Ep. 90 | Black Friday with Pete Fader
Every year the drumbeat of zealous consumerism begins with Black Friday. Besides the obvious toll on workers and their families during the holiday season, what do retailers stand to gain? Not much according to Wharton professor Peter Fader. Black Friday and its partner Cyber Monday as a marketing strategy are almost 100% wrong. In this episode host Allison Hartsoe talks with Professor Fader about why these strategies are so wrong and what high-value strategies retailers should be thinking about instead.
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Allison Hartsoe: 00:01 This is the Customer Equity Accelerator. If you are a marketing executive who wants to deliver bottom line impact by identifying and connecting with revenue generating customers, then this is the show for you. I’m your host, Allison Hartsoe, CEO of Ambition Data. Each week I bring you the leaders behind the customer-centric revolution who share their expert advice. Are you ready to accelerate? Then let’s go!
Allison Hartsoe: 00:32 Welcome everybody. Today’s show is about black Friday, and to help me discuss this topic is professor Pete Fader. Pete is the Frances and Pei-Yuan Chia professor of marketing at the Wharton School of the University of Pennsylvania. He is also the founder of two predictive analytics startups, Zodiac, which was acquired by Nike and Data Equity Partners. He’s also an established author and just an all-around fantastic person. Pete, welcome to the show.
Peter Fader: 01:03 Allison it is always great talking to you.
Allison Hartsoe: 01:04 Thank you. Thank you. Now I have heard through the back channels that you actually have a book coming out on Tuesday. Is that right?
Peter Fader: 01:12 Yes, indeed. October 30th is the birthday for the Customer Centricity Playbook, kind of the next stage and helping companies deal with these emerging concepts and strategies and of course, be glad to talk more about it.
Allison Hartsoe: 01:27 Fantastic. I’m sure we can weave that into our black Friday topic in the show, especially as we talk about the fundamentals of CLV. But before we dive into that, let’s, let’s just talk a little bit about your background and how you got into this topic of customer lifetime value and predictive analytics.
Peter Fader: 01:45 So it’s, you know, it’s interesting that I came into customer lifetime value almost through the back door. I was spending a lot of time in the mid to late nineties doing new product forecasting, a very fundamental topic, but in the academic circles, a lot of my colleagues were yawning about it. They said, come on that’s a solved problem. Come on. Really? Uh, and so, uh, so I did a slight pivot along with my partner in crime, Bruce Hardy at the London business school, say, instead of projecting at the product level, let’s project that the customer level, that was a little bit, that was a lot more novel. The idea of CLV was, was just emerging the data structures that would enable these kinds of predictions were, were just coming online, so it was a way to take, basically it was a, it was a classy pivot just to take the, what we were doing was put a different spin on it and all of a sudden there was a whole new world. Uh, the patterns were remarkable. The use cases were really interesting and it started to show us that what companies are doing with and saying about their customers is often very much out of line with what the data and the models tell us. So it actually, instead of just building a better mousetrap in terms of a slightly better new product forecasting model, it was actually much more fundamental. It was, wait a minute, the world of marketing needs to change. And we’ve been on that change mission for about 15, 20 years now.
Allison Hartsoe: 03:15 Now that’s a long time to make a discovery and keep beating the CLV drum. What do you think has changed recently that is helping to get more momentum around this concept?
Peter Fader: 03:26 Oh, companies are listening. That’s, that’s the big change that for most of this past 15, 20 years I’ve been going to companies and saying, look, you’re wrong about some of the patterns or to be a little bit more positive. Look, I have all these great models, I have all these great insights and tools that will help you understand your customers better, manage relationships in a more profitable manner. I would put out all the code for these CLV models and videos and technical notes and case studies and so on. Please go use this stuff, but for most of that time, the companies wouldn’t listen because they themselves are very product-centric. They really just weren’t thinking about developing customer relationships at the kind of granular level that I’m suggesting. It makes a lot of noise about it, but in the end, it would just be the customer.
Peter Fader: 04:16 So part of it was a recognition that just focusing on the product or generically on the customer isn’t going to get you real far. But part of it is the improved data that the companies now have, the improved computational capabilities that they’re now quite comfortable with and just a new generation of managers, folks who just weren’t necessarily born into the old way of thinking. A lot of these digitally native companies. It really is a new generation of executive. Uh, and so I think there’s still a lot of different forces coming together, the company to not only open to understanding some of these methods, insights and practices but are actively pursuing them. You know, the now the phone’s ringing off the hook. Tell us more.
Peter Fader: 05:01 And it’s just a, it’s a really great time.
