In his speech and conversation with Christine Miles, Peter Fader explains why customer-centricity is not only the right thing to do but is also a good way to demonstrate the long-term value of the organization.
One compelling consequence of COVID-19 would be a call for customer-centricity. All of a sudden, companies are having much more visibility, much more awareness, much more specific data about who is doing what, when, for how long, and for how much money. The use of this data for sending personalized offers to customers to sell more products is not as effective as many markets say it is, and especially not during a time of crisis. A better use of this data is towards customer-centricity.
Customer centricity is the idea that customers are extremely different from each other, and because of the data available, we are starting to see it in a way we never could before. This pushes the idea that there is no average customer, so if we are producing products and services as well as offers targeting the average customer, it is not going to do a very good job. Customer centricity is therefore a strategy that aligns a company’s development/ delivery of its products/services around the current and future needs of a select set of customers to maximize their long-term financial value to the firm. The whole idea is that not all customers are created equal, and if companies can figure out who the really good ones are and what is it that they seek out of the products that we create and deliver, and what are the other products and services we can surround them with, and then use this information to deepen our relationship with them in a meaningful way, not just to get them to buy more products tomorrow, but over the long run, and then find more customers who share relevant characteristics to them, we can make more money than just focusing on the products.
Customer centricity is the idea that customers are extremely different from each other, and because of the data available, we are starting to see it in a way we never could before
When companies say they value their customers, they should take the idea of customer value and consider it the core proposition of everything they do, not just on the marketing side but across the organisation. So, at the heart of the idea is Customer Lifetime Value (CLV). Most companies do not use the words “customer lifetime value” because they are solely focused on the product and who they should sell it to. We build organizations around the products and services that we sell and the different functions that we need to develop and deliver them. Instead, what customer centricity aims to do is put customers at the centre of everything a company does. Then, the next things to do is project how long the customers are going to stay with the company, how many transactions will they make over the horizon, how much will they spend when they do, and come up with an overall projected lifetime value and the future profitability that each of the customers brings, and use that information and the different nature of those customers to determine what kinds of products to sell, how to sell them, and other kinds of activities that an organization should be doing.
Even though it may seem unfeasible, our consumer data analytics company, Zodiac has done it for many client companies by using the data to see who is buying what and for how long, and projecting their future consumption pattern and the differences between customers. Again, it is not just about sending particular emails to particular customers, but about how we align our organization. The success of this model is evident from the fact that two years ago, Nike bought Zodiac, and since then Nike has beaten all the expectations in each of the last four quarters. Nike has consistently been doing better than people think because of several reasons, but one of the reasons is also that they have been using these tools to understand individual customers.
However, CLV is much harder than just running a bunch of quantitative models, and it does not even start with marketing. It is really important and difficult to get buy-in across the organization, to build the right kind of corporate culture that would enable this idea to take root and flourish. Corporate culture is a tricky subject, but there are many books one can read to learn about it. Jay R. Galbraith’s Designing the Customer-Centric Organization is one such book, where one can find the contrast between the principles of product-centric companies and customer-centric companies. The focus of product-centric companies is around their market share, development of new products, developing the right organization around the product that they develop and deliver, and divergent thinking (how many possible uses of the product?), and this is how most organizations, including non-profits, work. On the other hand, the focus of customer-centric companies is customer lifetime value, customer retention, customer satisfaction, net promoter score, etc.
However, it requires fundamental changes to the organizational structure, which means, fundamental changes in the way organizations incentivise people, the way they hire, and the way people interact with each other and with the customers. With the COVID-19 crisis and the surge in online shopping as a consequence, companies have the opportunity to start doing things differently, and fundamentally change the way they operate. Companies can start rebuilding using the principles of customer-centric organizations.
A surprising way in which change can begin is by starting the conversation, but not with the marketing team, but instead with the other parts of the organization. It is easier to win over the marketing department with this idea but it can get stuck there, so it is best advised to do the heavy lifting first by starting with finance and to start with the idea of Customer-Based Corporate Valuation (CBCV). You can help the finance team value the corporation better using exactly the same kinds of questions and metrics because even if it sounds like a marketing question, adding all of it up and projecting forward gives you the value of the company. So, we can actually do a better job than the traditional top-down way of doing the valuation. This idea of achieving customer-centricity across the organization by starting with this idea of CBCV is still very new, but a silver lining to this pandemic is that organizations are getting the opportunity to make such fundamental changes.
