Customer Centricity: Why Companies Should Play a Long Game Strategy

One of the bigger mistakes that retailers can make today is to believe that consumers are all the same.

The individual needs of one person will most likely be different from many others. Luckily for consumers, more and more companies are recognizing this issue. Unfortunately, not all do.

Wharton’s Peter Fader and Sarah Toms look deeper at this issue in a new book that they have collaborated on. It’s titled The Customer Centricity Playbook: Implement a Winning Strategy Driven by Customer Lifetime Value.

Peter is a Professor here at The Wharton School. Also with us is Sarah Toms, Executive Director and co-founder of Wharton Interactive.

Dan Loney:
Peter this has been an area that — customer centricity — that you have worked out for a good amount of time now.

Peter Fader:
I’ve been looking at it, I’ve been shouting about it, I’ve been doing research on it, I’ve been talking to a lot of companies about it. When I first started down this path around ten years ago, a lot of it was dismissed. “We have a product to sell. Yeah, we’ll be nice to the customers, too. But it’s all about the product. Well, that is clearly changing and it’s great to hear companies talking more and more about recognizing that not all customers are the same. Realizing it’s an aspiration for them to treat different customers differently. This new book is to turn that aspiration into action. And as you said in the title, it’s how to implement strategies that are taking these ideas and bringing them to life.

Dan Loney:
Sarah, the interest that you bring to this topic comes from where?

Sarah Toms:
My interest really started — I was an entrepreneur myself for over ten years and read Pete’s book before I even met him — when I took over the Learning Lab about five years ago. I actually have a new title now and a new team. It’s Executive Director of Wharton Interactive and working through and creating a simulation is where we really began our collaboration. So, it was taking decades of marketing research and we actually had to create artificial customers. How do customers act? How did they perform? And looking if you’re making decisions as a business and investments in your customers and how you acquire, retain, and develop them. What happens? How do you drive value?

Rachel Kipp:
Now Pete, in your previous book you mentioned that some of the companies — if you asked someone on the street: “What companies are most customer centric?” They may something like Starbucks or Nordstrom. Any mention in this book, too, that those companies may not be as customer centric as we think, but now they’re doing better. So, could you explain that?

Peter Fader:
Yeah, I don’t take credit for what those companies have done. But it’s great to see those are two really good examples of companies that were touted for just having, just kind of a nice atmosphere. It was, you know, customer friendly which is a fine attribute. That’s different than understanding each and every one of your customers at a granular level and using that understanding to really drive differential treatment of them. But it’s great to see how those two companies, among many others, have come along really far since I wrote my first book about of about five or six years ago. Things like loyalty programs, things like using knowledge of the customers to drive decisions about what products and services to offer instead of just doing them because they thought it was a good fit with the other things that they did. So, lots of other companies have been waking up, some of them doing it out of opportunity, like you know, “Hey, there’s money to be made by understanding these differences.” Some doing it out of desperation because they’re looking at big bad Amazon breathing down their neck and they know that they need to do something different. But whatever the reason, it’s great to see companies starting to move in this direction and I think they’ll be the first to acknowledge they need a little bit of guidance and that’s our job.

Rachel Kipp:
Now one of the things that you both advocate for in this book is the power of a simulation. And Sarah, this is something you do in your job. So, can you talk a little bit about how both of you use simulations and how companies can kind of take a cue from that?

Sarah Toms:
Sure. So, here at The Wharton School we have a rich culture — teaching and learning culture — based in experiential learning. So, Wharton students have about 20,000 student place per year that our various simulation teams are supporting here and what we’re really looking to do is bring the theory to life. So, what our faculty have been working on in their research and figuring out how to build compelling simulations so that our students can actually experience what it’s like to make decisions in that sort of environment. It’s really been an amazing experience here. And then getting to collaborate with Pete and taking all of his research and bring that to life in simulation as well.