Allison Hartsoe: 05:03 That’s fantastic. Now we talk a lot about CLV on the show and we talk a lot about some of the fundamentals, but you know, for folks that maybe listening for the first time, would you mind just recapping some of the basics that go into the way we think about customer lifetime value and customer-centricity as opposed to the way somebody might have gotten it before and an old MBA program?
Peter Fader: 05:28 Sure. Thanks. So let’s start with the most basic of basics so that no one will find surprising, no one should argue with, which is that a customer lifetime value represents the projected future profitability of everything having to do with each individual customer. So that is literally the definition of it. Customer lifetime value. The problem is that a lot of people use those words very very loosely and they kind of forget the literal meaning of those three words, especially the value part, and they’ll either base it on historic profitability, uh, or they’ll do it over a limited range into the future, although do it for a limited range of activities that the customers involved with or they’ll be kind of sloppy about what, how they take a costs into account. So it turns out that most of the CLVs that companies are talking about are putting out there or just using for their own decision making really don’t reflect customer lifetime value. I’m not saying that what they’re coming up with is wrong. We forget, again, if you’re talking about what the customer profitability is over the next two years, that could be very valuable. I’ve nothing against that. That might be more valuable than CLV, but call it C2V instead,
Peter Fader: 06:53 Let’s just be real clear about what we’re measuring in what we’re claiming cause we are going to be held accountable by this stuff. Right now companies are just putting these things out there, assuming that no one’s ever actually going to call them on it, but I’m trying to raise the bar. I’m trying to get people from across the organization and external stakeholders as well to start looking back at those numbers, let’s say two years from now and saying, well, were you right or not? So, so really trying to come up with much more rigorous standards about how these things are defined and measured and starting to augment them in other ways. So as just one example and there are many others that we can talk about. What about the social interactions that people have with each other? So it could be that, that my profitability impacts yours and vice versa. So when I talk about the future value of all interactions with one particular customer, we should also take into account where they’re located in the social graph and the contribution that they might make to making other costumers more valuable and so on. That’s a really hard problem. But if we’re going to talk about customer lifetime value, the right way to do it comprehensively, uh, we should be accounting for that as well.
Allison Hartsoe: 08:04 I can see where the data-crunching becomes an incredibly important part of that scenario.
Peter Fader: 08:10 Yes, and that’s one of the issues is, very often people will take me up on my offer when I talk about having videos and case studies and spreadsheets and technical notes, and they say, okay, well give me the starter kit. Well, the problem is, if you’ve got to be doing this stuff in practice and you’re going to be doing this stuff at full commercial scale, and you’re going to be doing it in a way that you’re willing to be held accountable. It’s actually pretty hard. And the basic back of the envelope version that people might do when they’re marketing 101 class is just plain wrong. The numbers that you come up with, the scope of behaviors that you account for, it’s just inadequate. And so I don’t even have, I never teach that kind of baby intro to lifetime value thing because I just don’t want to be spreading bad practices. Just not good to put out that baby version. Hey, that was not right. Let me give you this one instead. So this could be a problem on my part that maybe I’d be better off walking before I can run, but lifetime value is a sprint and you just need to be in shape before you even begin that kind of activity.
Allison Hartsoe: 09:10 You know I think there’s a white paper that’s really easy to access and I’ll, uh, included in the show notes, but if you do a google search for Pete Fader and customer lifetime value, that’s very brief document comes out that says what’s wrong with CLV? And it goes through each piece of why the calculation is not built correctly. And other things that you have to think through, but like you said, it’s, it’s fairly complex, uh, and it really has to reflect the business that you’re in order to correctly account for what you will be held accountable for at the end of the day.
Peter Fader: 09:45 That’s another fantastic point, Allison and too often in the textbook lifetime value calculation, it assumes that it is some kind of contractual relationship, that is, it focuses on calculating and using the retention rate, which is vitally important if you are in some kind of subscription or other contractual setting. But most business isn’t. Most business doesn’t have a formal retention rate for most companies. They don’t really know how many customers they have because there is no formal account like that that gets closed and the customer goes away. The best you can do is just to look at the transactions that they’ve had with you over the past year or two and say, you know, they used to do a lot. They haven’t been around for a while. They’ve probably gone now. So in that kind of non-contractual setting, it is much more complex and you cannot approximate it as a contractual one, you cannot come up with a retention rate in a setting when it’s impossible to count your customers. So it’s just another one of these examples where it raises the entry barrier to do this stuff, but it ensures that if you are gonna do it, you’re going to do it right.
