Peter Fader on Customer Centricity and Why It Matters

Starbucks and Apple stocks have been trading at record highs, but are these and other businesses doing everything they can to ensure growth over the long term? Peter Fader, Wharton marketing professor and co-director of The Wharton Customer Analytics Initiative, argues that too many companies are customer friendly, but not customer centric. In other words, they treat each customer the same, missing an opportunity to discover who their best customers are. Without that data, they cannot make their most valuable customers even more profitable to the firm. In his new book, Customer Centricity, part of the Wharton Executive Education Essentials Series, Fader describes what customer centricity is, what it isn’t and why it matters. He also demystifies customer relationship management and emphasizes the importance of gathering customer data in meaningful ways.

Stephen J. Kobrin, a Wharton management professor and executive director of Wharton Digital Press, talked with Fader about his new book.

An edited transcript of the interview follows:

Stephen J. Kobrin: You argue that Apple, Nordstrom and Starbucks are customer friendly, but not customer centric. What does that mean?

Peter Fader: Too many people think that they are the same thing. Too many people think that being customer centric means doing everything that your customers want, and that’s not the case. Being friendly and offering good service are a part of customer centricity, but they are not the whole thing. Customer centricity means that you’re going to be friendly, provide good service and develop new products and services for the special focal customers — the ones who provide a lot of value for you — but not necessarily for the other ones. You need to pick and choose. Some customers deserve the special treatment, and if others want to buy from you, that’s great, but they are not going to be treated the same.

Kobrin: Does that mean you ignore all of the customers who are not special?

Fader: You are not going to ignore customers. You are not going to fire customers. You are not going to treat them badly, but you will treat some better than others. You are going to be really careful about whom you choose to treat that way and what that treatment means. Does it mean you give those special customers absolutely everything? Maybe not. But you’re definitely going to give them more consideration than customers who frankly are not worth that much to you.

Kobrin: What does it mean to be a customer-centric company? Can you give me some examples of companies that you think are customer centric?

Fader: A requirement behind customer centricity is the ability to understand customers at a fairly granular level and to be able to identify the customers or the segments of customers who are valuable from the ones who aren’t. If you can’t sort out your customers — if you can’t look at them and know who is good and who is bad — then you can’t be customer centric. That’s step one.

Step two is having an operational ability as well as an organizational capability to be able to deliver different products and services to different kinds of customers. That’s tough to do. For the most part, we think about the most customer-centric companies being online firms such as Amazon and Netflix. Those are great examples. But by no means is this limited to e-commerce firms: Capital One, Harrah’s and even IBM are also examples of companies that are fairly customer centric.

Kobrin: How would a company go about identifying the customers it should focus on?

Fader: Companies have been sorting through their customers for a long time, ever since they first realized that customers are different from each other and might deserve some differential treatment. The basis that companies use to come up with this segmentation is the key. In the old days, the basis of segmentation used to be simple observable things like demographics or geography, easily identifiable characteristics. But the real key is to segment customers on their value. I’m not talking about historic profitability. I’m talking about future-looking customer lifetime value, which might be related to profitability. We want to sort our customers based on what they will be worth to the firm in the future.

Kobrin: How would you calculate customer lifetime value (CLV)?

Fader: That’s a key question. That’s actually been a big focus in my research for a number of years now. I’ve been focusing on those methods and how CLV varies based on whether you’re in a contractual business or non-contractual business. Different characteristics lead to different CLV formulas. It’s fairly technical — we won’t get into those details here — but there are some important considerations.

First, you must take into account the kind of business setting that you’re in. Secondly, you must take into account heterogeneity — the fact that different customers are going to have very different CLV­ values. Thirdly, you’re going to look at other kinds of factors: the cost of acquisition and the likelihood that different kinds of customers are going to stay with you.

Unfortunately, a lot of firms feel it is just too complicated. They don’t want to think about it, and they oversimplify it. They ignore some of these distinctions, and they use a one-size-fits-all formula across all their customers that doesn’t vary based on the business model. It leads to a garbage-in/garbage-out situation.

Kobrin: Along the same lines, Pete, you mention that most firms don’t handle customer relationship management (CRM) well. What do they do wrong? How can it be done right?

Fader: If you’re going to be customer centric, CRM is a really critical step. That’s the front line. That’s going to help you collect the data and organize it properly and understand which message you are going to send to which customer through which channel at which time. CRM is really the interface that pulls it all together.

