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In this episode of Customer Service Secrets, Gabe Larsen is joined by Peter Fader to discuss the different types of customers and how to have customer centricity. Peter is a professor in the Marketing Department at the Wharton University of Pennsylvania. He also consults and works in many different markets, from telecommunications to financial services. His most recent startup, Theta Equity Partners, helps organizations evaluate their worth based on the worth of their customers. Peter’s philosophies are centered around the lifetime value of customers and sales forecasting for products. His ideas are new, innovative, and are bringing about positive changes in the industry. Peter is also the author of the book Customer Centricity: Focus on the Right Customers for Strategic Advantage and its principles are the focus of the discussion in this episode. Listen to the full podcast below.
Not All Customers are Created Equal
Most organizations are focused on making sure that every customer is happy, satisfied, and motivated to continue buying their product. While this is a good focal point, customer service and customer treatment cannot be “one-size-fits-all” because all consumers are created differently. While equal treatment is normally the goal, Peter suggests the opposite to help businesses grow. He states, “we’ve got to really focus more on . . . the right customers, on the ones that we project to be more valuable. And by investing our marketing and other assets where the value is going to be generated, we will do much better than the kind of one size fits all . . . practices that we’ll see [from] a lot of companies.” Peter further mentions that by creating different levels for customers, they will get the treatment they want and deserve.
Questions to Determine How to Segment Customers
Determining the type of customer treatment starts with evaluating customers and determining how their worth can contribute to the worth of the company. Instead of segmenting customers into groups according to demographic, organizations need to look at the worth that a customer could bring or the amount of time they are projected to stay with the company. Peter states that these behavioral patterns are the best way to segment. The following questions are suggested by Peter to determine the lifetime value of customers.
“How long is this customer going to stay with us? Over that horizon, how many purchases will they make? And how much will we earn off of them on each of those transactions?” Companies who make decisions based on the value and behavior patterns of their customers separate themselves from other companies and they will see more success.
The Link Between CFO and Customer Valuation
For the rest of the podcast, Peter and Gabe discuss the importance of the finance department in a business, specifically the role of the CFO. Most innovations or new ideas are stopped by the finance department. However, with Peter’s model of seeking out the value of the consumers, it creates more hard evidence and space for the finance department to get on board. Peter recalls:
“If we can show the CFO that she can do a better job of valuing the entire company from the bottom-up, by projecting the number of customers they are going to acquire and the value that will derive from them, and go to Wall Street and say this is what we’re really worth, then we’re going to win her respect and then it’s going to spill over across the organization. And we’ve been doing that for real and it’s been amazing how well that’s been working.”
Peter’s “customer-based corporate valuation” tactics are winning over CFO’s and helping companies evolve and do more for their customers. By linking all these different corporate aspects, with the focus on customers with predictable behavior patterns and differential treatment, companies are innovating and expanding. It is a successful new model of thinking and as Peter said, “[it’s] been working.”
To learn more about customer centricity, how to focus on the right customer and what to do about it, check out the Customer Service Secrets podcast episode below, and be sure to subscribe for new episodes each Thursday.
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Full Episode Transcript:
How to Focus on the Right Customers for a Strategic Advantage with Peter Fader
Intro Voice: (00:04)
You’re listening to the Customer Service Secrets Podcast by Kustomer.
Gabe Larsen: (00:11)
All right. Welcome everybody to today’s podcast. Today we’re going to be talking about customer centricity. And to do that, we brought on Peter Fader. He’s currently the professor of marketing at the Wharton School out there in Pennsylvania. He is also the co-author of a couple of books. One that I actually ordered when I reached out to him called Customer Centricity, focusing on the right customers for strategic advantage and he also advises some startups. So, a man of many talents. Peter, thanks for joining. How are you?
Peter Fader: (00:37)
Oh, I’m doing great Gabe. Good to talk to you about this topic and other related ideas.
Gabe Larsen: (00:44)
Yeah, yeah, I love the idea of customer centricity. I did a little bit of an intro. Anything you’d add or explain as far as your background, some of the fun things you’re working on?
Peter Fader: (00:54)
Yeah, in addition to all the academic work, which is the day job, developing models, professing to others. Not only advising startups, but I’ve actually co-founded a couple of startups to take these ideas and methods and bring them to life at full commercial scale. So what we’re going to talk about here might seem a little radical, might seem unconventional, but it’s proven and it’s been quite successful so far.