Allison Hartsoe: 10:58 Right. And I feel that we have spent so much time looking at the digital streams that come in and I love the combination of looking at that non-contractual setting and getting some of those early digital signals and we sometimes see that there’s a nice match between valuable customers and how many signals they’re giving you. Like they, they’re starting out, they want to interact with you. They’re reading your emails. They’re clicking through. Maybe they’re not buying right away, but they’re giving those signals like almost a bid for attention that they are interested. When you combine that with their actual CLV value, it helps you see these are people who are starting to become good customers. Or conversely, these are people that are starting to maybe fall off the good customer bandwagon and so you can take appropriate marketing activities so that the combination of digital and customer lifetime value is just, I think almost unbeatable. It’s a fantastic tool.
Peter Fader: 11:59 So true, so true. And that’s really what would lead to the revelations that I mentioned at the outset, uh, the idea that, that not all customers are created equal and there are observable aspects, whether it’s behavior, sometimes it’s demographics, but usually not, uh, but things that they do or just things about the customer that can be indicative of what they’ll be worth over the long run. So we really can start to talk about lifetime value even before we’ve seen you live your whole life. And that’s what gives us pivot towards customer-centricity. The fact that we can anticipate, maybe not right all the time, but we can anticipate which customers are likely to be the most valuable ones. And so if we have a limited number of touches that we can give out, if the, if we’re going to kind of queue up our customers, uh, have some kind of priority for customer service or some other bonuses that we’re giving out, that we should be willing to kind of go out on a limb and say, you know, what, I think these customers over here, we’re going to be the good ones more than those over there and we should now have the courage, the ability to pick and choose like that.
Peter Fader: 13:07 And that’s what drives us in this direction of customers centricity. It all starts with CLV. But it really requires us to be able to get those early signals and the ability to take action on them.
Allison Hartsoe: 13:18 Now that is a fantastic queue up to black Friday. So tell us a little bit about why you think black Friday is a bad way for retail to go about getting new business.
Peter Fader: 13:33 So let’s start with the kind of the snarkiness most sarcastic, cynical, skeptical way to look at it. And then we can kind of work backwards to kind of put it on a proper perspective. Black Friday is the day when you identify your worst, worst, worst customers and treat them like royalty. Okay, all you terrible customers, all you customers who are very price sensitive and you rarely buy with us except when we have stuff on sale and you’re kind of difficult to manage. We are going to line all of you up and we’re going to have special hours. We’re going to pay our employees double just to let you destroy our store and buy stuff at deep, deep discounts, knowing full well that you won’t be back again until this time next year. Does that sound like a recipe for success or what? Now again, I’m overstating a little bit, but that’s the spirit of it is what Black Friday is all about, is going against everything that we were just saying that not all customers are created equal. So let’s take the worst ones and do far more for them and with them than we should.
Allison Hartsoe: 14:39 So why do you think companies do this?
Peter Fader: 14:43 Couple of reasons. Number one, lot of companies out there they don’t have the visibility into the individual customers and they don’t believe what I’m saying, and they say, hear all that kaching going on, we’re selling a lot of stuff. Let’s not worry about tomorrow. Let’s just celebrate today. So there’s a lot of that just getting kind of caught up in the moment. Um, there’s also the naive belief that if we can be their best friend, then all of a sudden they will turn from ugly ducklings into beautiful swans and that once we have information about them and we have this touchpoint with them that we can start cross-selling and upselling and they’re going to love us and they’re going to buy from us more often and at full price. Yeah. Right. And then the third part is it’s just competition. We know that our competitors are doing it and so we better do it too because we don’t want to get caught flat-footed. So there’s just a lot of reasons that in and of themselves are actually kind of understandable. But when you do step back and look at the big picture, which is the future projected value of customers and value of the customer base as a whole, that it’s not really a good thing to do.
Allison Hartsoe: 15:53 Yeah, I can see that and I can also see why the retailers get caught up in that short term gain. But one of the things I want to pick out from your three reasons that I think is a common assumption is that reason number two, that you can take an ugly duckling and turn them into a swan. Why do you think so many retailers believe that if they just aggregate enough customers, they can grow them into higher-value customers? And how have you figured out that it isn’t actually the case?
Peter Fader: 16:23 Well, again, this is. This goes back to the revelation, but until that time, until the early two thousand, we really believed in marketing management or worse yet, customer relationship management. That we can manage the customer relationship, that it’s kind of under our control and that we have these godlike powers and if we put the just right offer in front of the customer at the right time, that then magical things will happen. And it turns out that behavior is much more random, unpredictable, uh, that no matter how much data we collect on particular individuals, their decision to do stuff with us or their decision to kind of end the relationship is largely out of our control. And so a lot of this whole new era of looking at things is to recognize that there really is only so much that we can do and that we do need to be opportunistic.