Peter Fader:
So, here’s my take on it. I have a full semester course, I’m teaching all this customer centricity stuff. Let’s read about it, let’s talk about it, let’s look at case studies and so on and at the end I’d have this brief, little simulation type thing I developed it in Excel. It was a nice idea but it didn’t do justice to the richness of the material and that’s why I turned to Sarah and said, “Let’s build this thing out in a way that would be appropriate for an institution like Wharton and to really make it compelling, to really not dumb down the ideas but to bring them out in in their full complexity.” And what happened is that simulation instead of just being the capstone — kind of the cherry on top of the cake at the very end — became the real driver and now when we do an Executive Education [course] instead of using it as a little wrap up we use it as an intro. Let’s just throw people into this customer centric world and have them make decisions and so on. And then along the way we said, “You know we need to give them some support material so that they can do this and better and all learn from it.” And that was the real genesis of the book — how to really cope with a customer centric world whether it’s similar to one or a real one.

Rachel Kipp:
Now if I’m a company and I’m trying to build a simulation or even build the data stack to start doing this sort of thing. Where do you start? I mean what kind of things would you look at to start?

Peter Fader:
It starts at the end. Well, the end of the title, that is — customer lifetime value. Both from a conceptual standpoint as well as a practical one. If I can pull out my magic wand and wave it and see the future value of each and every customer I would run my business differently. I would recognize that there’s different value to be gained [from] different kinds of customers and that would drive the decisions. That’s what I’ve been saying for a long time, but again it’s been kind of aspirational. Now we’re really bringing it to life both in the [simulation] and in this book — to be able to say, “How do you do all that?”

Sarah Toms:
Yeah and what we really looked at when Pete and I began to collaborate on the simulation is understanding the trade-offs that need to happen in the real world. So, we’re obviously not giving our students the unlimited budget. They’re having to decide — “Okay, when I’m looking at acquisition strategies and tactics, when I’m looking at retention development, I have a CRM which is giving me imperfect data. How do I actually put all of this together and then make these decisions in a very realistic way? What I’m really proud about with the simulation is that it actually stimulates down to the customer level. They are being born and dying. The model underneath it. So, to your question: it’s incredibly complex and very difficult. The simulation itself took Pete and I years to develop and has become now one of our most popular offerings here at The Wharton School.

Dan Loney:
But how important is that with the successes that you’re seeing in working with some of the students? How important is that to now maybe even to get that out there in the public and working even closer with some of these companies for them to understand the mistakes that they may be making right now that are costing them customers?

Sarah Toms:
Yeah and that’s exactly the goals of the new team that I’ve co-founded here at The Wharton School. Wharton Interactive is about taking this thought leadership that we’re creating here at Wharton and offering it to the world. So, that is exactly the goal of this new team.

Dan Loney:
One of the companies you also mention in the book is EA Sports. I wanted to bring up because, I guess, they’re an example of a company that was so far to one side on the negative. Yet they have come back so far the other way on the positive.

Peter Fader:
Maybe they’re both at the same time and that’s the beauty of it. Not all customers are created equal. We’re not going to be everybody’s best friend and there are going to be some haters out there. We’re not going to judge ourselves by the least happy customer. We’re going to judge ourselves by the most valuable customers. EA — beyond just EA Sports — but in all of Electronic Arts has come to realize that there are some incredibly valuable customers out there. It’s impossible to turn everybody into someone like that. They’ll continue to face a lot of backlash from people who don’t like particular features of particular games, but in many cases that’s okay because they’re not that valuable to the company. Now they don’t want anyone to be unhappy, but they realize that by focusing more on the right kinds of customers, the right kinds of players, they can do much better than just kind of playing it right down the middle and trying to be, you know, pretty good to everyone.

Rachel Kipp:
You actually use in the beginning of this book, you use Michael Phelps, the swimmer, as an example of the adage that what you say is “good customers are born good.” Can you explain that a little bit and also I mean is it always that clear? I could look at Michael Phelps and think, “yeah he’s probably a pretty good athlete.” But is it always that clear who the best customers are?

Peter Fader:
Well, for one thing Sarah and I are both very avid swimmers. The difference is that she was born good, I’m not. It was kind of a very natural metaphor to use and I give Sarah all the credit for first coming up with it. Maybe it is a little bit of an extreme, but I think it gets the point across really well. When it comes to sports, you know, some people clearly are born good and you know you’ll never become that — at least I know I’ll never become that. When it comes to customers we often, we think we have more control.

