Ep. 15 | Customer-Based Corporate Valuation

Not every dollar is created equally. Dan McCarthy, Assistant Professor of Marketing at Emory University, talks about Customer Based Corporate Valuation (CBCV), which is at the heart of CLV Marketing. He shares how CBCV synthesizes marketing and finance together, allowing marketers to speak the CFO’s language about the potential value being driven for the company and its impact. Dan explains how the model forces a focus on customers as the metric of measurement for future revenue and solves the measurement problem of what’s happening currently and allows for more accurate predictive valuation. Dan is one of the co-founders of Zodiac Metrics, which was recently acquired by Nike.

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Allison Hartsoe – 00:02 – This is the Customer Equity Accelerator, a weekly show for marketing executives who need to accelerate customer-centric thinking and digital maturity. I’m your host, Allison Hartsoe of Ambition Data. This show features innovative guests who share quick wins on how to improve your bottom line while creating happier, more valuable customers. Ready to accelerate? Let’s go!

Welcome everyone. Today’s show is about customer-based corporate valuation, which is the heart of customer equity. And to help me discuss this topic is Dan McCarthy. Dan is a professor of marketing at Emory University in Atlanta, Georgia, although he has a PhD in statistics from Wharton, which is actually where I originally ran across him, and sometimes when I’m talking to Dan, I swear I feel like I’m talking to another Michael Burry. That’s the guy from the big short and so I want to call out that Dan is not a financial professor, but he is a very unique marketing professor focused on CLV. Dan, welcome to the show.

Dan McCarthy – 01:14 – It’s great to be here. I’m really enjoying the conversation. That’s going to be a lot of fun.

Allison Hartsoe – 01:20 – Good. Thanks, Dan. So Dan, I also want to note that you are a cofounder of Zodiac, a software tool that was built to run these models and was recently acquired by Nike. Tell us a little bit more about your background and how you were drawn to this topic and if you want to say anything about the acquisition, great. If you don’t totally understand those things can be sensitive.

Dan McCarthy – 01:41 – Yeah, that sounds good. Yeah, so it’s kind of alluding to that. The Michael Burry comment that you’d made. My background was actually pretty heavily financial, so I went to the Wharton School for undergraduate, and I concentrated in finance and statistics as well as system science, engineering and back in 2006 when I graduated. What everyone did was go to Wall Street. So I basically did what everyone else did and went to a hedge fund. So I was there for a number of years before you kind of seeing the light and coming back, my true passion was actually you really kind of applying quantitative models. So I went back to Wharton for my Ph.D. in statistics and it was really in the second year of the Ph.D. that I met Pete Fader, who’s a wonderful professor up in the marketing department at the Wharton School and I’d say the wonderful thing about customer base corporate valuation, which is really why it ended up very quickly becoming the centerpiece of my Ph.D. dissertation is it really brings together all three of those worlds that to finance,

Dan McCarthy – 02:40 – because we’re essentially we’re thinking about the overall valuation of firms, but it’s also very heavily statistics in marketing because we need quantitative models that are fairly sophisticated to be able to make the accurate predictions that we need to perform valuation accurately. And obviously what we’re predicting is the of customers which is the world of marketing models. So it’s really been a true pleasure, and it’s been just super exciting to see the level of enthusiasm that we’ve received about this work.

Allison Hartsoe – 03:10 – I bet I bet. But you know, for the average bear, I wonder if the concept of customer-based corporate valuation is hard to grasp. When you talk about finance stats and marketing coming together. Just that alone sometimes may seem insurmountable in some organizations, particularly the larger organizations. So if you were to use an analogy or if you were to describe customer-based corporate valuation that is a little bit more for the layperson, how would you describe it or how would you picture it?

Dan McCarthy – 03:46 – Yeah, I think you know, even though he had built up this whole image of it being really, really difficult at it’s most, it’s kind of basic level. It’s actually fairly simple. Essentially when you’re doing valuation of the company, one of the big things that you need to do is predict what that company’s future revenues are going to be and ultimately for customer based businesses, businesses that derived most of the revenue from customers for every dollar of revenues that the company generates, there has to be a customer who’s making a purchase and so to the extent that we can predict the flow of-of customers being acquired over time, the number of purchases are going to make and how much they’re going to spend on those purchases. That has to give us the revenues of the company. So essentially there’s nothing really new here in the sense that all we’re doing is really making an enlightened revenue projection. The key is, is how we get there. So I don’t know if that’s easier or harder, but you know, hopefully, at least it makes intuitive sense kind of why this could be useful in different.

Allison Hartsoe – 04:52 – Got it, got it. So when you say the key is how we get there, I imagine you’re saying that you might be standing on the shoulders of previous models, but now we’re using a more precise or more accurate model. Would that be fair?