Peter Fader: 17:20 And, and when the, when the opportunity arises on, here’s, hey, there’s a chance you’re a customer is seeking a way to deepen the relationship, we need to kind of pounce on it. But most customers aren’t seeking that very often at all. And just cause they’re checking out stuff on the website doesn’t mean that they’re, they’re looking for us to kind of call them up and offer them a lot of stuff. So the traditional ways of quote-unquote managing customer relationships, cross-selling and upselling like, hey, you know, people who buy this also buy that or hey, don’t you want this nicer version. They’re not nearly as effective as we thought. And very often when we look at them not through the lens of how much stuff we’re able to push out the door through such a campaign, but in terms of future value-enhanced or created there, they’re actually much more limited the ROI on those efforts.
Peter Fader: 18:11 Aren’t as great as we’d like to believe. So we really have to get much smarter about moving away from these kinds of one size fits all practices of cross-selling and upselling and think about more nuanced, a ways to go. And of course it’s something that I make a great big deal about in my new book that we need to think about some of the newer tools, some of which aren’t exactly brand new things like loyalty programs or some of the really newer stuff like customer experience activities or strategic account management, or premium services. Uh, there are things that we can target more effectively to help us grow value or defend value with the right kinds of customers rather than the one size fits all approaches that companies have traditionally followed.
Allison Hartsoe: 18:57 So, based on maybe some things that you outlined in the playbook. Can you, and I don’t know if you actually have examples here, but are there ways that you’d like to see black Friday retailers operate or are there actual examples of black Friday retailers who are doing things in a more customer-centricity playbook way, there being more intelligent about it? So how should it go at this time of year?
Peter Fader: 19:25 Sure. So, there’s this main framework that I just alluded to is we gotta ask ourselves which kinds of customers or are we focused on and what is it that we want to do with them? So what are we aiming at the high end or the low end of our customer pyramid? And are we trying to play offense to create more value or are we trying to play defense just to kinda, you know, hold onto the customers? I would say that the kinds of black Friday activities that we usually associate with the holiday and that I was just saying snarky things about should be put in the low-value play defense bucket. So there are some things that we need to do just to kind of stay competitive and to hold onto that kind of non-great relationship with those customers. Uh, so using black Friday and some kind of defensive way, uh, which means yes, you got to maybe offer some discounts and maybe you got to offer some merchandising and messaging and so on, but not to the full extent that most companies are doing it.
Peter Fader: 20:25 And instead, if you’re going to be really putting yourself out there, you should be focusing on those activities much more on the, on the high-end customers. So for instance, instead of throwing open the doors at midnight on Thursday night right after everyone ate all their Turkey and kind of encouraging all these not great customers who are going to come on in. You should be devoting those extra hours and those extra activities to the high-end customers. So why not have a special VIP shopping hours, um, when you were open later, you’re open early only for customers who have shown or are projected to have the right kinds of behaviors. So why not save some of the black Friday activity as rewards and using it as a way to kind of treat people really well instead of treating them like cattle or as a wonderful, wonderful example.
Peter Fader: 21:20 And I don’t even think it was even intended this way, but it just came out that way. Uh, it’s an example that I’m sure that many of your listeners are already familiar with the whole opt outside of campaign that REI came up with a couple of years ago. The whole idea of, you know, what, let’s avoid that mad rush. Um, and, and let’s just not even think about having all those crazy discounts. And instead, let’s just talk about family and leisure and exercise and, and let’s kind of play to the core of what REI is all about. And instead of inviting in all those customers who don’t even necessarily subscribe to those things or don’t buy very often with us, let’s just find ways to kind of make the day special for you and for our employees as well. I loved that campaign and I liked the way that they’ve doubled down on it over the years.
Peter Fader: 22:10 And I find it interesting how other companies have tried to mimic it in different ways. But all too often it ends up being a where like REI, but we’re going to have this tremendous sale. So all you should line up for it. This is an inherent contradiction. So indeed there are ways to make a black Friday or let’s call them, you know, early holiday shopping activities fit within this framework. But it’s important to recognize that it needs to be different kinds of activities that we’re talking about the high end versus low-end customers and whether we’re talking about offense versus defense, I think that brings a lot more discipline to the way that we look at what we’re doing and then how we might allocate our scarce resources for it.
Allison Hartsoe: 22:56 That makes a lot of sense.
Peter Fader: 22:58 Uh, yeah, in many ways black Friday is, it’s a really dramatic example, but I think the same perspectives they apply year-round, it’s just that black Friday is just the time when it really kind of goes against the grain of have so many companies allocating those scarce resources so ineffectively and again, I’m not saying that you should get rid of those sales, you need to do some of that, but you don’t necessarily need to overdo it and to let all of that craziness get in the way of actually creating meaningful value for the high-value customers.
Allison Hartsoe: 23:33 Let’s talk about online for a second because I think in black Friday we oftentimes think about the physical retail store and yet many of these principles should apply online as well as offline, correct?