You know, we talk about CRM — customer relationship management — as if we think that we can manage and create customers. We don’t have nearly as much control and maybe that point’s a little bit too extreme but I think it gets it across pretty well.

Sarah Toms:
Yeah, exactly. So, with Michael Phelps, and we do make this point in the preface, it’s easy to tell he’s good because… you just look at his time. It’s not even just looking at him, look at the time. And customer centricity really is about the long game. So, what we are asking for and what our goal in writing this book was really to hit the reset button. We hear the words “customer centricity” all the time and mostly they’re incorrectly stated. And we also wanted to draw and provide a playbook for how to actually enact a customer centric strategy from the standpoint of, how are you going to recognize who your best customers are? Looking at your CRM, looking at what insight you want to do and then running your different tactics in a way that are tuned to the value of your customers understanding that you can’t only have high value. You need actually the compliments of your lower value in your mid-tier customers, but what are you going to do for them once you’ve gained them?

Dan Loney:
You also take that a step farther. You also have to take it to the point of companies, of organizations that have multiple brands underneath them. You mentioned Gap, Inc. in the book and the fact that they have Old Navy and Athleta and Banana Republic and being able to understand, I guess, the customer within that realm but the fact that they may be crossing over to a variety of different brands as well.

Peter Fader:
You know, it’s a really interesting time for retailers and business in general. That on one hand you get a lot of these narrow, digitally native brands and they’re tightly focused on one kind of customer. And while they might do very well there, until you can cross over and attract a broader variety of customers you’re never going to find kind of the world class success that investors might demand. On the other hand, you look at a Gap or any kind of kind of multidivisional company and sometimes they’re spread out a little too thin. So finding that just-the-right balance where we can have multiple touchpoints with multiple customers and not treat them in separate silos, but actually learn from them. To have the breadth of a customer base that’s going to help us understand each and every one a little bit better than if we were just a single brand company.

Rachel Kipp:
You have a pyramid in the book and at the top we have the platinum customers and the bottom we have, what you call, the lead customers. Now I think it’s probably pretty easy to figure out like what to do to make the lead customers happy because they have a pretty low bar. You give me a sale, if you super-size me — I’m happy. But what about those platinum customers? I mean, how hard is it for companies figure out what those platinum customers want? How to make them happy and cultivate them so they continue being your best customers?

Sarah Toms:
That’s a great question, actually goes to the root of that entire chapter where we take it to the next step with the 2×2. And so, it’s first recognizing the value — where your customer sits on that pyramid and second, how are you going to direct those specific tactics to them? So, looking at your lower value customers and are you running offense or are you running defense? A lot of folks will look at something like customer service and they think, “Well, now we’re starting to call it customer experience, we’re starting to call it all these new-fangled words.” What Pete and I actually believe is customer service is akin to clean toilets. It’s pretty controversial when we say this in front of a room of executives or others and we say, “Look, you know, they expect when they pick up the phone that they’re going to have and this is your low value and your high value.” What we’re saying is you’re actually you’re running offense for your lower value customers. Your other programs, those such as loyalty, your strategic account managers, and others you want to really make sure that you’re tuning those strategies to your specific value of customer.

Peter Fader:
But then at the high end, as you mention Rachel, there’s a lot of companies that once they see the value of the customers, they see these high-end ones and they say, “Oh! We need to be their best friend. We need to be talking to them all the time. Are you happy? Is there anything wrong? Can we give you a glass of champagne? And they actually start annoying them. So, you have to find ways to maintain and enhance that value but without doing it in an intrusive way and so one of things we point out in the book is the idea of a “premium service.” Let them be part of the special club and give them access to different kinds of products and services that others just don’t have access to and they’re probably willing to pay for that. It’s recognizing the difference between that and just kind of, you know, low-end customer service but understanding at what time and for which customers are you going to be using one tactic or another.

