The customer isn’t always right, but some customers are better than others | Peter Fader | TEDxPenn

[Music]
so what do marketers talk about when
they talk about marketing well they tend
to talk about actions they talk about
activities they talked about tactics
they talk about the products they
develop the services they did that they
deliver how they get this stuff out
there the prices that they charge so
much of the conversation is about what
they do but so little of it is about who
they do it to or who they do it with and
of course I'm talking about the
customers I'm the customer guy and I
want to talk to you about this idea of
customer centricity and it's not what
you think what you think in marketing
professor or customer centricity all I
know I know you're going to talk all
about how the company needs to surround
itself around the customer and it's
their job to make every customer happy
we can't sleep at night until the least
happy customers satisfied now I'm not
going to talk about any of that stuff
over there I think about those notions
about the customer is always right it's
wrong I think it's irresponsible
I think it's ineffective and I think
following those ideals is actually way
out of line with the best practices that
we see across the other parts of the
organization so when I talk about
customer centricity I'm talking about
which are the customers that we should
be surrounding who are the best
customers who are the customers who are
most valuable to us and what is it that
we can do to enhance their value extract
some of that value from our shareholders
and find more customers like them
that's customer centricity and it's not
limited just to marketing it really
should be a company-wide strategy that
if we can figure out who the most
valuable customers are and if we can
find ways to use that for product
development sales and service
distribution and so on we can make more
money than if we just obsess over
version 2.0 of the product now I've
written two books on this this topic the
titles might not be that interesting or
that diagnostic but the subtitles they
hit the nail on the head
the first one is focus on the right
customers for strategic advantage the
second one no one implement a winning
strategy driven by customer lifetime
value that's really the main thing that
I focus on in my research is this idea
of customer lifetime value a lot of
people talk about it some kind of just
as if it's just an abstract concept you
can't really do it but it's fun to think
about the different long-run value of
each customer it's my job to really do
it it's my job to take this concept and
make it real and make it actionable and
help it make a difference for companies
think about it this way if I can project
how long my relationship with you is
going to last how many transactions or
interactions you're going to have over
that horizon and how valuable each one
of those interactions will be and
basically add all that stuff up I can
come up with a pretty good guess of your
lifetime value this is what I've been
doing research on for most of my 32
years here on the Penn faculty but it's
getting out of the laboratory getting
out of the academic journals and
bringing it to the real world back in
2015 i co-founded my first company
zodiac and that was exactly the idea was
to take these models and implement them
at full commercial scale and educate
companies about all the great things
that they could do if they knew the
value of their customers and the results
were awesome first of all it was an
incredible validation of the models they
really work secondly it was great to see
companies making more money by being
able to identify the differential value
of customers and then taking the right
actions based on the customers and third
was really interesting to see such a
crazy staggering variety of use cases so
besides trying to predict how often
you're gonna buy stuff at Amazon or how
many rise you're gonna book on lifts or
how many hotel stays you're going to
reserve at a Hyatt look at some of these
other applications over here so we're
not just talking about customers doing
things over time but anytime we're
talking about a different kind of entity
whether it's a customer whether it's a
whether it's an animal whether it's a
library book and we're looking to see
how many times it's done the thing in
the past and we have a desire to project
how often will it do it in the future or
is it still even active at all it's
incredible how the simple math can be
broadly applied to so many other domains
well zodiac was a great success but if
you notice been talking in the past
tense about it because in March of 2018
we sold the company to Nike that by
itself was just an incredible validation
such an amazing company wanting to
embrace these ideas these techniques and
going out there and really changing
their own practices that's been
wonderful but it doesn't mean that my my
passion about customer centricity that
my mission to bring it to all kinds of
different companies and organizations
has ended basically instead of focusing
purely on marketing let's think about
some of the other areas of application
so when it comes to new product
development looking at companies like
Electronic Arts the gaming company who
looks at the lifetime value of each and
every of a billion customers around the
world to determine which kinds of new
games to come up with our companies like
Marielle a veterinary pharmaceutical
company down in Georgia that uses
lifetime value to realign and
incentivize all of its salespeople well
how about this last one over here
customer based corporate valuation maybe
a marketer like me has to say something
to the people in finance that's the
nature of my new startup theta Equity
Partners as it says here we're
revolutionizing finance through customer
based corporate evaluation the basic
idea is pretty simple that if we can
project how many customers are going to
acquire and how long they're going to
stay how many transactions they're gonna
make and how valuable those transactions
will be we can do a better job than the
usual top-down ways of forecasting
revenue determining what the company as
a whole is worth and giving companies
guidance as to what they should be doing
in order to run their businesses more
effectively I want to share with you
just a couple of examples one of them
was one I'm thankful to many of my Penn
students for back in 2017 I gave my
students date
from Dish Network subscription TV
company that many of you might know
about and I said taking this historical
data I want you to project how many
customers dish is going to acquire for
each of the next four quarters and then
we waited weeks and weeks after the sign
was done we got a chance to compare
their forecasts with the so-called
experts on Wall Street and it was very
interesting in the first week of May
2017 Dish announced that they had
acquired five hundred forty-seven
thousand new customers Wall Street was
very disappointed the Consensus Estimate
was 13 percent higher they lost a
billion dollars of shareholder value in
a week how do our Penn students do they
hit the nail right on the head
their average estimate was 550,000 new
customers within point five percent of
the actual number and we roll ahead to
the quarter after that and the quarter
after that just as close so by bringing
in some understanding of marketing of
how customers behave how they differ
from each other and by breaking down
their behavior into these different
components that I mentioned we can do a