Peter Fader: 23:47 Of course, we had this icky phrase, people still talk about it, but I hope that they’ll stop. Maybe they will. Maybe this year we’ll start to wane the idea of Cyber Monday or, or whatever that, you know, after the holidays and then you’re back at work. Are you spending all your time online shopping there? So this, first of all, we should eliminate both phrases because neither one is really valid. It’s not even like black Friday is the biggest shopping day of the year. Usually, it tends to come actually closer to Christmas. So let’s just get rid of the stereotypes. It’s bad that I even brought it up, but there should be just lots of both integration of online and offline. I’m certainly not the first to be saying that I’m all retailers should be Omni channel, but to be able to use the different kinds of platforms to be able to differentiate among customers and the different kinds of customer experiences, you know, there’s a lot of retailers including mighty Amazon that hesitate to do different things online versus offline.
Peter Fader: 24:45 You’re going to some of these Amazon stores and even though it is a different experience, uh, the prices are the same and the merchandise, it will be a subset of what you see online. But instead, a retailer should be offering an Omni channel that they should be available on a seamless way across, online and offline. But they should at the same time celebrate some of the differences. And have some merchandise that’s available to one or the other or a potential interactions that might be different on one versus the other. And again, that’s going to be an opportunity to be growing value while with some also play defense with others.
Allison Hartsoe: 25:22 You know, what’s interesting about that is it almost sounds like you’re suggesting that Amazon has something like a prime store that’s a different type of store for it’s more valuable prime customers or maybe even a VIP prime store or some other additional level. Have you seen that in the real world where companies are starting to break out special stores or special experiences for those higher-value customers?
Peter Fader: 25:49 Yeah, we are starting to see it. Not with Amazon necessarily, but with one of the things I love is with Nordstrom’s. So they now have a series of stores that are opening up. I think first one started out in LA where you can’t even buy anything where, uh, where you can try stuff on and you can kind of meet with your fashion consultants and you can get a, I think they have like spa treatments and other beauty activity. So it’s going to be less about just buying, buying, buying and sell, sell, sell, and more about kind of the holistic, let’s get to know each other better. That’s clearly going to cater to their higher-end customers, the ones who just love Nordstrom and want to have a more multifaceted relationship with them. So I think that’s a really great example there. Of course, we see other examples at the low end of a lot of these stores including Nordstrom, but all the big department stores having their outlet stores. So there’s the way of, here we go again, kind of playing defense at the lower end, but doing so in a way that can kind of sort out those customers from the higher end ones that you want to spend a little bit more time doing the personal stuff with. So we’re clearly starting to see some of that. I think it is that kind of differentiation, but at the same time coordination, that’s going to help retailers fight against the Amazons. Amazon’s as if there’s multiple, against Amazon, um, as effectively as possible.
Allison Hartsoe: 27:09 It almost sounds like in, in that description about the Nordstrom stores that the brand is trying to become a friend, an almost a human entity to the high-value customer in creating that deepening a more personal experience and, and you know, as we. So we’ve all experienced, you can’t be friends with everybody, you can be acquaintances with everybody, but you can’t be deep friends with everyone because there’s just not that kind of fit. Is that the same philosophy that stores that want to attract high-value customers are moving to, they’re, they’re almost trying to attract a tribe and become an entity.
Peter Fader: 27:47 Well, we certainly see great examples of exactly that happening with all of these direct to consumer, digitally native startups. So starting with Warby Parker and right on down the line with the dozens that have followed suit is there kind of beginning, not just with a product but with a promise and there’s usually, either some kind of a social angle to it or they’re meeting some kind of particular need that just the traditional players in their sectors haven’t been able to meet. So they’re really setting themselves apart by saying if you share this vision then you know you want to kind of go deep with us. And so yeah, we’re starting to see a lot of that and then ironically then they start spreading themselves out. So let’s go back to Warby Parker, so, they started with just this very unusual premise that set them apart from other glasses, a provider.
Peter Fader: 28:41 So it was the idea that buy one pair and they give one to charity, but also the really interesting ways that you can order a bunch of them and it will send you those frames and you can try them on and then send them back things that are quite commonplace now, but they really kind of created the mold for it. But then they start opening stores and they start becoming more broadly appealing. So other customers who didn’t necessarily know about or even resonate with that original appeal. So it is important at some point, as you said, to let everyone be your acquaintance, but to be selective about who your friends are and not to expect that everybody’s going to want to be part of that club.