Gabe Larsen: (01:20)
I love it. I love it. Interesting. Well, let’s dive right in. Start big picture for us. I mean, people use different words, customer engagement, customer service, experience. You talk a lot about customer centricity, big picture, what does it mean to you? How do you define it?
Peter Fader: (01:35)
Yeah, I have to tell you, Gabe, it’s a very bad choice of words and I mean that sincerely. I look back at the book, which has been very, very good. It’s sold a lot and people have been, like yourself, have been reading it and intrigued by it, but the title doesn’t do justice to it. In fact, I think, I don’t know if you have a copy of it in front of you right there, but Gabe what’s the subtitle of the book? That tells us what it’s all about.
Gabe Larsen: (01:59)
Yeah. Yeah, it does say here it’s the focus on the right customers for strategic advantage. Does that, that’s kind of where you’re at.
Peter Fader: (02:06)
So we’re talking about exactly the idea that not all customers are created equal. And it’s not just a matter of being centered around the customer. It’s rather being engaged with, intimate with, responsive to, providing experiences to, the customer and some faceless, nameless, one size fits all way. It’s recognizing the vast differences across them, the disproportional value that some bring. Say, we’ve got to really focus more on those, on the right customers, on the ones that we project to be more valuable. And by investing our marketing and other assets where the value is going to be generated, we will do much better than the kind of one size fits all we love everybody, kind of practices that we’ll see for a lot of companies.
Gabe Larsen: (02:59)
Interesting. So do you feel like — certainly, we, I think for a long time we’ve operated in the world where we all treat customers kind of the same way. It’s that vanilla-type experience. What are the challenges for trying to do this? To actually get to a place where you treat customers either the way they want to be treated or specifically based on their need?
Peter Fader: (03:23)
That’s is the challenge and that’s what keeps me gainfully employed, keeps me in the streets. The challenge is to recognize or at least project what each customer is going to be worth in the future. See, too often we base our customer management strategies either on the past like what did they do with us? Or on totally irrelevant cues. Like are they millennials or gen Xers, or demographics? The real way to value manage your customers is based on, what do we think they’re going to be worth? In other words, how long do we think they’re going to stay with us? How many transactions are they gonna make over that horizon? How much are they going to spend? How much margin are we going to make? In the old days, it was impossible to do that. You couldn’t tag and track and project your customers nearly as well as we can do today. And so we wouldn’t even go there and anyone who would try to do it would be laughed out of the room. But today, given the kind of data that we have, given the kinds of analytics that we can lay on top of it, and given the kinds of technologies that then let us serve up different kinds of experiences, and products, and messages to different kinds of customers based on their value, we can do it; and it’s now a strategic imperative to do it. That’s the idea that I’m pushing.
Gabe Larsen: (04:40)
Wow. Wow. Interesting. If you just had to say, I mean obviously it’s your point, you’re gainfully employed, what percentage of companies are doing this to a level that you would say is, these guys are doing it world-class Gabe? Is it 5%? Just kind of a guesstimate on how the market is reacting to this, so to say.
Peter Fader: (05:03)
That’s a very interesting question that we got to ask. Where are we going to draw the line? Are we going to draw it at world-class? Are we gonna draw it at adequate to keep up with the changing times? So let’s, let’s first be a little bit more modest and talk about just those who are keeping up.
Gabe Larsen: (05:20)
Yeah. World-class is maybe… Yeah, that’s fair. That’s fair. Yeah, go ahead.
Peter Fader: (05:26)
And I’m happy to talk about world class too. It’s just that there aren’t a lot to talk about. And, the issue is this, and it’s an issue that comes up every podcast you do, every conversation you have, Amazon. And the funny thing is that even though Amazon touts itself as being the world’s most customer centric company and they’re not bad at it, that’s not their thing. Their thing is operational efficiency. Their thing is just being able to stock a lot of stuff, get it to the customer real quickly, keeping the prices low. They are operational efficiency, just incredible. They make an operational efficient firm like Walmart or Toyota look like they’re terrible. But, the amazing thing about Amazon, what really sets them apart, isn’t only that they turn the crank better than anyone, but in the process, they’ve also raised the bar on these ideas of customer engagement, intimacy, responsiveness. So Amazon is just a paragon of operational efficiency. And in the process they’ve actually raised the bar on all this — what we ever want to call it, customer centricity, customer engagement, customer intimacy, responsiveness — to the point where even though that’s not their truly main goal, it just arises as a side effect, a spillover from their operational efficiency. And, it makes it impossible for every other company to keep up on either dimension. So again, even though that’s not really what they do, although they’d like people to think about that; companies need to at least be at that level of understanding customers, how they’re different from each other and how the kinds of services and products that we put out there are going to be reasonably responsive to their differential wants and needs. And most companies are just really bad at it cause most companies, most retailers let’s say, are just chasing after Amazon on the efficiency side and not even coming close. And so they’re falling way behind on these other dimensions.