Dan McCarthy – 05:07 – Yeah, in some sense it’s standing on the shoulders of marketing giants. Yeah. We’ve got these great models that have been studied and analyzed and improved on within marketing. And one of the big innovations here is in some sense to take those great marketing models and bring them into the world of finance. So you know, within finance to the extent that we have customer data that firms are disclosing, let’s just kind of run the marketing models that we’ve come to know and love and use those to come up with our revenue projections instead of doing it the traditional way, which is oftentimes to say something like, you know, revenues grew 55% last year and the year before, so I’m, I think it’s going to grow another three percent this year, which is just not potentially nearly as accurate and it’s definitely not anywhere near as diagnostic because essentially the other angle of how you arrive at the projection of being almost as important as the projection itself

Dan McCarthy – 06:08 – and you can have a dollar of revenue come in and to the same degree that not all customers are created equal. Not all revenue dollars and created equal. If I’m getting that revenue dollar from a customer who I know is going to keep coming back for the next five years, that dollar is going to mean a lot more. I pay a lot more for it than a revenue dollar from the customer at a business that has very low retention, and I can’t expect that customer to come back. So again, it’s just a lot of nuance and detail that we get from thinking about things from the vantage point of the customer that we just completely lose when we kind of go to that traditional way of thinking about things within finance.

Allison Hartsoe – 06:47 – I love that concept. Not every dollar is created equally, and I think we’ll circle back to that at some point here, but I do want to dive into, you know, we’ve hit on a bit of why care about customer-based corporate valuation through the definition, but I want to take it a step further into the different people. Can you walk us through, you know, because you’ve got these different lenses within the organization. Maybe walk us through the different people who should care about it and why they should care from different angles.

Dan McCarthy – 07:20 – Yeah. It’s an extremely important question. So first and foremost, there’s the marketing department. You have people like you and me, and if I’m a marketing manager, I need a marketing budget, and the tough part is if I go to the CFO until him or her, you know, I need this marketing budget so I can improve the customer experience in change. The customer journey. I’m sure the CFO will appreciate that on some level, but you, the CFOs are very dollars and cents a person and so you know, with this work and really help do is kind of changed the conversation to one that is essentially the same language that the CFO is speaking. So you’d be able to say with this marketing budget I will be able to expand the value of the business by x and that’s something that I think the CFO could very much get on board with. So to the extent that the CFO is the one who controls the purse strings, that’s a conversation that needs to be had and this I think is a wonderful way to be able to have that conversation.

Dan McCarthy – 08:21 – The flip side of the coin or the people in finance and so they’re the people who actually are buying the stock or selling stock on a day to day basis and it’s ultimately they’re the ones who will determine what the valuation of your firm will be and this is extremely important to them because essentially it represents a whole new dimension of the valuation equation, an important source of signal for them to make potentially more profitable investment decisions. So even within finance, I’d say kind of two main distinctions. There’s kind of passive shareholders. Those would be kind of more people like you and me where we go to our Ameritrade account and buy or sell the stock.

Dan McCarthy – 08:59 – We don’t really have control over any marketing levers, you know, so this can be very useful, but essentially we’re just kind of making passes predictions. It can also be really useful for you to say private equity firms because, in addition to being able to kind of come up with some projection of what the value of the firm should be, assuming the status quo, where to persist, they can actually think about some of the marketing levers they can pull to say improve customer retention or improve the efficiency of their new customer acquisition, spend the further enhance the value of the company and that’s the overall valuation in front.

Allison Hartsoe – 09:34 – I love it. I love it, and in fact, I’ll just call out that Anthony Choe from Provenance as a private equity investor will be speaking at our customer centricity conference coming up on May 17th and 18th at Wharton campus in San Francisco. So he’ll be speaking exactly to the point you just mentioned, right?

Dan McCarthy – 09:54 – Yeah. I would say, Anthony, I’ve spoken with him now a number of times about some of the amazing work they’ve been doing and they’re just light years ahead of almost everyone else I’ve spoken with within private equity. So I think of cheers to him, and I think yeah, this is definitely a really important source of potential incremental value for his firm.

Allison Hartsoe – 10:15 – Got It. Yeah, I agree now. I mean there’s a lot of financial models and things that come through, and I just wonder if you really think this is, is this a temporary passing fad because of the situation we have with data today, and you know maybe it’s just the way that we are able to put models together right now, but in the longterm it will really stick. So I guess the bottom line here is, is this a passing fad? Is this customer base corporate valuation really here to stay? Or is it just something we think is interesting now?

