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Peter Fader on Customer Centricity and Why It Matters
Published : November 18, 2011 in Knowledge@Wharton
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:
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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
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Kobrin: Along the same lines. That's the front line. Secondly. I'm talking about future-looking customer lifetime value. Page 2 of 4 . In the old days.Peter Fader on Customer Centricity and Why It Matters: Knowledge@Wharton (http://knowledge. For the most part. They ignore some of these distinctions.but there are some important considerations. They don't want to think about it. Kobrin: How would you calculate customer lifetime value (CLV)? Fader: That's a key question.the fact that different customers are going to have very different CLV. 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. But the real key is to segment customers on their value. What do they do wrong? How can it be done right? Fader: If you're going to be customer centric. we think about the most customer-centric companies being online firms such as Amazon and Netflix. the basis of segmentation used to be simple observable things like demographics or geography.upenn. but you will treat some better than others. But by no means is this limited to e-commerce firms: Capital One. That's step one. you must take into account heterogeneity -. and they oversimplify it. All materials copyright of the Wharton School of the University of Pennsylvania. CRM has taken on a life of its own. easily identifiable characteristics. Pete.wharton. a lot of firms feel it is just too complicated. 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.values. Unfortunately. you mention that most firms don't handle customer relationship management (CRM) well.edu/article. Does it mean you give those special customers absolutely everything? Maybe not. Instead of it being just a tool that helps you achieve customer centricity. When the system is in place.then you can't be customer centric. First.we won't get into those details here -. It's fairly technical -. 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. I've been focusing on those methods and how CLV varies based on whether you're in a contractual business or non-contractual business. Thirdly. Unfortunately. Different characteristics lead to different CLV formulas. people don't know quite what to do with it because it's often so complex.or set of systems -. It leads to a garbage-in/garbage-out situation. If you can't sort out your customers -. Those are great examples.if you can't look at them and know who is good and who is bad -. Harrah's and even IBM are also examples of companies that are fairly customer centric. I'm not talking about historic profitability. which might be related to profitability. You are going to be really careful about whom you choose to treat that way and what that treatment means. CRM is a really critical step. But you're definitely going to give them more consideration than customers who frankly are not worth that much to you. That's tough to do. and they use a one-size-fits-all formula across all their customers that doesn't vary based on the business model. 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. you must take into account the kind of business setting that you're in.that gets embedded in a company and becomes a huge operational challenge. CRM is really the interface that pulls it all together. The basis that companies use to come up with this segmentation is the key. We want to sort our customers based on what they will be worth to the firm in the future. That's actually been a big focus in my research for a number of years now.cfm?articleid=2875) going to treat them badly. it becomes a massive system -. 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.
and not just ingredients. and I'm not suggesting that it's going away tomorrow. It's all about technology. Today's customers are so much more informed.cfm?articleid=2875) The first step of CRM is to keep it really simple.upenn. the companies that are bringing it in are biting off more than they can chew in many cases. Kobrin: You talk a lot about the difference between a product-centric and a customer-centric strategy. Kobrin: One of the things that surprised me in the book is you say that "the customer" doesn't exist. I need to understand the strategies into All materials copyright of the Wharton School of the University of Pennsylvania. but celebrating it. Instead of pushing back and complaining. We've been talking about customers all afternoon. Page 3 of 4 . all this heterogeneity is a great thing because it lets us pick and choose different kinds of customers!" When we say "the customer. you say this current generation of consumers is spoiled: They know what they want. 50 or 60 years ago.or actually a step up. they really need to be a solutions provider. What are the implications of that for companies? Fader: First of all.edu/article. By talking about "the customer" or by talking about "the average customer. keeping the operational parts around it simple. saying.that can actually be a more profitable way for many companies to go to market. You look at the performance metrics that they rely on. 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. and that's going to drop to the bottom line. companies have to realize that instead of just putting products out there. A lot of companies spend their time pushing back. That's more or less business as usual. I realized that I need to take a step back -. I'm not suggesting that it's easy. But I am suggesting that there are alternatives. say. That's kind of a corny phrase these days. What does that mean? Fader: One of the things that drives me crazy is when I hear managers or entrepreneurs talking about "the customer. That's not the case anymore. but I think there is some validity to it. Kobrin: What was your biggest surprise in writing this book? Fader: I wrote the book because I'm a model builder. Economic times in general tend to be better than they were. It's all based on different kinds of products. You look at the incentives. Kobrin: In the book. 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 -. and they want it immediately. Customers are far more empowered than they ever were before. You look at the language they use. Start with really simple data and then add simple queries that you want to make on that data.Peter Fader on Customer Centricity and Why It Matters: Knowledge@Wharton (http://knowledge. let's think about the driver [behind] it. step one of being customer centric is not only acknowledging the heterogeneity. Companies need to help consumers figure out how their products and services are going to fit into their lives and offer solutions. What is the difference? Fader: Nearly every company on the planet is product centric.giving them the right incentives and the right resources and tools -. I'm interested in helping companies improve their quantitative literacy to assess the value of the customers and do more effective targeting. I'm interested in the methods." 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. "Wow. Again." that doesn't do justice to the vast heterogeneity and the incredible differences across our customers in terms of their propensity to buy. I think it's undeserved. and it's broken up by different kinds of products. to talk to each other and to respond to different kinds of offers.wharton. I don't think it is the fault of CRM or the vendors that sell CRM systems. You look at their organizational chart. CRM has gotten kind of a bad reputation. Then you can build up and add complexity as the company has a genuine need for it. The whole business model is based on producing something or a set of somethings in really high volumes and at really low costs. I think it's important to not use those words and to always have a plural there." we are selling ourselves short.
posters or plaques. a really big piece of it was to bring clarity -. this customer centricity stuff might not even be essential. custom reprints..com P. whether it's even right for them. They have to understand what it means. it does bring some clarity. You need to understand what all these consequences are going to be before you get into it. informed decision about whether to go there and what it means when they start to do it. But I want firms to be able to make an intelligent. and you get four different definitions about it. But I want to provoke a discussion and to get people to really think about what this stuff means.cfm?articleid=2875) 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. Once again.wharton. please contact PARS International: reprints@parsintl. if they choose to go there. All materials copyright of the Wharton School of the University of Pennsylvania. e-prints. especially for firms that want to call themselves customer centric.edu/article. Kobrin: How does the book help a firm become customer centric? Fader: For one thing. This is a single/personal use copy of Knowledge@Wharton. but I think it's important for everyone. partly because a lot of the things that I believe are at odds with conventional wisdom. (212) 221-9595 x407. it's really hard to just pick a strategy and run with it. I'm hoping to lay out a roadmap for firms to understand where they are going. There are a lot of provocative aspects of the book.to it.Peter Fader on Customer Centricity and Why It Matters: Knowledge@Wharton (http://knowledge. For multiple copies. For many firms. It's going to help them understand what customer centricity is . I'm not sure I'm going to achieve that goal. I was surprised at just how ambiguous a lot of these definitions were or how contradictory they were. For me. and get organized around this strategy.or some consensus -.. They shouldn't even go there. Page 4 of 4 .upenn. You pick up three different books on customer centricity.
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