Gabe Larsen: (07:36)
Fascinating. Fascinating. Do you feel — so going again is a little more tactical then. So, you’ve talked about some of the tagging capabilities that allow people or brands, companies, to start to do this idea, start to treat people slightly different. What are the most typical or the recommended ways to segment customers? Sounded like there were some bad practices; millennials for example.
Peter Fader: (08:02)
Yeah.
Gabe Larsen: (08:02)
Sounds like there’s some good practices
Peter Fader: (08:04)
There are. Well that’s again my thing is, let’s not segment people based on what they look like. Let’s not segment people based on necessarily what they’ve done or where they live or any of that. Let’s segment people on a good guess of what they think they’re going to be worth. Or, on the dimensions that are one level below that. So, like I said before, I focus on customer lifetime value, the overall future value of a customer; and that’s the Holy Grail. That’s the gold standard. That’s the best way to do it. But, that’s also, for a lot of people in companies, it’s kind of hard to get their brain around it. So, let’s just knock it down one level and, and break it down into the three or four dimensions that I mentioned before. How long is this customer going to stay with us? Over that horizon, how many purchases will they make? And how much will we earn off of them on each of those transactions? So, those three dimensions, that’s the basis of it. So, Hey, look, we’ve got some customers over here and they’re going to stay with us for a long time, but they’re not going to spend very often. We have some customers over here and they’re going to be come and go. But, when they’re with us, they’re going to spend a lot. And we have some customers over here who, well, they’re not going to buy very often, but when they do it’s going to be giant, giant purchases. So we want to segment people on these relevant behavioral—
Gabe Larsen: (09:34)
Behaviors, yep.
Peter Fader: (09:34)
—topics and we’d like to do it with an eye towards the future as opposed to the past. The past isn’t terribly misleading but it might be a somewhat distorted view of what they’re going to be doing as we move ahead.
Gabe Larsen: (09:50)
Now do you feel like, so once you’re able to segment based on some of those things and I love the idea like lifetime value for example, is the Holy Grail. That’s a great one. Do you, what is, how do you do it differently then? I mean, now that I know this, now that I’ve segmented it appropriately and I’ve got to use some different methodologies, technologies to potentially do that. Is it the more experienced agents? Do you do kind of the gold level, the gold standard experience for the bigger lifetime value customers? Finish that piece of it. How do you –?
Peter Fader: (10:21)
Sure thing. okay, let’s do it. Sure, so once we have our lifetime value magic wand and we wave it over each customer’s head and we see that number shining, then we put them in buckets based on, let’s say high, medium, low. So, you just mentioned the most obvious thing, which is let’s create the presidents, gold, metal, blue ribbon, red carpet club. Let’s give them this special 1-800 number. Let’s check in with them every now and again, make sure they’re happy. So that’s kind of a given. And a lot of companies get that even if they don’t do it particularly well, they don’t use the right basis segmentation or they don’t go far enough with it. So that’s step one. But when I’m looking at some of the best practice companies, it’s amazing how far this differential treatment will spill over.
Gabe Larsen: (11:08)
Yeah.
Peter Fader: (11:08)
So, a really good example would be, it should spill over all the way to product development. So instead of going to the R and D people say, Hey, R and D people come up with something cool that we’re going to sell a lot of. No, it’s, Hey R and D people. We’ve got these really valuable customers over here. Come up with something for them. We don’t mind if other people buy it too, but job one is to make sure that we maintain, enhance, extract the value from those really good customers and acquire more like them. So let’s come up with not just awesome products that will be good to the masses, but that will be especially appealing to the valuable customers. Let’s really double down on and give them differential treatment, not so much when it comes to customer service, but even when it comes to designing products in the first place.
Gabe Larsen: (12:01)
Wow. So basics on that front is, well maybe basics isn’t the right word, but foundationally speaking, yes, do the red carpet, blue ribbon type thing, 1-800 number. The next level on top of that is to actually sit down and say, from a product standpoint, how are we delivering something to that group that keeps them close to us and grows the relationship? Interesting.