Dan McCarthy – 10:51 – I really think it’s here to stay. I think that saying that customer base; corporate valuation is a fad would be like saying discounted cashflow valuation. Yes. Just kinda catch up it DCF valuation is kind of the defacto standard way of evaluating firms and you to the same degree that it almost kind of has to be true. You just purely by accounting. This has to be true, essentially a model for how customers behave, rolling that up and using that to come up with an accurate revenue forecast that decomposition cannot be false. This almost a cartology built into it. So I think as long as we have the data, this will be valuable, and it will be very diagnostic. So that’s kind of the other point. I really do think we’re kind of in the first innings of this, you know, we’ve now just done a handful of examples ourselves

Dan McCarthy – 11:49 – and each time we’ve done an example, you say blue apron for life, we can talk about, you know, hopefully in a second we’ve seen a dramatic reaction, whether it’s from new kind of the financial community or whether it’s from the popular media, but we haven’t really seen this expand too much beyond the work that Pete Fader and I have done in this area. So it’d be very hard to say that, uh, you know, we’re, you know, we’ve kind of hit the saturation point. I’d say we’re finally getting to the point where we see real adoption by people other than us. But yeah, that’s still a very long process, and we’re still kind of making our way there.

Allison Hartsoe – 12:27 – I can definitely speak to that because we are on the front lines of that and I oftentimes see organizations that they’re structured to work against this thinking because they’re structured in the old 1800s railroad model which is functional or product lines and that sometimes works against our customer-centric thinking, which we’ll talk a lot about at the conference and I know we’re on the same page there. So let’s shift for just a second here and let’s talk about the Blue Apron and the Wayfair examples that you mentioned as well as maybe get a little more specific about the models, and we’ve been using a very generic term here about models, but I imagine that there are many more flavors of models that you use inside the concept of customer-based corporate valuation.

Dan McCarthy – 13:14 – Sure, yes. I don’t know if you think it’d be helpful to kind of walk through the story a little bit of what happened and then, uh, you know, that we can start talking models.

Allison Hartsoe – 13:21 – Yeah, let’s do that.

Dan McCarthy – 13:23 – Yeah, that sounds good. Yeah. So basically what happened was it a blue apron, and they put out an IPO perspective, which is what all companies do before they go public and it was actually Pete who had sent me a message saying, hey, have you taken a look at their IPO prospectus? And I had just finished my dissertation feeling pretty good. I feel like I had some time to wait. So as like, you know, I’m just going to kind of dive in.

Allison Hartsoe – 13:47 – This is where you were like, what I would imagine Michael Burry to be like, I’ve got some free time, I’ll run some models.

Dan McCarthy – 13:54 – Why not? This is how I have fun. It legitimately is. I don’t know if that’s a good thing or a bad thing.

Allison Hartsoe – 13:59 – I love it.

Dan McCarthy – 14:00 – Yes. I took a look, and the first thing that was very surprising was they didn’t disclose anything about customer retention or customer churn. Even though, yeah, they’re fundamentally a subscription-based business, and a lot of their new appears it companies like telecommunications firms, they do disclose those sorts of metrics. So that was interesting. But they did disclose some data points about their customers, but they kind of did it kind of a throwaway way where essentially the picture that they were painting was one of everything going up into the right, kind of your typical venture capital Powerpoint deck and so they were saying you are. Our revenues are growing strongly. Our active customer accounts growing strongly look at our order growth and essentially even though I couldn’t apply the exact methodology from a paper I had co-written with Pete Fader on subscription-based evaluation. I applied a very similar model, and basically it allowed me to, to uncover what the company’s retention curve actually was even though they didn’t disclose it.

Dan McCarthy – 15:05 – And the punchline was yeah, basically, you know they acquire 100 customers roll forward the clock by six months and about 70% of those customers will have turned and far worse than companies say like Netflix or Dollar Shave Club that they essentially they retain almost twice as many customers. So I kind of did a deep dive and essentially that works at posted it to LinkedIn. So it’s publicly available, and for good or for bad, I’d actually disclose the underlying spreadsheets that I use to come up with all the calculations. So everything was fully transparent to everybody, and that piece ended up going viral. So it ended up in a Wall Street Journal multiple times, Fortune, Forbes, Darren, uh, you name it, and kind of did the rest of the story for them. This is kind of history that, you know, originally they had priced the IPO at 15, $17 per share about five days after I released a detailed analysis. They cut the price range to the $10 to $11 a share the IPO to 10 and you know, now that they’re sitting know below $3 a share.

Dan McCarthy – 16:11 – So yeah, they fall in a subsequent over 70% from an already discounted IPO price. I really do feel like it was a very good example of we had this one image that was being painted, which is kind of the traditional venture capital growth at all costs. Look at all this. We’re just going to eventually grow ourselves into profitability. Don’t worry about the fact that we’re losing money right now. On the flip side, you kind of dip beneath the surface and see actually the fundamentals at the customer level are eroding and are really not looking good. If you actually identified that, that would have really dodged a bullet in this case.

Allison Hartsoe – 16:52 – Wow. Wow. Do you think that had the companies that took some public, do you think had they done this kind of model valuation, would they have ever gotten out of the gate?