We build organizations around the products and services that we sell and the different functions that we need to develop and deliver them. Instead, what customer centricity aims to do is put customers at the centre of everything a company does.
Customer centricity may not make sense for every organization, and they could be doing fine with product centricity, but every company owes it to themselves and their internal and external stakeholders to at least think about it. It is not only the right thing to do but also when it comes to making money and demonstrating the long-term value of your organization, this is a good way to do so. It also helps to sync up everything together, as this way we deepen our relationships with customers and are also able to show the external stakeholders the value created from these customers.
Christine Miles in Conversation with Peter Fader
Christine Miles: What is the difference between B2B and B2C in terms of customer-centricity?
Peter Fader: The customer is the entity that we sell to, not necessarily the end-user, and the basic idea is that not only are they applicable in a B2B setting but in many ways, they are easier to implement in a B2B setting. You might have a smaller number of customers, so you understand how they stack up relative to one another and you are thinking about all the other things that we can and should be doing with them and for them, so the principles apply just as well with anything. The principles of customer-centricity apply easier and better in the B2B world where we can have deeper, more multifaceted relationships. It’s harder to do it in the B2C world when there is a bit more of a distance with the customers, there are many more of them and it’s harder to track them, so many of the best practices do arise in B2B. So, yes, it is, if not more applicable in the B2B world.
Miles: Can you share an example or a story, specifically about when these principles were applied, what that looked like, and what happened?
Fader: In the first book, Customer Centricity, I took to task several companies that sometimes get a lot of credit for being nice to customers that aren’t really customer-centric. One of those companies was Starbucks. Everyone loves Starbucks but did they really – today they do – understand their customers at a granular level? The person who used to run their customer analytics and loyalty program, Aimee Johnson read the book and decided to take customer-related work more seriously. About two-three years ago, Starbucks completely changed their mobile app and the nature of their loyalty program. A lot of that is a direct reflection of their desire to move in this direction, to better understand customers, and to change their internal policies and practices not only to reflect that but to put them in a better position to take advantage of those differences.
Miles: How do we focus customer centricity at this time in a crisis, considering this is disruption? Some of the past customers may not continue to be our best, others may rise to the forefront in the future. So, how do we differentiate at this time?
Fader: I don’t yet know because it is still so early and I haven’t yet seen any granular customer data about the direct impact that it has had. We are going to be able to answer these questions once the data starts coming in. The important thing is when we are talking about the impact this horrible crisis is going to have on business, too many people are asking this simple and naïve question: What impact is it going to have on our revenue? It is not an unimportant question but I want to decompose that drop in revenue to say how much of it is either losing customers that we have, acquiring customers that we wouldn’t have acquired otherwise, and keeping customers but they are buying from us less often and spending less each time.
Once we start to get a few weeks, a month or two of data from after the crisis started, we are going to be able to answer those questions and we’re going to be able to give specific guidance on how to move ahead.
Miles: Post COVID, do you feel investors and analysts will place less of a premium on growth and more weight on value moving forward?
Fader: We don’t have to distinguish the two from each other. That is the whole premise of customer-centricity, that we can find growth through value. Value doesn’t necessarily mean selling stuff cheap but making money by understanding the value of customers. One of the silver linings that will emerge from this is that we will start to think more about that word, value. The way we were working, we were all content till early March. I’d recommend thinking more about value and using that as a way to identify the sources of growth. It’ll all come together by doing CBCV, by merging the concepts, as I think we’ll all be better off, and again, if we spill over consequences, it’s going to help other parts of the organization benefit as well.
Miles: We are also at the forefront of patient-centricity. Which health systems nationally or internationally have you seen doing sustained patient-centricity well?
Fader: If we are talking about patient-centricity, then a lot of the concepts of customer-centricity don’t apply. When we define value, we have to be extremely careful. If we are talking about patient-centricity, it better not be only on dollars, it better be on basis of things like lives saved, lives improved, and metrics that are sometimes harder to quantify and harder to bring in there with the financial metrics.
Hence, first of all, it is really important to be talking on a much broader basis when we are talking about patients. The same goes if we are talking about other areas like financial services and other spaces where it’s more than just dollars and pence, where we have an ethical, legal, and a real responsibility to make people better off.