Peter Fader: (12:25)
Of course, I endorsed what I just said, but I wouldn’t necessarily call that the next level.
Gabe Larsen: (12:31)
Oh, okay.
Peter Fader: (12:31)
It’s kind of a far off level.
Gabe Larsen: (12:33)
Oh, okay.
Peter Fader: (12:33)
So the first level is just to do it purely on the direct marketing and then customer service side. The second level would be to do it, let’s just go one step away from marketing. Let’s go to sales. So when we’re interacting with our sales people and when we’re incentivizing our salespeople, let’s encourage them not just to bring in as many customers as they can as cheaply as possible; let’s incentivize them to go after the valuable customers.
Gabe Larsen: (13:01)
Okay.
Peter Fader: (13:01)
Let’s use lifetime value as the metric to guide and gauge their activities. Which salespeople kind of like. They don’t want to just bring in customers. They want to build relationships.
Gabe Larsen: (13:13)
Yes.
Peter Fader: (13:13)
And so let’s use these lifetime value metrics for sales as well. So that’s one step away from marketing and then maybe the next step away would be on the supply chain. So as much as we want to deliver things quickly and cheaply to everyone, we’ve got to make sure that we get the stuff to the good customers in a way that’s even going to be fast and really reliable. So let’s tip our supply chain a little bit more towards them. So basically we take these ideas and have them diffuse through the organization one step at a time and product development is several steps away. And sometimes there’ll be a lot of pushback from those folks, but if we can win over enough parties within the organization. Now for me, the ultimate partner that we want to have would be finance. And all too often, the folks in finance are really, really skeptical of, if not downright disdainful of what’s going on in marketing. And so that’s been a Holy Grail for me personally, that’s been over finance and that’s what I’ve been doing lately and a lot of my recent research and my newest startup; the idea of customer based corporate valuation. If we can show the CFO that she can do a better job of valuing the entire company from the bottom up by projecting the number of customers they’re going to acquire and the value that will derive from them and go to Wall Street and say this is what we’re really worth. Then we’re going to win her respect and then it’s going to spill over across the organization. And we’ve been doing that for real and it’s been amazing how well that’s been working.
Gabe Larsen: (14:49)
Wow man it sounds like you’ve got your hands full, project here, project there, project there, project here. Ultimately, so this finance thing that you just talked about, maybe just one more click on that. So just bringing it all together, you get this kind of customer centric message and this customer, prioritization engine or model working and you’re really starting to focus on this as a strategic, go to market, what, what does that do different for the organization? Maybe that’s an obvious question, but are you seeing that, end outcome, you know, valuations are higher, end outcomes, the NPS scores are bigger, better, it’s lifetime value grows? All of that?
Peter Fader: (15:35)
All of the above. I’d be happy to give you the specifics on it. So, one thing just from a spreading of the gospel, like we said, we’re going to start with marketing, more over sales [inaudible], and so on. Once we get to finance, then these ideas, these practices, spread like wildfire through the organization. At that point, all of this — once the CFO nods their head and says, yeah, I’m on board with it, then all the other C level people are instantly bought in. I mean, let’s just face it. That’s the power and respect the CFO has in the organization. So it just helps spread the ideas. That’s number one. Number two, all of the stuff, the idea of building relationships for the long run instead of trying to squeeze as much money as we can out of our customers today goes against the grain of traditional Wall Street valuation procedures. It’s really hard for a company, for a CEO to stand up in front of Wall Street and say, trust me, our quarterly numbers aren’t that great, but just wait till what they’re going to look like in two years. But once you have this lens of customer base, corporate valuation, you can actually go to your external stakeholders and say, look at these customer assets. Maybe they’re not showing up on our balance sheet, but they’re real and hold us accountable for them. It’s a kind of thing that Jeff Bezos has been doing informally for for years, but now we’re showing how to do it formally where we’re really working with companies directly, with investors and saying, here are those future looking numbers. You should share them, you should hold yourself, and me, accountable for them. And it works.
Gabe Larsen: (17:14)
Yeah.
Peter Fader: (17:14)
So you get the external buy in as well and it really gives a jolt to these ideas that, I hate to say it, that no internal marketing activity can ever achieve.
Gabe Larsen: (17:29)
Wow.
Peter Fader: (17:29)
So this is something I had never thought about. Like again, if you looked at my first book, there was never this notion at all, but the key to finding success in customer centricity is win over the CFO first.
Gabe Larsen: (17:41)
I love that. I love that.