Dan McCarthy – 17:02 – I think that the people who might’ve pushed them in this direction were the VC community. I think that there are many companies them, but also some other subscription box companies and otherwise who have folded upshot who essentially said we pursued this growth at all costs model. It was promoted by the venture capital firms that essentially just gave them a lot of money and say grow and you know, that doesn’t. I think that model is becoming less and less relevant. So I think there is an element here where there’s kind of a pocket of people within VC kinda like Anthony Choe within private equity that are waking up to the importance of revenue stability, not just revenue growth and the importance of unit economics, but still, you know, I think they are certainly, I would say partially blame for what happened to blue apron.

Allison Hartsoe – 17:51 – Yeah. In a way, you’ve got to do different objectives. The objective of the VC is not necessarily the objective of the company. I want liquidity at the highest rate I can get back for highest return for my dollar. I don’t really care if the company is the sustainable long-term, but for the average investor who’s buying into that IPO, it’s really unfair, and I’m glad your models are bringing to light. Some of that would almost feel like a bad marketing exercise. You know they’re going out there saying buy, buy, buy, but it’s really not a good thing to buy, and that’s good what you’re doing.

Dan McCarthy – 18:28 – Hopefully as this sort of way of thinking about the world gains more traction. If the VCs know that they won’t be able to go public at good valuations with these companies because you know, investors now on understand and appreciate the importance of unit economics, they won’t push them out of the starting gates to pursue that model because suddenly now they’re incentives are aligned with those of the public market investors. So I think that’s really the hope and I think to some degree, yeah, it’s going to be very, very potentially beneficial for the overall economy because essentially what one would argue is that strategy itself is destroying value. So to the extent that we can kind of just prevent companies from doing that, it’s just going to retain the value that otherwise would have been destroyed.

Allison Hartsoe – 19:18 – I love it. So this example is really about the importance of retaining customers and a bit about the customer acquisition cost and maybe even about, you know, how many customers were in the market, but let’s shift gears to your second example to Wayfair. How did that one shape up and what did you learn when you’re in those models?

Dan McCarthy – 19:38 – Yes. It was a very fundamentally different story just to kind of provide a little context. Again, the context can be very helpful. We had put out the original paper on how we can do valuation for subscription businesses, and obviously you know with that kind of box checked where like the next target should be doing the same thing for non subscription, so we went out, and the original version of the paper actually featured no empirical public company examples at all. It actually just featured data from a privately held company that was very gracious in providing us essentially the full transaction log all the way back to the beginning of commercial operations. So we had played this experiment game.

Allison Hartsoe – 20:20 – Sorry. The original version of the paper was a subscription model, or you had a private company that gave you the back to the dawn of time data to work with, correct?

Dan McCarthy – 20:30 – Yeah, the subscription paper. I had pretty much been accepted at the Journal of marketing, so essentially moving onto part two of the dissertation for nonsubscription firms. Yeah, so it was for that paper that we essentially use this private company and play this thought experiment game where you said imagine that this was a publicly traded company. Imagine that this hypothetical company disclosed certain aggregated metrics. Let’s think about how well we can be able to predict what this private company will do. If we only had those metrics and we ran these simulations and basically code with the right set of aggregated quarterly disclosed metrics. We can essentially predict the future just as well as we could if we had the granular transactional data. But the reviewers came back, and they said, come on. If you’re going to propose the methodology for valuing public nine subscription firms, you need to actually do it for a public firm.

Dan McCarthy – 21:28 – So we said, okay, fine, and it was because of that that we actually searched around and found overstock and Wayfair. They were two companies that just so happened to disclose a pretty good amount of customer data and their public filings. So we basically went in and repeated the analysis for them and essentially the conclusion that we reached was. Whereas with overstock evaluation seem fairly reasonable and that we kind of ran up a related model where we kind of predict out, you know, how many customers we’re going acquire in the future, the cost that will incur to acquire each of those customers, and then the flow of subsequent purchases that those customers make until they turn and then a motto for basket size, the resulting revenue forecast led to evaluation. That was very close to overstocks. Then current traded stock price, but when we ran the exact same model for Wayfair, we came to a very different conclusion basically. Yeah. We inferred that their stock should be worth something like one-sixth would. It had been trading.

Dan McCarthy – 22:32 – We did, yeah. We were very struck by that, and we did not want that to be the conclusion in some sense, we don’t want to challenge the efficient markets hypothesis in marketing paper, and this is an academic paper, so it was very divergent from what the market had said, but it was what our model implied, and so we had just to be scientists, that’s what we had to report. So we did and had no idea how that would be perceived, but what ended up happening was one of the people we’ve mentioned in the paper, Andrew Left, he subsequently tweeted about the paper. Yeah, just the very next day actually, and I don’t know if you know Andrew Left, you mentioned Michael Burry, Andrew Left. He’s very, very, very popular and he’s an extremely famous short seller. And so it’s led to this explosion of interest in downloads in the paper.

