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Peter Fader Professor of Marketing Wharton School at the University of Pennsylvania
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Bruce Ernst Vice President Product Management Monetate
How Can Customer Centricity Be Profitable?
Professor Peter Fader The Wharton School, University of Pennsylvania
Co-‐director, Wharton Customer Analy=cs Ini=a=ve
[email protected] www.petefader.com TwiCer: @faderp
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• The tradi=onal product-‐centric business model is showing some cracks – Commodi=za=on, well-‐informed customers, globaliza=on, etc.
• Customer centricity is a promising alterna=ve but is not clearly understood – Many firms that are touted to be customer centric really aren’t…
• Celebrate customer heterogeneity: dis=nguish the profitable customers from the less profitable ones – Emerging metrics such as customer life=me value (CLV) make this possible
• So where do higher profits come from? – That is our focus today…
“Customer Centricity: Focus on the Right Customers for Strategic Advantage”
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Show me the money! Customer centricity can lead to improved profitability through greater effec=veness/efficiency in: • Customer acquisi=on • Customer reten=on • Customer development
You can’t expect to be world-‐class on all three dimensions, but doing very well at even one of these could be highly lucra=ve for the company as a whole.
But mastering each of these cri=cal func=ons is a lot trickier than you think…
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Mo money Balancing acquisi=on, reten=on, and development requires considerable skill (and analy=cal insight)
If you had an extra dollar to spend, which of these ac=vi=es would you allocate it to?
Let’s examine each tac=c separately in order to learn the answer…
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Customer acquisi=on
• What metric is used by most firms to gauge and guide their acquisi=on ac=vi=es?
• CPA (cost per acquisi=on) • Big mistake! • Would you use it for other kinds of acquisi=on ac=vi=es (e.g., employees,
technology, lawyers)? • Firms should focus instead on:
– VPA – “Value per acquisi=on” à which is CLV!
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Marke&ng Science, Sept./Oct. 2011, p. 837-‐850
“Customers acquired from Google on average have a higher lifetime value (mean CLV at $1,002) than customers acquired from other channels (mean CLV at $808). The difference is even larger for those whose first-time purchase was off-line (mean CLV at $1,226 versus $959, respectively)…”
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Customer acquisi=on: summary • You must ac=vely avoid having a “CPA mentality”
– Focus on ceilings instead of floors… • Celebrate heterogeneity by using CLV to drive acquisi=on strategies and
tac=cs – Be more pa=ent/forward-‐looking when judging acquisi=on efforts
• In general, firms tend to underspend on acquisi=on, and underachieve as well
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Customer reten=on
• What metric is used by most firms to gauge and guide their reten=on ac=vi=es?
• Churn/aCri=on rate (or reten=on rate) • This is a good metric, but you need to examine it at the right level…
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Vodafone aCri=on rate (quarterly annualized %)
Source: Vodafone Germany Analyst & Investor Day presenta=on (2004-‐09-‐27)
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Celebrate heterogeneity!
ACri=on rate
% customers
Source: “Vodafone Achievement and Challenges in Italy” presenta=on (2006-‐09-‐12)
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Transla=on to CLV
Expected life=me using this average aCri=on rate: 5.6 years
Ø What’s wrong with this calcula=on?
Cluster Attrition rate
% customers
Low risk 0.06 70 Medium risk 0.35 20
High risk 0.65 10
ACri=on rate
% customers
Average aCri=on rate: 0.177 (0.06 × 0.70 + 0.35 × 0.20 + 0.65 × 0.10 = 0.177)
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“Because we can’t get accurate calcula=ons with averages, we must work with the actual rates for each separate class of customers.”
Reichheld, “The Loyalty Effect,” p. 54
The key insight…
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Transla=on to CLV
Expected life=me using this average aCri=on rate: 5.6 years
Correct average life=me: 12.4 years (16.7 × 0.70 + 2.9 × 0.20 + 1.5 × 0.10 = 12.4)
Cluster Attrition rate
% customers
Low risk 0.06 70 Medium risk 0.35 20
High risk 0.65 10
ACri=on rate
% customers
Average aCri=on rate: 0.177 (0.06 × 0.70 + 0.35 × 0.20 + 0.65 × 0.10 = 0.177)
Expected lifetime
16.7 2.9
1.5
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Customer reten=on: summary • There is no “average” customer, and calcula=ons based on such a no=on
will always underes=mate the value of a customer base – And the difference can be huge!
• When heterogeneity is accounted for, the “aCri=on elas=city” is much lower than in the homogeneous case – Investments in reducing aCri=on will have more modest returns than expected
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Customer development: quick summary
• It is useful to look for development opportuni=es, but the upside to these ac=vi=es is more limited than most managers think
• Due to massive customer heterogeneity, there is more opportunity to “move the needle” via acquisi=on than development
• S=ll, it’s important to pursue development tac=cs, but think about them as “icing on the cake”
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Balancing acquisi=on, reten=on, and development
If you had an extra dollar to spend, which of these ac=vi=es would you allocate it to?
Not to minimize the importance of reten=on and development, but at the margin I favor acquisi=on… Consider the conven=onal wisdom: “it costs 5-‐10 =mes more to acquire a new customer than to retain one, so work hard to keep the ones you have…”
This may be true, but it totally misses the point: focus on value instead of costs #monetatewebinar
Overall summary • Customer centricity can only succeed by “celebra=ng heterogeneity” • The greatest upside to improve customer profitability arises through
“smart acquisi=on” • Don’t overspend on reten=on – the flighty customers will fly away no
maCer what you do (or they’ll be unprofitable) • View development as “icing on the cake.” ACemp=ng to turn persistent
“detractors” into “promoters” is a difficult task, and the resources required to do so can be beCer invested elsewhere
• Don’t have blind faith in the conven=onal wisdom about these tac=cs
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Professor Peter Fader [email protected]
www.petefader.com TwiCer: @faderp
“Customer Centricity: Focus on the Right Customers for Strategic Advantage”
hCp://bit.ly/FaderCC
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Customer Centricity in the Digital World
Bruce Ernst Vice President, Product Management Monetate
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40% Marketers who don’t target any customer or visitor segments to create personalized website experiences. Econsultancy, The Reali&es of Online Personaliza&on, 2013
28% Marketers who say they do not know which high-‐value customers to focus their markeKng on. BRITE/NYAMA Marke&ng in Transi&on Study, 2012
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SegmentaKon • Is Real
• Is Possible • Will make a difference to your business
Questions & Answers
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Peter Fader Professor of Marketing Wharton School at the University of Pennsylvania
Bruce Ernst Vice President Product Management Monetate