Peter Fader: (17:43)
Again, this is what I’m seeing. So if you look at my new startup company called Theta Equity Partners, thetaequity.com, it looks like a straight investor play and working with private equity firms and others, just to basically show the value of the customer base or the companies that they’re working with. We’re trying to make it distinctively appealing to them about, again, once they see the value of it, then they start to ask these questions. Wait a minute, wait a minute. Why has all this customer value plateaued? Is it that we’re not acquiring enough customers, they’re not staying long enough, not spending enough? So it starts getting the CFO to start asking marketing type questions and having a really productive conversation with the marketing folks instead of just saying, no, all the time.
Gabe Larsen: (18:35)
Boy, do I know that world. But I do find it fascinating Peter. Right. It’s kind of like the way the world finance has always been. It’s been more of the lag, I’m going to use lagging indicators. We always are looking back and what I’m hearing you say is if you guys can start to look at, I’m going to use the word broadly, like leading indicators, but maybe something that’s not your typical SaaS metric, for example. It’s more customer focused. That would be different.
Peter Fader: (19:04)
So, let’s spin it around. You mentioned just a few minutes ago, net promoter score. Well, so we’ve been spending a lot of time talking to the current holder of the flame of, of NPS. That’s Rob Markey at Bain Consultants.
Gabe Larsen: (19:20)
Yes, absolutely.
Peter Fader: (19:20)
He, along with Fred Reichheld, who first came up with the ideas, they’re not just standing still and just shouting about NPS and ending the conversation there. Rob, to his great credit, is thinking exactly along the lines that you just mentioned, which is let’s augment net promoter score with other forward looking customer metrics. Ones that are a little bit more behavioral and not just attitudinal, like NBS.
Gabe Larsen: (19:46)
I love it.
Peter Fader: (19:46)
Let’s figure out what metrics will be good indicators of how profitable and healthy our customer base is. And you know what? Let’s not just talk about them. Let’s not just insist that our clients look at them and disclose them. Well, let’s go to regulators. Let’s go to financial accounting standards boards and say, you know what? You should be mandating that every couple of weeks we should put these things out there.
Gabe Larsen: (20:14)
I love it, I love it. I love it. That’s so funny.
Peter Fader: (20:14)
Now this is real. If you go look at the current issue of the Harvard Business Review, Rob has an article and we basically have companion articles where he’s talking about the new loyalty economy and painting this picture about how the world has changed. And then we have this companion piece about customer base, corporate valuation. This is my partner in crime, Dan McCarthy and myself. And we both submitted letters literally to FASB, the financial accounting standards board, saying things have got to change; these metrics really work. We should really be having a conversation about which one should be disclosed, what caveat should be associated with them, what investors should or shouldn’t be doing with them. We’re really, really serious about this. And, it’s really taking off, I mean, just in the last year or two, it’s amazing how much progress we’ve had and it’s just beautiful how we’re building the bridge between marketing and finance in a way that it was just really inconceivable just a couple of years ago.
Gabe Larsen: (21:15)
Yeah. This is, I’m looking at the Harvard business review, you guys. Interesting. Well, I know, I know we’ve got a hard stop here, so let’s, let’s let you jump. But wow, real interesting dialogue. If someone wants to, Peter, learn just a little bit more about some of the things we’ve talked about or learn a little bit more about you. What’s the best way to do that anywhere you’d send them.
Peter Fader: (21:35)
So, three different directions. So there’s me personally, so I’m always tweeting about this stuff @faderp, love to connect with people on LinkedIn, keep the conversation going there. Then there’s the day job if you go to Petefader.com you see my Wharton faculty page and all the research, teaching stuff. And then as I mentioned, there’s the new startup thetaequity.com, where would we have all these wonderful case studies of how we’ve valued publicly traded companies from the bottom up using these marketing metrics. So lots of different things. They might seem kind of different and unrelated, but they really do come together and paint this picture of what customer centricity is and what it should be.
Gabe Larsen: (22:18)
I really think that’s forward thinking, Peter. I mean, we’ve been looking backward long enough, so I appreciate your work. I’ll have to check some of that out. I had gotten your book, but I was truthfully not aware of some of these other projects. So I appreciate you taking the time.
Peter Fader: (22:29)
And Gabe, I appreciate your giving me the opportunity to talk about it.
Gabe Larsen: (22:32)
Alrighty well we’ll let that, and I’m sure the audience appreciates it. And for both of you, have a fantastic day.
Exit Voice: (22:46)
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