Dan McCarthy – 23:26 – And yeah, so that ended up in the Wall Street Journal. We ended up on a conference call with about 70 hedge funds moderated by the sell-side firm. It was a lot of controversies involved, but the, again, it was all because we essentially wanted to be true to the conclusions of the work, so

Allison Hartsoe – 23:43 – Where you get so many calls, people were having trouble accepting the answer or were you getting so many calls because people just wanted more reason to believe the answer.

Dan McCarthy – 23:56 – We were getting the calls because the day that those tweets came out, uh, no other news, the stock fell by about 10%. And so that ended up being the biggest one day drop the stock had had in about a year and a half. The people, I think we’re thinking like, Whoa, I need to understand what this paper is saying because clearly, it’s moving the market. So I think that was the original source of it.

Allison Hartsoe – 24:22 – Okay. So they wanted to understand but were they understanding in a like, tell me more, let me just get my arms around this, or where they like, nope, that can’t be right. No, I’m sure my evaluation is better.

Dan McCarthy – 24:33 – All the above.

Allison Hartsoe – 24:35 – You’re getting everything.

Dan McCarthy – 24:37 – Yeah. So whereas the Andrew left therapy and people who generally got the company was overvalued. Yeah. They said that’s exactly right. This is the smartest analysis I’ve ever seen. And then the people who had been long the stock, I was getting calls from the second largest shareholder of Wayfair and wow. Obviously they have a vested interest in saying the analysis is incorrect. And so actually, you know, there are people who are spreading false rumors about this work was actually paid for by that short seller is completely false. But when money’s on the line, if people will do whatever it takes to essentially predict their position, and that’s I think exactly what happened on both sides.

Allison Hartsoe – 25:16 – So with Wayfair, it sounds like the. You mentioned that the stock price didn’t align, but was it about retention? Was it about the acquisition? What aspect didn’t really align?

Dan McCarthy – 25:28 – You know, it was primarily a case of customer acquisition cost. So they were acquiring a ton of customers. We actually, I inferred that they would eventually penetrate a very substantial proportion of all our households. So there wasn’t an issue with just the volume of future acquisitions either. And in fact, compared to overstock after a is acquired, Wayfair customers were substantially more valuable. The net present value of all the future profits that a Wayfair customer will generate. After the acquisition, it was something like 30% higher. The problem was Wayfair was spending way more to acquire customers and that $69 per customer, whereas it overstock, it was just dramatically lower than that. And so I ended up in essentially that whereas it overstock, they earned about $10 for every customer they acquire.

Dan McCarthy – 26:25 – Wayfair is losing about $10 for every customer that they acquire, so in some sense then the more they acquire customers, the less valuable to get every customer did they acquire is destroying value.

Allison Hartsoe – 26:40 – Oh, that’s horrible.

Dan McCarthy – 26:44 – Yes. It’s. I think a very interesting case study. Just the comparison between the two you overstock was taking, the more we’re not going to grow as quickly. We’re not going to penetrate nearly as much as the market. We are going to be stingier about how we acquire customers and even though those customers going in up being as valuable as Wayfair customers at stinginess on the acquisition side will at least leave us with a sustainable but smaller business. So I think again, all those components really, really matter a lot,

Allison Hartsoe – 27:15 – the complete picture. These are fantastic stories, Dan. Thank you. Let’s circle back to one thing that you alluded to that I’m not sure we defined very well for the listeners and that was the concept of subscription versus non-subscription models. Can you talk a little bit about what kind of companies are appropriate for the models and what the differences between subscription and non-subscription?

Dan McCarthy – 27:35 – Yeah, it’s a very important point because I think a lot of people, they will spend more time thinking about the distinction between B2B and B2C or domestic versus international and actually these models apply very well to those B2B and B2C companies, domestic and international. Now going back to Zodiac, for example, we had customers that were headquartered in South Africa and the models continue to work just as well for them as they did for e-commerce companies here in America. So those distinctions I think are less important. Those are all businesses that we can model without any issues. The difference between subscription business and a non-subscription business is much more important, and the main reason why is essential because as subscription firms the modeling can be much easier because we actually have the ability to observe when customers terminate the relationship.

Dan McCarthy – 28:32 – So essentially what I would argue, and this is why we had two separate papers, one for the subscription setting and one for the non-subscription setting. It’s because the model that we have to use to predict what future customer behavior will be is very different between those two settings.

Allison Hartsoe – 28:47 – Got it. When it’s a subscription-based, you can tell when the customer is gone, and when it’s non-subscription, you’re guessing, which means you probably have a statistical propensity to say whether they’re likely to return or not.

