How to Find Value in Every Customer

Customers are not monolithic. There are high-value customers, low-value ones, and plenty who fall in the middle. But they all matter for businesses that want to make the most out of them. That’s the message in a new book by Wharton marketing professor Peter Fader and Sarah Toms, executive director and co-founder of Wharton Interactive. The Customer Centricity Playbook: Implement a Winning Strategy Driven by Customer Lifetime Value is designed to guide businesses to the next level, where success is measured beyond mere dollars. Fader and Toms recently spoke on the Knowledge@Wharton radio show on SiriusXM about the importance of being customer centric.

An edited transcript of the conversation follows.

Knowledge@Wharton: Peter, you have been looking at customer centricity for a while now. Could you tell us about it?

Peter Fader: I’ve been looking at it. I’ve been shouting about it. I’ve been doing research about it. I’ve been talking to other companies about it. When I first started down this path around 10 years ago, a lot of it was dismissed. “We have a product to sell. We’ll be nice to the customers, but it’s all about the product.” That is clearly changing, and it is great to hear companies talking more and more about recognizing that not all customers are the same, realizing it’s an aspiration for them to treat different customers differently. This new book [aims]to turn that aspiration into action.

Knowledge@Wharton: Sarah, tell us about your interest in this topic.

Sarah Toms: I was an entrepreneur for over 10 years and read Pete’s previous book (Customer Centricity: Focus on the Right Customers for Strategic Advantage) before I even met him when I took over Wharton’s Learning Lab about five years ago. Working through and creating a simulation is where we really began our collaboration. We had to create artificial customers. How do customers act? How do they perform? If you are a business, how you acquire, retain and develop customer? How do you drive value?

Knowledge@Wharton: Pete, in your previous book, you said that if you asked somebody on the street what companies are most customer-centric, they might answer Starbucks or Nordstrom. In this book, you say those companies may not be as customer-centric as we think, but now they are doing better. Could you explain that?

Fader: I don’t want to take credit for what those companies have done, but it’s great to see. Those are two really good examples of companies that were touted for just having a nice atmosphere. It was customer-friendly, which is a fine attribute, but it is different than understanding each and every one of your customers at a granular level and using that understanding to drive differential treatment of them.

But it is great to see how those two companies, among many others, have come along since I wrote my first book about five, six years ago. [They are doing] things like loyalty programs [and]using knowledge of customers to drive decisions about what products and services to offer, instead of just doing them because they thought it was a good fit with the other things that they did.

“If I could pull out my magic wand and wave it and see the future value of each and every customer, I would run my business differently.”–Peter Fader

Lots of other companies have been waking up. Some of them are doing it out of opportunity because there’s money to be made by understanding these differences. Some are doing it out of desperation because they are looking at big, bad Amazon breathing down their neck and know they need to do something different. But whatever the reason, it is great to see companies starting to move in this direction, and I think they will be the first to acknowledge they need a little bit of guidance. And that is our job.

Knowledge@Wharton: You both advocate for the power of simulation. Sarah, this is something you do in your job at Wharton Interactive. How do you use simulations, and how can companies take a cue from that?

Toms: At the Wharton School, we have a rich teaching and learning culture based in experiential learning. We have about 20,000 student [role]plays per year that our various simulation teams are supporting here, and what we are really looking to do is bring the theory to life. It’s taking what our faculty have been working on in their research and figuring out how to build compelling simulations so that our students can experience what it is like to make decisions in that sort of environment. It has really been an amazing experience here.

Fader: I have a full semester course where I have been teaching all of this customer centricity stuff — let’s read about it, let’s talk about it, let’s look at case studies and so on. At the end, I would have this brief little simulation type thing I developed in Excel. It was a nice idea, but it didn’t do justice to the richness of the material. That is why I turned to Sarah and said, “Let’s build this thing out in a way that would be appropriate for an institution like Wharton and make it compelling — not dumb down the ideas, but bring them out in their full complexity.” What happened is that simulation, instead of just being the capstone, the cherry on top of the cake at the very end, became the real driver.

Now, when we are doing executive education, instead of using it as a little wrap-up, we use it as an intro. Let’s just throw people into this customer-centric world and have them make decisions. Along the way, we said, “We need to give them some support materials so they can do this better or learn from it.” That was the real genesis of the book. It’s how to cope with a customer-centric world, whether it is a simulated one or a real one.