Allison Hartsoe: 29:20 And when you do have that core group that’s part of the club, then you can build on it just as you said, is Warby Parker stretching out and saying, okay, now we’re going to have a slightly bigger club, but still very selective. Uh, certain persona that they’re after,
Peter Fader: 29:35 That’s right. And it takes us back to black Friday. And so there’s a real opportunity to say that for you members of the club, we’re going to do something very special for you. That here’s going to be a way to avoid the rush and we’re going to come up with sales, or we’re going to come up with other kinds of relationship-enhancing activities that are a way for us to celebrate you. So I think it’s, it’s a really great way to kind of zig when all of these big box stores or are zagging, uh, and to show that we really can do something special there. When you’re tired of kind of waiting online and I’m being mistreated by, by all these other vendors.
Allison Hartsoe: 30:13 Well, let’s say that I’m convinced and I am a retailer and I decided that I want to do something new with my store for black Friday. We’ve talked about a couple of examples, but could you give us a bit of a bulleted or a tactical list of what to do for second third in order to help my company pivot, my company being, you know, any generic retailer.
Peter Fader: 30:35 Well, goes back to the beginning of the conversation. It goes back to customer lifetime value. The firms really need to double down on their efforts to tag and track their customers and recognize their value and measure as they interact with them. How much are they enhancing, if at all? Uh, the value of that customer. So it starts with that, that none of this, none of my black Friday snark, um, would make sense. None of it would be possible unless we’re able to measure the value of customers. And as we started doing it through my first startup Zodiac, we’d start to see all the incredible lack of value lining up around the store had been, I had Thursday night and saying, wait a minute, what are we doing? So it’s important to really, really, really do that at a granular level and on a dynamic basis, like I said, to say how much more or less valuable as the customer today than they were yesterday.
Peter Fader: 31:30 So it starts there and then it starts getting into this more a nuanced alignment of retention and development activities that it’s not just this one size fits all campaign, um, but it’s going to be doing different things with different kinds of customers and measuring, measuring, measuring all along the way to find out which activities make most sense. You know, there’s a real dilemma about we have these high-value customers over here. So should they be the ones that we go after first, um, or do we kind of just leave them on cruise control because they were already high value and spend those touches on the lower value customers instead? That’s a real tough challenge. And the answer is, well, it depends, and so that’s why we need to measure all the time and find out which kinds of activities for which kinds of customers are value-enhancing and at which time should we just leave those high-value customers alone because we don’t want to annoy them. You know, they became great customers on their own without us annoying them, so it’s not clear that we need to keep reminding them of how valuable they are to us that actually might hurt their value. So it’s being really careful about the tactics that we use, running experiments, measuring after the fact, and then learning kind of on a Meta level, what are the characteristics of the tactics that are value-enhancing versus value defending for different kinds of customers.
Allison Hartsoe: 32:51 I think that’s an excellent point about running experiments and learning and being very careful about what activities you do. Just a week or two ago, we had the brand marketing director from Winky Lux, which is one of these start fast retail companies, and she was talking about how they were getting ready to kill a product in the product set, but when they looked at who was actually buying it, they realized it was a high-value customer favorite product and that if they married it with other products in a specific way, they would be able to and they did take the people who were in the middle levels and help get them to be a little bit higher in retention, become a little bit more high value. So by analyzing not just product but actual merchandising with the connection of the customer value, they were able to increase the overall value of the base, which is going exactly back to your point about testing and running experiments. They didn’t know what answer they were going to get.
Peter Fader: 33:54 That is such a great example, Allison. I’m going to have to go back and listen to that podcast myself because that idea of judging products on the basis of who buys them as opposed to how many units we ship out. That is just such a wonderful illustration of what customer-centricity is all about and how it contrasts very sharply with the usual product focus views. Now let’s go back to black Friday because a lot of those products that are moving most rapidly are the ones that are appealing to low-value customers or maybe I’m speculating a little bit about that. But it stands to reason that the people who are just waiting outside the door and they’re going to come in. You know let’s watch to see which products they’re running after and it’s probably those kinds of products that are magnets for the worst kinds of customers. Now I’m not saying we should abandon all of those products, but we should keep in mind that just because something is a best seller doesn’t mean that it’s enhancing the most ongoing and future value for us. And so we really need to figure out which products are most appealing and least appealing to our most valuable customers and kind of look at the portfolio of products in the same way that we look at the portfolio of customers.
Allison Hartsoe: 35:05 Now I’m going to take a guess here because I haven’t been very close to Theta Equity Partners, but is that what you’re trying to help people see in the, with Theta Equity Partners, helping them see how companies build value through the customer base as opposed to the product sales?