Dan McCarthy – 29:00 – Yeah. It’s always this guessing game that you’re not sure whether someone who asked me purchasing a while, they’re just kind of a light buyer who is kind of within the natural inner purchase cycle or whether it’s someone who’s terminated a relationship and they’re never coming back again. So essentially it changes the sort of data that these companies can provide us as well. So in the example of overstock and Wayfair, you know the sort of things did they were disclosing where in addition to revenues, the number of active customers, just the number of people who made at least one purchase over some window of time because at least that’s observable, but where they couldn’t ever disclose. And with this, even the CEO of Overstock, Wayfair will never be able to know is the total number of customers who actually still have relationships with different contrast that to this network or Sirius XM subscription-based companies, they were able to put in their filings the total number of customers that they have a relationship with. And again, it’s just; it’s much easier because they are actually able to know that number.

Allison Hartsoe – 30:01 – Yeah, that makes a lot of sense. So what about companies that are not just B2B and B2C, but B2B2C?

Dan McCarthy – 30:09 – Yeah, things get harder if you go to the example of a CPG company like Proctor & Gamble, they don’t necessarily have direct visibility to the end customer. And the same would be true, you know, historically speaking of a company like Nike, again to go back to the Zodiac, Nike ties up. Yeah. Historically at Nike was a brand, you know, so they sold very heavily through middlemen, whether it’s footlocker or what have you. And again, just saying things that are completely out in the public domain. I’m not trying to. There’s nothing, nothing confidential here. They’ve made a big pivot toward selling directly to the consumer, whether it’s through their website or through there, through their Nike stores. So suddenly now that they’ve made that change, they actually had the ability to observe the end customer, and that’s really kind of what makes the modeling much easier for people like us.

Dan McCarthy – 31:03 – So it’s not to say that a company like Proctor & Gamble, you know, to the extent that they don’t have any direct to consumer business, it’s not that we can’t do our analysis, but it becomes much harder. And so, you know, they may need to rely very heavily on data from data providers like a Nielsen and IRI using panels as opposed to the actual transaction logs.

Allison Hartsoe – 31:28 – Do you trust that data are coming in or is it just as good as you can get?

Dan McCarthy – 31:32 – Yeah, in the land of the blind, the one-eyed man is king is something I live by, don’t whatever I can get.

Allison Hartsoe – 31:42 – Especially with all the discussion about Cambridge Analytica and Facebook lately, it’s made me think more about how much of our data is out there, but oftentimes that data is really bad, and I see it in multiple databases, and this is a side topic, so I don’t want to go too far down this avenue, but I think it as anyone who works with data, we’re always subject to the quality of the data that we work with and the beauty of the customer based corporate valuation is oftentimes you’re using either publicly disclosed data which has got to be clean or what you hope you would hope it’s clean or you’re using the company’s data itself, which is probably, you know, some of the best data that you can get hold of as opposed to. In the marketing world, we’re often using proxies for data. Like I don’t actually know that you’re a customer, but you’re illustrating behavior that looks like a costumer. So you’re making this kind of leaps of faith in the data that you have.

Allison Hartsoe – 32:42 – Or you’re using advertising data. And again, we’re back to the point where that information is better than what you had before, but still not necessarily accurate. And I guess that, I guess that’s not going away anytime soon, is it?

Dan McCarthy – 32:58 – Yes. I think the rise of alternative data sets will only make those trade-off more and more relevant in the future. And I think the issue of data being good or bad, it really can come down to kind of like three main distinctions, you know, the first is, is it observable? You actually get to see the data in the first place. And for CPG companies you don’t. Often there’s the question of is the data usable, is it useful or not? And so, you know, I think to the Cambridge Analytica example, a lot of that information is, was psychographic in nature. And to the extent that I have worked with demographic and psychographic data, often it’s very not predictive of the value of customers. So that data is observable, but it’s not useful. So it’s things like that I think are very helpful too, to kind of make clear.

Dan McCarthy – 33:53 – I’d say one of the beauties of the sort of models that I’ve been working with is that we actually don’t need a whole lot of data beyond the transaction log, that if I have the ability to observe customer behavior over some period of time, whether it’s a transaction log looking at say 12 months or more of actual customer buying, or it’s a public company where I have, you know, say three years or more of public disclosures, oftentimes that’s enough to be able to work the magic. We don’t necessarily need all of these additional CRM attributes that I think make a lot of people very uncomfortable. So yeah, I think if even if we were to move into a world, you know, say post GDPR where we don’t have the ability to, you see a lot of these other data points about customers, I’m perfectly okay with that. I actually think that that will be a big positive for sort of modeling that I personally do.

Allison Hartsoe – 34:46 – That’s an interesting perspective, Dan. We should do a follow up on that now. You did just say three things, and you said, is it observable? Is it usable? What’s the third?