Knowledge@Wharton: If I am a company trying to build a simulation or even build a data stack to begin doing this sort of thing, where do I start?

Fader:  It starts at the end of the book title: customer lifetime value. Both from a conceptual standpoint as well as a practical one, if I could pull out my magic wand and wave it and see the future value of each and every customer, I would run my business differently. I would recognize that there is different value to be gained out of different kinds of customers, and that would drive the decisions. That is what I have been saying for a long time, but again it has been kind of aspirational. Now, we’re really bringing it to life, both in the sim and in this book, to be able to say how do you do all of that.

Toms: What we really looked at when Pete and I began to collaborate on this simulation is understanding the trade-offs that need to happen in the real world. We are obviously not giving our students unlimited budget. They are having to decide, “OK, when I am looking at acquisition strategies and tactics, when I am looking at retention development, I have a CRM (customer relationship management) that is giving me imperfect data. How do I put all of this together and then make these decisions in a very realistic way?”

What I am really proud about with this simulation is it actually simulates down to the customer level — they are being born and dying…. So, to your question, it is incredibly complex and very difficult. The simulation took us years to develop and has become one of our most popular offerings here at the Wharton School.

“Customer centricity really is about the long game.”–Sarah Toms

Knowledge@Wharton: One of the companies highlighted in the book is EA Sports. It is an example of a company that was so far on the negative side, yet it has come back far on the positive side.

Fader: Or maybe they are [on both sides]at the same time. The beauty of it is that not all customers are created equal. We are not going to be everybody’s best friend, and there are going to be some haters out there. We are not going to judge ourselves by the least happy customer, we are going to judge ourselves by the most valuable customers.

Beyond EA Sports, all of Electronic Arts has come to realize that there are some incredibly valuable customers out there. It is impossible to turn everybody into someone like that. They will continue to face a lot of backlash from people who don’t like particular features of particular games, but in many cases that is OK because [those customers]are not that valuable to the company.

They don’t want anybody to be unhappy, but they realize that by focusing more on the right kinds of customers, the right kinds of players, they can do much better than just playing it down the middle and trying to be pretty good to everyone.

Knowledge@Wharton: In the beginning of the book, you use Olympic swimmer Michael Phelps as an example of your adage that good customers are born good. Can you explain that? And is it always that clear who the best customers are?

Fader: Sarah and I are both very avid swimmers. The difference is she was born good, I am not. So, it was a very natural metaphor to use, and I give Sarah a lot of credit for coming up with it. Maybe it is a little extreme, but I think it gets the point across really well that when it comes to sports, some people are clearly born good, and you know you will never become that. I know I will never become that. But when it comes to customers, we often think we have more control. We talk about CRM as if we think that we can manage and create customers. We don’t have nearly as much control [as we think].

“We are not going to judge ourselves by the least happy customer, we are going to judge ourselves by the most valuable customers.”–Peter Fader

Toms: With Michael Phelps, it is easy to tell that he is good because you see his time. Customer centricity really is about the long game. Our goal in writing this book was to hit the reset button. We hear the words customer centricity all the time, and mostly they are incorrectly stated. We also wanted to provide a playbook for how to enact a customer-centric strategy from the standpoint of recognizing who your best customers are, looking at your CRM, looking at what insights you want to [get], and then running your different tactics in a way that are attuned to the values of your customers. You can’t only have high value; you need the complements of your lower value and your mid-tier customers. But what are you going to do for them once you gain them?

Knowledge@Wharton: You also take that a step further to companies that have multiple brands underneath them. You mentioned Gap Inc., which has Old Navy, Athleta and Banana Republic. It’s being able to understand the customer within that realm and the fact that they may be crossing over to different brands.

Fader: It’s a really interesting time for retailers and business in general that, on one hand, you get a lot of these narrow, digitally native brands that are tightly focused on one kind of customer. While they might do very well there, until you can cross over and attract a broader variety of customers, you are never going to find the world-class success that investors might demand.

On the other hand, look at a Gap or any multidivisional company: Sometimes they are spread a little too thin. It’s finding that just-right balance where we can have multiple touch points with multiple customers and not treat them as separate silos, but learn from them to have the breadth of a customer base that is going to help us understand each and every one a little bit better than if we were just a single-brand company.