Peter Fader: 35:22 Yes, indeed. Indeed, yes indeed. So what we’re doing with Zodiac was much more micro. So how valuable is this customer there for? How valuable was that product or that campaign? At a Theta Equity Partners, we’re operating at a much higher level. We’re not doing any of that micro kind of stuff. Instead, we’re saying just how valuable is this overall set of customers? How much can we break it down for the cohort we just acquired versus the cohort we acquired last year. And, and what’s the linkage? I mean, here’s the important part between the overall amount of customer equity and the overall value of the firm. Let’s tie customer valuation to market valuation and show companies, first of all, are the two lined up and if they’re not, why is that the case? Is it that shareholders are not seeing all the value residing in these customers or is it that they’re seeing other sources that the customers are only so valuable, but they’re kind of overvaluing the company because they’re kind of seeing value that might not really be there that can’t be born through the customers. So let’s try to bring some rigor discipline on the finance side through customer evaluation and then, then work backwards. Then give the companies both the courage and the tools that on their own they can start to do some more micro-activities.
Allison Hartsoe: 36:41 This always reminds me of what you used to say, which is that the CFO has to get on board with the CMO’s customer-centric methodologies in order for it really to take flight and it sounds like this is exactly anchored to that idea.
Peter Fader: 36:57 Yes. Yeah, indeed. That our clients are the CFO’s or the VP’s of investor relations and it’s been really, really heartening to see, uh, how many of them, and how immediately they get this message. Again, they don’t necessarily care about all that marketing stuff. They just want to make sure that what they’re saying to their external stakeholders is aligned with the true value of the firm. That as they go out there and think about say a merger and acquisition activities, they want to make sure that they’re doing it correctly and then after they see that these models work in terms of corporate valuation to be able to then have that partnership with the folks in marketing. Again, that’s not why they’re doing it, but it’s wonderful icing on the cake that it can create a more productive and aligned conversation within the organization as well.
Allison Hartsoe: 37:44 Pete, would you like us to link to the corporate valuation papers that you and Dan Mccarthy did in the show notes or as part of this podcast?
Peter Fader: 37:51 Of course, yeah. That’s the nice thing about it is that even though we have this commercial enterprise Theta Equity Partners, and there’s lots of information on that website as well, a lot of it begins with some academic work that Dan and I have done, so there’s no kind of black-box secret sauce here. We’ve put a lot of these methods out there. We want people to use them. It goes right back to the mission that I kind of started that 15, 20 years ago that there’s just really good practices to be done but it, but it’s hard to do them. They’re, they’re very unfamiliar. So it’s been my job to put a lot of this stuff out there in the public domain. And ironically, even though I’ve commercialized some of it, the commercialization is partially just to legitimize it. And just to say, you know, hey, look, you know, we can make money on this. You can too. You don’t necessarily have to come to us. You can just read these papers and act on them on your own. Uh, but if you find that too burdensome or if you want to work with the best in class, then hey, we’re happy to do it, but I, so both academically and commercially, uh, it’s just worth knowing about this stuff and at least exploring the possibilities.
Allison Hartsoe: 39:00 Now, if you’re not a CFO, of course, you could get the customer-centricity playbook that is coming out and you could also get a good idea of what kind of strategies to start to pull into your company through that playbook. Right?
Peter Fader: 39:14 Indeed. And it’s important to emphasize that we have different activities, models, text depending on where you are in the organization, depending on what level you’re at, depending on what functional area you’re in, but it all does fit together. That’s the beautiful thing about it is that I can turnaround from a corporate valuation exercise to some kind of, you know, black Friday marketing tactical thing. And while it might seem like I’m talking about very different stuff underneath the surface, it’s all aligned and it’s all about looking at and leveraging the lifetime value of the customer base. And that’s what makes me really happy is that I don’t have to offer an entirely different message to different people within the organization. I’m going to say the same thing slightly differently. Uh, but, but it all comes back and it’s just really nice when you see that kind of consistency.
Allison Hartsoe: 40:04 Exactly. Well, now if people want to get in touch with you, Pete, how should they reach you?
Peter Fader: 40:09 Well, the easiest thing. The best thing is just to Google my name, or you can go to petefader.com. That’s my kind of academic page or go to thetaequity.com where you can see a lot of things that we’re doing with the valuation. Uh, but uh, but maybe the best first step would be to go to check out our Customer Centricity Playbook. It’s coming out right now. Uh, it’s, it’s already been sparking a wonderful conversation from folks who have seen some advanced copies of it and I just can’t wait to see how that gospel spreads and how it can lead to other changes that the company’s take on to give them just a little bit more courage and knowledge to try things that they just wouldn’t have been thinking about doing even five years ago.