better job than Wall Street let me give
you one other example a company that
many of you might be familiar with
wayfarer big online furniture company
out of boston
look at these revenue numbers Wow I mean
this company is just an incredible Wall
Street darling there's making all this
money but here's the question we don't
care about how much money you've made in
the past we care about how much money
you're gonna make in the future and
looking at these revenue numbers can we
go a little bit deeper than that instead
of just saying all dollars are created
equal let's try to break it down once
again into well how many customers are
we gonna continue to acquire how long
will they continue to transact with us
how many transactions will they make and
how valuable will they be one of the
amazing things of our way fair hasn't
only been its financial performance but
their willingness to actually share
metrics that relate to some of these
customer behaviors if you think about it
the way that it works with most publicly
traded companies is all they reveal to
wall street is the bare minimum revenues
Wayfair goes further than that
and I know it's really hard to see here
but they also tell the street how many
customers did they acquire in this last
quarter how many total orders were
placed on the website and what was the
number of active customers new or
existing customers who placed those
orders using that kind of very rich and
very unusual information we can actually
break down the revenues into the
different behavioral components that I
was talking about before and again
without getting into all the details
it's actually remarkable how well we can
take these models and project new
customers to be acquired the length of
their lifetimes and so on not get into
the details but if you're interested
here's a paper that I wrote with former
Penn student Dan McCarthy that shows how
we can take the publicly available data
on a company do this kind of breakdown
and then build it up to come up with
more accurate assessments of revenue and
overall firm valuation than if you just
looked at the raw or revenue numbers so
let me show that to you here's the basic
idea we have these separate models that
are picking up these different aspects
of behavior now we know that no model is
perfect so we take our models we take
the parameters and we perturb them a
little bit so we can come up with
different kinds of revenue projections
I'm going to show you right here several
thousand different possible revenue
projections the dark line over here
being our best guess but a wide variety
of different possible scenarios around
them some of them are much better than
others but all of them have one thing in
common the same basic shape which if you
haven't been forecasting revenue before
arnai suspect you have it might not be
as alarming to you as it is to me so
usually what happens with revenues is
they look much smoother because usually
as you start to saturate all of the new
customer acquisitions there's enough
repeat purchasing going on that the
company stays really healthy this one's
really different wayfarer is an
acquisition machine but not a very well
oiled one they're bringing in lots and
lots of customers but they're doing so
in a very expensive manner and those
customers aren't sticking around and
buying over and over again
as they should if you look at their own
data the the velocity of customer
acquisition is just way way way greater
than the ongoing repeat buying and at
some point that will stop at some point
this company will crash I'm not saying
it's gonna happen tomorrow I'm not
saying it's gonna happen next year it
might happen 10 years from now I'm not
sure that's why we have all these
different scenarios but they all paint a
fairly grim picture shares what we're
going to do we're gonna take these
revenue trajectories all of them from as
of May of 2017 and for each one of them
were going to do all the accounting and
Finance stuff to come up with an overall
valuation for the firm as a whole and
that's what we see right over here in
May of 2017 the company was trained for
about 65 dollars a share our estimate of
course all these different scenarios
good and bad is that the company's worth
about $10 a share we wrote a paper on it
you just saw it and we posted the first
version of it to some academic website
in September of 2017 why would anyone
pay attention to an academic paper from
a couple of marketing professors well
it's kind of interesting to see just how
much attention at God the day that we
posted the paper and for a couple of
weeks after that people paid very close
attention it was actually remarkable the
amount of tension that we were receiving
from lots of experts on Wall Street this
was the largest drop that Wayfair saw in
its overall stock price and shareholder
value for several years and including
some of the most familiar faces and
names on Wall Street some of you might
know Jim Cramer from Mad Money here's
what he had to say about it again when
he tweeted his support of an academic
paper published by professors at Emory
in the univers Pennsylvania Chloe at the
smartest piece ever written on wayfarer
it did the job costing wait for the
plunge from 83 to 7 years of today what
was so devastating about a high level
academic paper the professors tried to
come up with a way to pin a value on
Wayfarers current and future customers
based on how many I don't how much they
make from these customers versus how
much they spend go Hornets let's think
about that for a second the professors
saying that the best way to value a
company is by looking at the value of
the customers now again I don't know how
many finance experts that we have here
but I would imagine that from any of you
the reaction would be duh of course
that's the way we should be valuing
companies we should be looking at the
customs we acquire projecting how long
they're gonna stay how valuable they are
and adding all that stuff to say that's
the value of the firm so while we claim
that we're revolutionizing finance some
of these ideas are actually pretty basic
some of these ideas are pretty simple
let me bring it full circle to wrap up
by talking about customer centricity
remember my goal is to make this a
corporate wide strategy not just for
marketing not just for finance and
corporate valuation but I want everybody
in the company to recognize that the
main thing that we do isn't a sell stuff
but to build relationships with
customers and so that's my mission over
here is to try to make customer
centricity this is well understood this
very desirable strategy but there's the
other side of the conversation which
we're not gonna have time to get into
today and that's what's in it for you
like how do consumers react to this like
what do you think when you realize that
not all customers are created equal the
companies actually have the capability
to kind of size you up and say that
whether you belong to the president's
gold medal blue-ribbon Club or not
there's all kinds of implications of
these strategies above and beyond just
making more money what kinds of
companies what kinds of industries
should be using these tactics like what
about retailers sure why not
what about financial services what about
health care delivery there's a lot of
questions to be answered there's a long
conversation that we need to have I like
to believe that I'm starting that
conversation I hope that some of you
finding these ideas kind of intriguing
and I hope that it's a conversation that
we can continue for many years ahead
thank you very much
you