Knowledge@Wharton: You have a pyramid in the book. At the top, we have the platinum customers. On the bottom, we have what you call the lead customers. It is probably easy to figure out what to do to make the lead customers happy because they have a pretty low bar. But what about those platinum customers? How hard is it for companies to figure out what those platinum customers want, how to make them happy and cultivate them so they continue being their best customers?

“One of the concerns that we often hear is, ‘We are going to really upset our customers by having something like a premium service.’ Our point is, don’t worry about that.”–Sarah Toms

Toms: That is a great question, and it goes to the root of that entire chapter where we take it to the next step with the two-by-two. First, it is recognizing the value, where your customer sits on that pyramid. Second, how are you going to direct those specific tactics to them? Looking at your lower-value customers, are you running offense or are you running defense?

A lot of folks will look at something like customer service and think, “Now we are starting to call it customer experience. We are starting to call it all of these newfangled words.” But what Pete and I believe is customer service is akin to clean toilets. It is pretty controversial when we say this in front of a room of executives. We say, “[You] are running offense for your lower-value customers. Your other programs, though — such as loyalty, your strategic account managers and others — you want to really make sure that you are tuning those strategies to your specific value of customer.”

Fader: But there are a lot of companies that, once they see the value of the high-end customers, say, “Oh, we need to be their best friend. We need to be talking to them all of the time. Are you happy? Is there anything wrong? Can we give you a glass of champagne?” And they actually start annoying them.

You have to maintain and enhance that value without doing it in an intrusive way. One of the things that we point out in the book is the idea of a premium service. Let them be part of the special club and give them access to different kinds of products and services that others don’t have access to, and they are probably willing to pay for that. It is recognizing the difference between that and low-end customer service, but understanding at what time and for what customers you are going to be using one tactic or another.

Toms: One of the concerns that we often hear is, “We are going to really upset our customers by having something like a premium service.” Our point is, don’t worry about that. LinkedIn is a great example where they have been able to drive a tremendous amount of revenue by offering a premium service. You think about Amazon Prime, you think about others, and this really is an opportunity to figure out what value are you leaving on the table that you can actually extract and make these customers even more valuable.

Knowledge@Wharton: The relationship with the customer will drive some of the other things that companies do, correct?

Fader: That’s a really important point. The customer lifetime value (CLV) isn’t just about figuring out which message to send to which customer at which time. It should be a corporate-wide strategy. It should be tied in not only with marketing but also with finance and sales and HR, and everybody in the organization should be thinking along these lines. Who are the best customers? What is it that we can be doing with and for them to enhance and extract some of that value? It is much more than just some kind of marketing flavor of the month.

“Until you can cross over and attract a broader variety of customers, you are never going to find the world-class success that investors might demand.”–Peter Fader

Toms: Pete is absolutely right. We have a chapter directed specifically at finance and a chapter directed specifically at technologists. This is about bringing everybody together and thinking about CLV in a universal way, and how each of these different functions are going to leverage that information or support the strategy behind providing that information.

Knowledge@Wharton: Pete, you have done a lot of work around customer-based corporate valuation. Can you tell us about that?

Fader: That’s a big thing that I have been working on right now, both in a lot of my academic research as well as this new startup that I have, Theta Equity Partners. It has been fascinating to work with CFOs and VPs of investor relations and get them on board with this idea of customer equity. What is the future value of all of our existing customers? [We can] use that for corporate valuation, to say this is just a different perspective to see what this company is worth. Once you have credibility on that, throw it over the fence and then let the marketers figure out which emails they should be sending to which customers.

It has been a great way to create alignment and get people in the organization, who might hear this kind of cross-functional blah-blah and dismiss it, to say there really is something here for me. It has been wonderfully successful for me, my students and others I work with, and enlightening for companies.

Knowledge@Wharton: One of the examples you give in the book is Blue Apron, which was a company that looked amazing from one perspective. But when you looked at it from the customer valuation perspective, something else emerged.

Fader: Exactly, and we bring it up in our discussion of acquisition addiction. There are lot of companies that think they’ve just got to bring in as many customers as possible, either under the misguided belief that they will turn all of them into wonderful customers by educating them and building great relationships with them, or under the naive belief that investors are only looking at top-line revenue. If we are just bringing in dollars, then ka-ching.

But if you are bringing in a lot of customers who only buy once and they don’t stick around, then that is not so good. That is exactly what was happening with Blue Apron and other companies. It is really important to look at the relationship, not just the faceless, nameless customers. How many people are you acquiring and how often are they then buying again with you?