in a subscription setting where we know what the customer is doing with us.
We know when they leave and then basically to either ignore. The non subscription setting or to try to make it look subscription, even though it’s not. So, so that’s what I’m talking about is that there’s different kinds of business models, different kinds of customer relationships. The biggest distinction to me is the, is that the presence or absence of some kind of subscription thing, but even when we don’t have habit, we can still do this stuff. It’s just, it’s just a little bit harder.
Andy Paul: Okay. Another one, which I thought was very interesting and relevant to what we’ve been talking about is believing customer retention rates remain the same.
Peter Fader: Yeah, it’s so important. But when we acquire a group of customers and this is going to be true, B2B, B2C, product services, domestic international, we acquire group of customers. There’s not The Retention Rate will actually always see retention dynamics that if you look at a group of customers, I want every company to do this, but we’ll look at all the customers that you acquired in say let’s say January, 2018. and especially in a, in a subscription setting, I ask yourself how many of them, renew there’s subscription from, you know, let’s say, you know, one month to the next, and then the next month or the one after that look at the month over month retention rate. And what you will notice is that those retention rates tend to go up. So we acquired a thousand customers and we, we, you know, 650 of them are new and then 400 of them renew. And then 300 of them are new. They’ll notice that those period over period retention rates go up and then you say, aha, this is great. We’re building relationships. They’re learning to love us. We’re learning to meet their needs, but very often these retention rates are going up simply because of a shakeout. We’re losing the so-so customers, they, you know, they try to, eh, not so good there. So basically the customer base is kind of reshaping itself, narrowing itself just into those loyal delicious go through the Gates of hell customers. And so there’s very important retention dynamics that take place as a customer base reshapes itself. So, Hey, it’s important to anticipate that and be it’s important to learn from that because that’s going to give us really good information about how big that juicy segment is and how different they are from the others.
Andy Paul: Which leads to the next point is, as you said, talking about believing your customers are normal. It’s a mistake.
Peter Fader: That’s right. That’s right. So, so once I get people to, to agree. Okay. Okay. Okay. Not all customers are created equal. Then they go back to that horrible math or statistics course that they took, you know, as a freshman in college vowing, never to touch that stuff again. And again, all your listeners are going to remember the good old, normal distribution, bell shape distribution, and where we’re, we’re kind of told by our professors and other experts that everything is bell-shaped. Well, it turns out that when we look at differences across customers and we look at customer goodness, net promoter score, lifetime value, it’s it’s anything but that, and the, the shape of the distribution is very, very, very different.
There’s a whole bunch of people who are ehhh. And then there’s this long, thin tail of customers who, you know, there aren’t many of them, but boy are they valuable? So it’s very important to understand, the, the, the nature of the, of the spread among customers and how that’s different across our business units, our geographies, and when we do campaigns and when we launch products, which parts of the distribution is it most appealing to?
So it’s good. I’m getting a little technical here. I know people’s eyes, you know-
Andy Paul: Still, but it’s a great point as
Peter Fader: It’s important.
Andy Paul: Right. We don’t want to generalize. And that the thing is we have the data, why would we jump, continue to generalize? Right,
Peter Fader: That’s exactly right.
Andy Paul: right. Cause we can, we can find these distributions and I, and the last point I wanted to get to on that is, is explain to people, cause you said there’s a, a non-financial. You know, component of this valuation. So how do you, how do you, how do you value that? How do you weight the nonfinancial part of and explain what that part is and how
Peter Fader: I started to explain what it is because in many ways, for a data oriented guy like me, it’s almost my Achilles heel because I want to, it’s so easy for me to work with transaction log data. It tends to be very clean. It tends to be very standardized across companies. It doesn’t change much over time.
So I love transactional logs. But I have to acknowledge that a lot of the value that customers bring is it doesn’t necessarily show up directly in production logs. So it could be things like social connections. It could be that some people don’t necessarily buy a lot of stuff, but they talk about us a lot.
And so they bring value just by getting others, to either be acquired or to buy more with us or to stay with us longer. And that’s a little bit harder to measure. It’s going to be a lot more kind of context dependent than just saying here is the social score. so, so, so a big part of it would be social, but also in many other settings.
there there’s more to value than just dollars and cents. And they’re really, really good example would be, let’s say when we’re talking about, healthcare, different kinds of, healthcare products and services, you know, if you’re, if you’re a hospital, you, you gotta be really careful about measuring people purely on the dollars that they bring to you.
so we really should be measuring based on, on outcomes. Like, are we improving your life? You know, are we. Letting you live longer and have more satisfaction in your activities. It’s very often those two things, you know, quality of life and money that you spent with us could be at odds with each other. So and so in many settings, there’ll be other kinds of metrics that will be as if not more important than just the financial stuff. Again, those are going to differ very much from one situation to another, but that doesn’t mean we shouldn’t account for them.
Andy Paul: Yeah. And I think when you’re talking to the healthcare in particular, you were sort of, I think you’re sort of making the point is that at that point, really the values of the organization come into play because yeah, if you’re gonna focus on people that have expensive end of life care, as opposed to extending life, you know, then, then you’ve got to serve a values issue, right. As an organization
Peter Fader: think it was raises a really important caveat, not just about the calculation of lifetime value, but about this customer centricity stuff in general, it’s not for everyone. So if you’re in a company where picking and choosing is a kosher thing to do, it’s fine to say we’re going to look more at some than others, but if you are in some setting where that would just be ethically wrong.
Like, if we’re talking about a health services delivery or pharmaceuticals or, or different kinds of municipal services, the last thing we want would be for, for government to be picking and choosing some citizens over others. So there’s a lot of of settings and including some, you know, regular business ones.
Where just the, the, the, the need to, to, to be there and to be responsive to everyone might outweigh the benefit of just finding those people off there. Oh, over there on the right tail. and so I don’t want to say that, that these principles, practices and methods are for, for every organization, right.
They’re definitely better served in things like, you know, mobile gaming or travel and hospitality, where it’s more of a discretionary and then ones where it’s really important to emphasize, kind of, you know, inclusion, as, as much as it is to attempt to size profit.
Andy Paul: Right. Well, I think they’re very applicable though for a lot of the SAS world, because again, it’s, we tend to do it as a brute force thing. Right. They’ve got 500 seats. Therefore they must be good, ipso facto, when, to your point. Yeah. That’s not really the case. If you really want to grow a sustainable at a sustainable rate, then you have to look at other attributes.
So, alright, well, Peter we’re unfortunately run out of time, but it’s been fantastic talking to you. How can people find out more about what you’re doing?
Peter Fader: Well, I w easy thing is to Google my name and you’ll see all kinds of crazy activities going on. As I mentioned, in addition to all the academic work and writing the book, I had these two startups, one of which was a company Zodiac, that we sold to Nike, but the current one, a company called Theta Equity Partners. I’m working with a lot of, of, public and private investors to show the value locked into their, their customer basis, and then to get the marketers, to give them the license to actually act on it. So a lot of the case studies that we’ve done there have been a really instructive, and we really want to see, not just finance people, but, but marketers as well. I take advantage of some of these ideas and build bridges within the organization.
Andy Paul: Perfect. All right, Peter. Thank you very much for joining us.
Peter Fader: My pleasure. Thanks. Great questions. And I’d be glad to follow up with you or anyone else is interested in this
Andy Paul: Okay. Thanks a lot. Talk to you soon. Bye.