Dan McCarthy – 34:56 – Is it observable? Is it usable in the third one, is it representative? And the reason I mentioned that is that often if you have a panel of users, that could be very different from if you have the full dataset from the company itself. Yeah. Especially with these business intelligence firms, often you’ll be able to get something like a very large credit card panel, but it still represents on the order of say three percent of all credit cards in the United States and so you have that kind of just lingering doubt in your head. That is that three percent actually representative. I think often these firms have done a job of being able to convince people because if other data they have about these customers that it is, but very different from saying SEC data, you know, where they might be aggregated, which limits its usefulness, but it’s fully representative.

Allison Hartsoe – 35:52 – Yep, that makes perfect sense. I love it. Okay, Dan, so let’s say that I’m totally sold on this. I love the idea of customer-based corporate valuation. It seems to me that if I were to begin the first step is that it CBCV basically tells me what’s happening. Would you agree with that? I’m kind of just getting the placeholder of what’s going on that my first step.

Dan McCarthy – 36:19 – That’s fair. I think it’s basically a measurement problem and so it’s particularly relevant and very happy to share the two papers that Pete Fader and I have published on this topic, but both of them kind of assume that the person doing the analysis does not control the steering wheel. So I’d mentioned the private equity firm example, you know that conceivably bacon manipulates marketing levers. In this case, it really is more imagine that the status quo or to persist. What does that imply for the health of my business? I think to understand that and really kind of internalizing that it is kind of in a very important first step.

Allison Hartsoe – 36:56 – Excellent. Excellent. And then once you know what’s happening, is there a side of the equation that’s more important to address? Like is it more important to address retention versus acquisition or does it just depend on the company itself?

Dan McCarthy – 37:11 – Depends on the company. So I think once you’ve kind of run the model yourself and you have a chance to kind of internalize what it means for your firm. And so again, going back to the example of blue apron that work really highlighted the difficulty of customer retention and secondarily the importance of customer acquisition costs which had been moving up really concertedly before the IPO, you know, that could mean to the extent that you want to put the pressure where the pain is, maybe they should be spending a lot of time thinking about and potentially how they can improve the retention profile their customers and/or make their customer acquisition spending more efficient if it were a different company that essentially sells product at a loss, could be that their acquisition, they had no issues with customer acquisition cost. It could be that they need to really think about targeted cost reductions.

Dan McCarthy – 38:02 – So yeah, I think it really does kind of depend on the context, but what will remain constant in all of those examples is the overarching value framework that’s going to remain the same. You know, to essentially we can be able to think about the value of your firm by thinking about the quantity and quality of the customers you will acquire in the future retention of all of your customers, whether they’re existing or future, your ability to get orders out of those customers, the amount that they spend on those orders and the cost to serve the customer. That framework will always be the same.

Allison Hartsoe – 38:33 – That’s back to the core problem of it’s the customer that drives your business, and that’s what I love to come back to, especially in the marketing world where we’re oftentimes, I think, distracted by channels, and I oftentimes say to my customers, channels, don’t buy your product. Customers buy your product. You have to get the customer.

Dan McCarthy – 38:55 – We hear the same thing with products. We need to sell this product. No, we need to do is build a portfolio of products or a portfolio of channels that are synchronized and expand the value for the customer, but ultimately it’s CLV that matters the most.

Allison Hartsoe – 39:12 – Got it. Yeah. I love it as just speaking to the choir here. So Dan, if people want to reach you, how can they get in touch?

Dan McCarthy – 39:21 – So I’m on Linkedin and Twitter. I would say first it would be great to connect on both. Happy to share my details, you know, with, you know on the website I do have a kind of a semi-regular drip feed on Linkedin, so that tends to be kind of my home base

Allison Hartsoe – 39:35 – And I follow it. It’s valuable. I love it. I love the stuff that you post, so I highly recommend it to anyone.

Dan McCarthy – 39:43 – Well I’m glad at least one person finds it useful. Hopefully more but

Allison Hartsoe – 39:49 – for sure. So Linkedin, Twitter and then we can put any other contact information you want to share up on the podcast site.

Dan McCarthy – 39:57 – Yeah, email is also great. I’d love to basically hear anyone and everyone. I really feel very strongly about this and kind of become my second baby. So yeah, definitely you create value for the economy.

Allison Hartsoe – 40:13 – Sounds good. Sounds good. Okay. So I’m going to summarize here, and I’ll do my best to capture our conversation and just feel free to let me know if I’ve missed anything or if you want to add anything. But first, we talked about why you should care. And the part I loved about this most was when you said not every dollar is created equally because that just really sums up the whole concept. And behind that is the concept that not every customer is equally valuable and that’s. That’s almost heresy. But the concept that not every dollar is created equally is sometimes a little easier to understand or more palatable perhaps. So when we keep that concept in mind. Then the next idea that you rolled into also in why you should care. That I thought was really effective is when we talk about marketers needing a budget and being able to speak the CFO’s language.

