Forget customer friendliness!
Prof. Peter Fader on Customer Centricity
Forget customer friendliness!
Who is the customer really? Are some customers better or worse than others? For Peter Fader, an authority on customer centricity, focusing on the right customers gives a significant competitive advantage. In this interview, the marketing professor from the Wharton School explains why you should never treat customers badly, yet you should certainly prefer some over others.
Professor Fader, in many companies, you will often hear it said that “…the customer is at the heart of our company.” What this means to many employees, however, is that the customer is always in their way. Does this fit with your experience as an expert in customer centricity or as a customer?
That is a pretty extreme statement, which I don’t really like. However, it is true that for many companies, customer focus is nothing more than a claim. Most are not genuinely interested in really understanding or serving their customers. For many, customer centricity is more a nuisance than a burning desire, so they don’t do it very well. A typical mistake is that many companies confuse customer friendliness with customer centricity.
Why is customer friendliness not the same as customer centricity?
Because not all customers are equal. In the 1950s, when marketing as we know it today first began, nobody had any idea of the differences between different customers. That’s why people talked about ‘the customer’. The discovery that no two customers are alike was seen by many as a nuisance. Today, we see it as an opportunity. If we find out who our best customers are and tailor our products and services to them, we can actually make more money rather than trying to serve the ‘average’ customer. Unfortunately, most companies don’t fully understand what differences between customers really mean for them.
… which leads us to the concept of customer centricity, which you have been studying for many years.
Customer centricity means that you are friendly, provide a good service and develop new products and services for your special customers, those who offer a lot of value to you. You have to choose and decide, some customers deserve special treatment; others not necessarily. If others want to buy from you as well, that’s great, but you don’t have to treat them the same way.
How can a company identify which customers to focus on? It doesn’t exactly sound simple.
Before we get to the heart of this question and prioritise customers, we first have to ask ourselves, “who is our customer as an entity?” In a B2C context, there is no question that the customer is the person to whom we sell our products and who uses our products. In this case, it is pretty simple. If, on the other hand, we are in a B2B setting, this is a different story. In a complex setting, such as the pharmaceutical industry, the customer can be the patient, the doctor, the insurance company or even the hospital procurement network. So first of all, we need to reach a consensus on which entity to focus on, a discussion that surprisingly few companies have. Instead, many departments target different customers, leading to confusion and misalignment.
So once we’ve defined ‘the’ customer, what then?
When we have clarity about who our customers really are, we need to decide which metric we’re going to use to evaluate them. This gets to the crux of what I have been studying over the past decades, the concept of customer lifetime value. This indicator is the sum of the profits generated by a company throughout its relationship with a customer. It is used to estimate how much to spend on attracting and converting new customers. We are not talking about the value of a customer in the past, we are talking about the future customer lifetime value. A company should categorise its customers according to their future value.
Is it really possible to predict the value of each individual customer?
Of course. Luckily, when we developed this concept, we had recourse to some excellent work by other marketing experts. Today, we are able to predict with some accuracy how long a customer will stay with you, how many transactions they will make over that period and how large the shopping cart & financial value of each of these transactions will be. We can use this as a basis to develop use cases of how companies should align their business practices as a whole with the most valuable customers. What is important is both the operational and the organisational ability to offer different products and services to different types of customers. That is a pretty complex task.
A company should categorise its customers based on their future value.
In an interview, you, rather surprisingly, mentioned Apple, one of the most valuable brands of our time, as a company that is customer friendly but not customer centric.
This brings us back to where we started. Apple puts the customer at the heart of its business. When Steve Jobs launched the first iPod, he still knew exactly what the customer wanted, because customers had actually asked for this type of product. Since then, however, Apple has concerned itself much less with analysing customer behaviour and calculating their Customer Lifetime Value (CLV) or viewing them as a heterogeneous group. They are lagging far behind other Silicon Valley giants such as Facebook, Netflix and Google. We shouldn’t forget, however, that Apple isn’t alone in this, almost all companies in the world follow a product-centric rather than a customer-centric strategy.
What are the characteristics most companies aim for and celebrate? Number one on their list is innovation; in other words, the development of ground-breaking products or services. That’s why companies invest so much money in R&D and only think about marketing afterwards, to sell what they’ve developed. “Now that we have this cool new service, who can we sell it to?” That is what they ask themselves. All of their thinking starts with the product.
This is very different from what I propose, which is to start with customer lifetime value and find out who the most valuable customers are. And this leads to the question, “What should we develop to increase the value of these most valuable customers?”
At first glance, these two approaches look quite similar. In reality, they differ vastly in terms of overall corporate strategy and the metrics used to measure them.
Is there a company or brand that you think is successfully pursuing a customer-centric strategy?
There are many companies around the world that are starting to embrace these ideas from the Commonwealth Bank in Australia to Marimekko in Helsinki. A company that has really impressed me is Electronic Arts (EA) the games company responsible for SimCity and World Cup for example. EA was pretty product centric before it switched strategy 10 or 15 years ago and started working out who its best customers were and how to develop games with these customers in mind.
Today, they check on a daily basis which games the various EA customers are playing, how much time and money they spend playing these games and what that means for their customer lifetime value. And they do this every day for a billion customers. It’s incredible.
How do these companies ensure that their insights into customer preferences permeate through the entire organisation?
This is an important question that takes me straight back to Electronic Arts. Zachery Anderson, Chief Analytics Officer at Electronic Arts, places as much emphasis on these matters as he does on the technical foundations of the models. How do you get a company’s employees to share data, use data and make better decisions based on data? Reorienting a company’s discipline, culture and focus towards customer centricity is a very challenging task.
People don’t like looking around and if you observe them over a long period, you’ll see that consumers tend to search around even less once they’ve found a reliable provider.
Today, many marketing people are claiming that customers are much more demanding and fickle than in the past. Is this assertion true or is it simply an excuse made by lazy marketers?
It’s more the latter. Or perhaps an excuse for naive marketers who are too quick to believe the hype. In fact, the basic patterns are always the same, we just surround them with all this mythology. It may be that the average customer today has a briefer relationship with brands than in the past, but the difference is not so marked. People don’t like looking around and if you observe them over a long period, you’ll see that consumers tend to search around even less once they’ve found a reliable provider. It will always take a great deal of effort to switch from one provider to another and customers are therefore more likely to stick with their old, long-standing provider.
The main differences are between individual consumers and the important thing is to learn to appreciate this diversity. If you identify which customers have a high lifetime value early in the acquisition phase, these customers are a hundred times more valuable to you than the average consumer, even if you have to spend more to acquire them.
When and how have you, as a customer, been surprised by a company or brand in the recent past?
I’m a great proponent of treating valuable customers better than others. However, that does not mean I am a big fan of treating average customers worse. But that’s exactly what Harrods, the British luxury department store, recently did. During the Christmas period, children have always been able to visit the Harrods Christmas grotto to meet Santa and receive a gift. It’s an old tradition. This year, however, Harrods announced that only customers spending a minimum of £2,000 at the store would be able to do so.
This policy is so terrible that I don’t even want to talk about just how stupid it is. Unfortunately, many people forget that customer centricity is not about penalties, it is about rewards. It is very sad to hear of such cases.