This is Knowledge@Wharton here on SiriusXM 132 Business Radio powered by The Wharton School. Dan Loney and Rachel Kipp inside our studio with Peter Fader and Sarah Toms, who are the authors of the book The Customer Centricity Playbook. Your comments are welcome at 844-WHARTON, 844-942-7866 or if you can’t get to your phone, you’re more than welcome to send us a comment on Twitter: @BizRadio132 or my Twitter account, which is @DanLoney21.

Sarah Toms:
Yes, I wanted to pick up on that premium and one of the concerns that we often hear is, “We’re going to really upset customers by having something like a premium service.” And what Pete and my point is, don’t worry about that.

LinkedIn is a great example where they’ve been able to drive a tremendous amount of revenue by offering a premium service. You think about Amazon Prime, you think about others, and this really is an opportunity to figure out what value are you leaving on the table that you can actually extract and make these customers even more valuable.

Dan Loney:
You mention as well the fact that you have that relationship with the customer but also this will drive some of the other things that companies will do — their marketing, their customer service, there’s a variety of different elements that kind of spiderweb off of this as well. Correct?

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

Sarah Toms:
Really bringing it back to the playbook, when Pete and I were laying out how we wanted to, you know, construct this and thinking about the different functional areas within a company, Pete’s absolutely right. You know, we have a chapter directed specifically at finance, we have a chapter directed specifically at technologists, you know, this really is about bringing everybody together and thinking about CLV in a universal way and how each of those different functions are going to leverage that information or support the strategy behind providing that information.

Rachel Kipp:
Pete, you’ve done a lot of work considering value of customers when you consider corporate valuation. Now, what do you think that’s getting at that our current ways of valuing companies are not getting at?

Peter Fader:
#CustomerBasedCorporateValuation. Yep, that’s a big thing I’ve been working on right now both in a lot of my academic research as well as this new startup, Theta Equity Partners.

It’s been fascinating to work with CFOs and VPs of investor relations and get them on board with this idea of customer equity. What’s the value — the future value — of all of our existing customers? And using that, first of all, for corporate valuation to say: “This is just a different perspective to see what this company is worth.” But then once you have credibility on that to then throw it over the fence and then let the markers figure out which emails they should be sending to which customers. So, it’s been a great way to create that kind of alignment and to get people in the organization who might hear this kind of, you know, cross functional blah blah and dismiss it to say: “No, there really is something here for me!” It’s been just wonderfully successful for me and my students and others I work with and enlightening for companies.

Rachel Kipp:
Now, one of the examples you give in the book is of Blue Apron which was a company that looked amazing from one perspective, but then when you looked at it from the customer valuation perspective something else emerged.

Peter Fader:
Exactly. We bring it up in our discussion of acquisition addiction. There’s a lot of companies that for a variety of reasons think: “We just got to bring in as many customers as possible!” Either under the misguided belief that they’ll turn all of them into wonderful customers by educating them and building great relations with them or under the similarly but different naive belief that investors are only looking at top-line revenue and if we just bringing in dollars — ka-ching.

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

Dan Loney:
Now let me ask you a question. Obviously, a lot of this is involving the companies themselves, but are there elements of this that really consumers can get a better understanding of what is going on with the retailers that they deal with? I mean, there’s probably some points that really can resonate with people that are listening to us out there.

Peter Fader:
It’s a really important point because customers understand that they’re going to be treated different from each other. You know that when you’re sitting on an airline that you paid a different fare than the person next to you. That should become more the norm. That again, it shouldn’t be just lowest common denominator marketing. It should be that, you know what, I’m going to be treated differently based on my value to the firm. And so, part of it is we’re not only legitimizing those ideas were giving firms specific instructions of how to do it and how to communicate it.

Sarah Toms:
Actually, that is such an interesting question and I hadn’t really thought about it from the perspective of the customers themselves. I think, though, we brought this out in the story about Best Buy. And really thinking about the motivations of the people who were standing in the aisles and then taking their business elsewhere. Then as soon as the company understood that actually those customers really did have potential to stay and it was really unlocking why and how to get them to become high value customers. The potential was there but because of things like price and not actually bringing to bear the service that these customers needed, they were losing that opportunity and once they understood that they then were able to tap into the potential lifetime value of otherwise customers who were literally walking out the door.