I have had lots of interesting conversations with various health systems and there are some interesting insurance companies here as well as the hospital system. It’s great to see organizations like those including some non-profits that are trying to say “can we find that right balance of the financial value as well as the more meaningful patient-centric value?”. I can’t say that any one of them has taken off as of now to a point where I can count them as one of my overall heroes of customer-centricity, given the changes that are taking place and the very different ways that many health systems are dealing with the crisis. They are, nonetheless, going to start to feel some of the changes being amplified in these times, and will hopefully continue when things calm down.
Miles: Is now the right time to launch a new product or should we be waiting till Q3? What is the opportunity post-COVID to create customer-centric products?
Fader: To answer the first question, it depends. There are a lot of companies that are being shy about product development and messaging. It wouldn’t look good to do any kind of conditional marketing right now, but there are also genuine customer needs right now. We might be quarantining but we are still consuming, and we may be consuming in different ways- ways that might be temporary and ways that might be long-lasting. Therefore, I think it’s an excellent time to launch new products that might be relevant to where people’s lives are now and hopefully that will continue to be relevant and valuable as we start to get out of the situation over here.
Instead of saying what kinds of products you can sell a lot of, brands should think about the most valuable customers, the ones who have been with them and who’d continue to buy with them even when the times are tough and should think about what they can do for those customers. It doesn’t imply that brands should come up with a product that is uniquely situated for them, but if it is very appealing to them as opposed to the average customer, that is going to help you acquire other kinds of valuable customers. That is going to be a more sustainable way to grow than just trying to aim at the middle. For most companies, it doesn’t come naturally, but at a time like this, it makes it possible to do so.
Miles: Can you teach customer-centricity to a team or is it one of those EQ things that some people just get and others do not?
Fader: I used to think that tools are tools that can be used to make money, but it is not that easy. A company has to be ready for it, it has to have the right culture, right curiosity, and the right senior-level buy-in. It is not enough just for the CMO to do this. There has to be absolute passion, understanding, and motivation coming from the CEO herself. It is fairly important that it is diffused through the organization. I don’t have the expertise to look at an organization to tell whether they are ready or not, but once they are ready for it, of course, the answer is yes.
Miles: Is this simulation really to help build the muscle of being customer-centric?
Fader: Yes, but it is also a way to get buy-in across the organization. Very often, the CMO gets this stuff but bringing in partners across the organization is difficult. So, it’s really both ways; it is to teach companies how to do it better but also to teach them how to create the alignment around it.
Miles: How can these principles be applied to smaller or earlier stage companies?
Fader: These principles apply even more easily when you have a small customer base, like in the case of B2B. Let’s say you operate a mom and pop store or some sort of small business, and you know almost everybody that you interact with, you already know who the really valuable customers are, or if you are a private wealth manager and your customer base is a half dozen zillionaires, again you know everything about them, you know about their families, their wants and needs, you know whose calls you are going to take at 2 a.m. and who can wait till Monday for you to call them back, so you get a lot of these ideas when you have a relatively small customer base. A lot of these things come naturally.
The problem is when you go from that one mom and pop shop to opening a second, third, and fourth one, and all of a sudden you lose that intimacy. At that point, you basically give up on that kind of thing, the focus is purely on volume or cost or product development.
Miles: What is the cost of having to recover a valuable lifetime customer?
Fader: It’s better if the companies understand what that value is before their relationship even ends. Too often, companies are obsessed over customer attrition. An example of that is cable companies who give as much discount as you demand if you threaten to leave them. In many cases, it is a big mistake on the company’s part. The first thing they ought to be doing is looking up the lifetime value of the customer and see if it is a really valuable customer or not, and therefore if it is worth giving them the discount or not. A lot of companies think along that kind of question proactively.
If you ask the question about cost, that part itself is a huge issue because we need to fundamentally change the way we do accounting, to really understand the cost of acquiring a customer, the cost of maintaining a customer, and the cost of recovering a customer. The standard way that we do accounting sometimes doesn’t fully respect all of those costs, so there are a lot of conversations that we need to have, and that we are having with our friends over in accounting, for them to better understand the stuff we are doing, the metrics we are looking at, and for us to learn from them how to find that right balance for that value and cost.
Miles: Any closing remarks or thoughts you’d want to share as we wrap up the session?
Fader: Sure. I have been talking about this stuff for a long time and the problem is that when the times are good, companies are dismissive of these models and strategies. When times are bad, whether it is for a company specifically or for an economy as a whole, they are willing to listen a little bit more. When we are going into panic mode, a lot of companies are not willing to invest in new ideas and practices, and that’s why they’ll go right back to the beginning. It is important to realise that all that data that companies own may not help right now but it will in the long run.