Allison Hartsoe: 40:49 Excellent. Excellent. Well, let me do a very quick summary here and you can tell me if you want to add anything else along the way. But we started out talking about Black Friday and the thing that you said in the very beginning that I thought was very interesting and I haven’t heard on this show before, is this phrase about we used to believe we could manage the customer relationship. This struck home with me because I just came back from a conference where everybody was talking about the next best action and the embedded assumption in the next best action wasn’t about it being customer-led. It was about exactly what you said. If you just put the right thing in the front of the customer, then the customer will take it that it’s just like you’re feeding somebody a series of treats in order to get them into a particular activity, but what you said is that the behavior is really more random and there’s only so much we can do and that we need to acknowledge that limitation by creating that relationship with customers, understanding their value and thinking about more nuanced ways to go and that’s particularly what’s wrong with Black Friday.
Allison Hartsoe: 41:54 Did I get that right?
Peter Fader: 41:55 That’s a wonderful summary, Allison. It’s probably better than the previous 45 minutes � good job on that.
Allison Hartsoe: 42:02 And then we talked about what kind of impact can I get. You had said that, are we playing offense, which is about creating more value in existing customers or are we playing defense, which is about holding on to the customer base and Black Friday was really about holding the line and setting the defense and then you said it’s okay to have some discounts like we don’t need to completely do away with discounting altogether, but the sense that the companies could devote all that effort to higher-end customers and you know, how would you reward and treat your higher-value customers as opposed to just a free for all for people that you might never see again until next year.
Peter Fader: 42:43 That’s right. And, and you know, one piece of the equation that we haven’t touched on, Allison, is customer acquisition. So far we’ve been talking an entirely just about the care and feeding of the existing customers, but we don’t have the time to get into this now. But, but it’s real important to point out that when we’re talking about playing offense, as you said, were creating and extracting more value out of the existing customers. But there’s also that whole idea of going out there and finding new customers as well. Uh, that should be part of the holiday season is bringing in new customers and unfortunately a lot of the black Friday activities, the new customers we’re bringing in aren’t going to be very good ones. So then we’re going to be stuck with even more bad customers making a bad thing worse.
Allison Hartsoe: 43:23 Exactly. I think that’s maybe that’s a topic for a future episode and, and such a good point. So then we talked about what to do next and obviously you have to measure, you have to understand who is coming in and get your CLV calculations and then you actually called out some interesting avenues here that it’s not just about the fact that I could look at it from the Customer Centricity Playbook and the activities I could take there. But the interlocking of that with the Theta Equity side, which is a, I could also look at how my company is valued and then everything underneath connects. And I think that’s something really beautiful that most companies don’t see and is incredibly valuable. So thank you for calling that out in the, uh, in the steps of things to do next.
Peter Fader: 44:08 And Allison, thanks for being just a great big platform megaphone for making some of these ideas and truly making them accessible to a very broad audience.
Allison Hartsoe: 44:17 Thank you Pete. Well, as always, links to everything we discuss are at ambitiondata.com/podcast. Pete, thanks so much for joining us today.
Peter Fader: 44:25 I really enjoyed Allison and I’m hoping to see just a little bit more, little bit more rationality when it comes to Black Friday this year. Uh, every year we’ll take a step in the right direction.
Allison Hartsoe: 44:35 We’ll have to wait and see. 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.
Allison Hartsoe: 44:47 I’ve been chatting with Wharton Professor Peter Fader about the new book he wrote with Wharton Interactive Executive Director Sarah Toms. It’s called the Customer Centricity Playbook – Implement a Winning Strategy Driven by Customer Lifetime Value. Now obviously that’s something that we believe deeply in on the show and thanks to the nice folks at Wharton, we were able to secure a special discount for our podcast listeners, so if you go to bit.ly/ambitiondata, which is bit b i t dot l y slash ambition data, a m b i t i o n d a t a, you will receive a 30 percent discount off the ebook retail price and this is actually a Wharton Digital Press page that loads the discount where you can buy the book, which by the way is very good for customer centricity as well.
Allison Hartsoe: 45:40 Since if you’ve ever sold a book, you know that you don’t get any information from Amazon about who buys your stuff. So anyway, that link again is bit.ly/ambitiondata, which is b i t dot l y slash ambition data for a 30 percent discount off the ebook.
Allison Hartsoe: 45:59 Thank you for joining today’s show. This is your host, Allison Hartsoe and I have two gifts for you. First, I’ve written a guide for the Customer-Centric Cmo, which contains some of the best ideas from this podcast, and you can receive it right now. Simply text, ambition data, one word to 31996 and after you get that white paper, you’ll have the option for the second gift, which is to receive The Signal. Once a month. I put together a 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. Things I include could be smart tools I’ve run across, articles I’ve shared, cool statistics or people and companies I think are making amazing progress as they build customer equity. I hope you enjoy the CMO guide and The Signal. See you next week on the Customer Equity Accelerator.