Unfortunately, CRM has taken on a life of its own. Instead of it being just a tool that helps you achieve customer centricity, it becomes a massive system — or set of systems — that gets embedded in a company and becomes a huge operational challenge. When the system is in place, people don’t know quite what to do with it because it’s often so complex.

The first step of CRM is to keep it really simple. Start with really simple data and then add simple queries that you want to make on that data, keeping the operational parts around it simple. Then you can build up and add complexity as the company has a genuine need for it. CRM has gotten kind of a bad reputation. I think it’s undeserved. I don’t think it is the fault of CRM or the vendors that sell CRM systems; the companies that are bringing it in are biting off more than they can chew in many cases.

Kobrin: In the book, you say this current generation of consumers is spoiled: They know what they want, and they want it immediately. What are the implications of that for companies?

Fader: First of all, let’s think about the driver [behind] it. It’s all about technology. Today’s customers are so much more informed. Economic times in general tend to be better than they were, say, 50 or 60 years ago. Customers are far more empowered than they ever were before. A lot of companies spend their time pushing back, hoping for the old days when they could just put a product out there and leave it to the customers to figure out how to use it and how to integrate it with other products and services. That’s not the case anymore.

Instead of pushing back and complaining, companies have to realize that instead of just putting products out there, they really need to be a solutions provider. That’s kind of a corny phrase these days, but I think there is some validity to it. Companies need to help consumers figure out how their products and services are going to fit into their lives and offer solutions, and not just ingredients.

Kobrin: You talk a lot about the difference between a product-centric and a customer-centric strategy. What is the difference?

Fader: Nearly every company on the planet is product centric. You look at their organizational chart, and it’s broken up by different kinds of products. You look at the incentives. You look at the language they use. You look at the performance metrics that they rely on. It’s all based on different kinds of products. The whole business model is based on producing something or a set of somethings in really high volumes and at really low costs, and that’s going to drop to the bottom line.

That’s more or less business as usual. I’m not suggesting that it’s easy, and I’m not suggesting that it’s going away tomorrow. But I am suggesting that there are alternatives. If you organize the company around different types of customers and have customer segment managers who are just as powerful as today’s product managers are — giving them the right incentives and the right resources and tools — that can actually be a more profitable way for many companies to go to market.

Kobrin: One of the things that surprised me in the book is you say that “the customer” doesn’t exist. We’ve been talking about customers all afternoon. What does that mean?

Fader: One of the things that drives me crazy is when I hear managers or entrepreneurs talking about “the customer,” doing back-of-the-envelope calculations about what “the customer” will be worth or discussing how “the customer” will respond to this kind of product or that kind of offer.

By talking about “the customer” or by talking about “the average customer,” that doesn’t do justice to the vast heterogeneity and the incredible differences across our customers in terms of their propensity to buy, to talk to each other and to respond to different kinds of offers.

Again, step one of being customer centric is not only acknowledging the heterogeneity, but celebrating it; saying, “Wow, all this heterogeneity is a great thing because it lets us pick and choose different kinds of customers!” When we say “the customer,” we are selling ourselves short. I think it’s important to not use those words and to always have a plural there.

Kobrin: What was your biggest surprise in writing this book?

Fader: I wrote the book because I’m a model builder. I’m interested in the methods. I’m interested in helping companies improve their quantitative literacy to assess the value of the customers and do more effective targeting.

I realized that I need to take a step back — or actually a step up. I need to understand the strategies into which these models and methods and analyses would fit. As I stepped back and looked at what experts are saying about customer centricity and loyalty and all these higher-level terms, I was surprised at just how ambiguous a lot of these definitions were or how contradictory they were. You pick up three different books on customer centricity, and you get four different definitions about it.

For me, a really big piece of it was to bring clarity — or some consensus — to it. I’m not sure I’m going to achieve that goal, but I think it’s important for everyone, especially for firms that want to call themselves customer centric. They have to understand what it means.

There are a lot of provocative aspects of the book, partly because a lot of the things that I believe are at odds with conventional wisdom. But I want to provoke a discussion and to get people to really think about what this stuff means, whether it’s even right for them. For many firms, this customer centricity stuff might not even be essential. They shouldn’t even go there. But I want firms to be able to make an intelligent, informed decision about whether to go there and what it means when they start to do it.

Kobrin: How does the book help a firm become customer centric?

Fader: For one thing, it does bring some clarity. It’s going to help them understand what customer centricity is … and get organized around this strategy. Once again, it’s really hard to just pick a strategy and run with it. You need to understand what all these consequences are going to be before you get into it. I’m hoping to lay out a roadmap for firms to understand where they are going, if they choose to go there.

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