Allison Hartsoe – 41:07 – That’s a huge advantage, and I almost see it as you’re there hat in hand with the CFO and you’re trying to talk about the value that you’re driving. And the way the question should run or the way that layout should run is if I can expand sales by x gave y dollars, or perhaps I can expand sales by x gave y dollars to target z customers, you know, the customers are the good customers or the ones that are becoming good and they represent a specific future value, then it’s a much easier conversation for the CFO to justify a particular budget because you’re basically saying, here’s the model in the past, here’s the model going future and how I want the marketing to support it. Did I miss anything there? Would you agree?

Dan McCarthy – 41:57 – Yep. I think that sounds exactly right. Yeah. You’ve got the ability to say; this is how much I’m going to spend. I can give you an estimate of the cost per acquisition, and this is how much I expect those customers to be worth after they come in the door. And so, you know, I can give you a return on investment calculation that hopefully should be reasonable enough to justify a very large marketing budget.

Allison Hartsoe – 42:18 – Yeah. Yeah. And you know, these valuation models, they run a million. That’s not like you’re looking at the Roi of a campaign. It’s really powerful. I love these numbers. Then second, let’s look at the kind of impact. We talked about the Wayfair example, and we talked about the blue apron example, but in both cases I think it goes back to business 101 where you have to understand your numbers, you know, your customer acquisition costs, your customer retention cost, perhaps your unit economics and there are just so many millions of metrics that people can measure, but getting aligned with a laser focus on what drives the heart of the business I think is what sets the real leaders apart to generate impact versus the follow-ons who are distracted by perhaps other metrics that are supporting metrics but are not the core metric and this is where I think the CBCV Models are really the key because they force you to focus on customers as the key to your future revenue. Did I miss anything there?

Dan McCarthy – 43:19 – Right on.

Allison Hartsoe – 43:20 – Good, good. Okay. And then third, I mean we’ve given a couple of different links to papers that we will include, and we’ll have those in the followup. But when I think about how and moving into the next steps, what I really liked here is that you talked about it as a measurement problem. You know, first I have to understand what’s happening. Second, within those measurements, I need to look at the specific focus that’s right for my business. You can’t just pick up what happened at Wayfair, what happened at Blue Apron and blanket applies it. You have to really understand your business concerning the model, and that’s where your internal subject matter experts become incredibly important for deciding what should you really do, and you know, what’s the right way to move forward. But I think the fundamental step of running the model and getting that information together just to say what’s happening is really your key. That’s the first piece. And of course, check out Dan’s Linkedin posts to, uh, to get more information on how he’s applying them in perhaps more recent examples. Good.

Dan McCarthy – 44:26 – I think if I were to kind of just build up this a little bit too on the what’s happening pointed that you just mentioned there’s kind of what’s happening to my firm and then the other kind of two dimensions of that or what’s happening to me relative to my competition to establish kind of a baseline level of what good performance actually is. And then the third would be even for very good firms, you know, what’s my performance relative to my performance in the past. And so even if you say Netflix, which has done a wonderful job of creating very high CLV customers and acquiring a lot of them over time, you know, they can essentially run models like these every single month or every single quarter and be able to say how much CLV they did acquire this quarter and what was the average CLV per acquired customer? Is that trending up or down? And that could be a way to kind of really helped push good companies to become even better. So I think, you know, this is not just a methodology for flagging companies looking to turn themselves around. This is something that I think applies to virtually all customer-driven businesses.

Allison Hartsoe – 45:29 – I almost think that there is a limited number of good customers out there though, and the people who do this now will have a substantial competitive advantage. Do you think that’s a correct assumption?

Dan McCarthy – 45:41 – Yeah. Better to come out in front of it then to continue with the status quo, but then get 10 of bushwhacked two years or so now.

Allison Hartsoe – 45:49 – Better to do it now. Well, with that, Dan, thank you so much for joining us today. As always, everything we discussed is at ambitiondata.com/podcast and remember everyone, when you use your data effectively, you can build customer equity. It’s not magic. It’s just a very specific journey that you can follow to get results. Thanks, Dan.

Allison Hartsoe – 46:21 – Thank you for joining today’s show. This is Allison. Just a few things before you head out. Every Friday I put together a short bulleted list of three to five things I’ve seen that represent customer equity signal, not noise, and believe me, there’s a lot of noise out there. I actually call this email the signal things I include could be smart tools. I’ve run across articles, I’ve shared cool statistics or people and companies I think are doing amazing work, building customer equity. If you’d like to receive this nugget of goodness each week, you can sign up at ambitiondata.com, and you’ll get the very next one. I hope you enjoy The Signal. See you next week on the Customer Equity Accelerator.