178: You’re Treating Your Customers Equally (And Its Costing You Money)
Posted by December 27, 2018on
Today, we’ve got an excellent interview with Wharton Professor and entrepreneur Peter Fader.
He’s a two-time guest. We wanted to bring Peter back on the show because he’s an expert in customer lifetime value and customer centricity.
How do you predict lifetime value? What models should we use to predict lifetime value? This is what Peter spent his entire career focusing on.
In this episode, Peter talks about the difference between contractual businesses and subscription businesses. He shares some big name eCommerce businesses that on are track to go out of business because of their product-centric model.
It’s a deep dive into customer centricity, lifetime value, and it’s something I think you guys will enjoy.
- 4:37 The predictive analytics work Peter did with Zodiac that made Nike wanted to buy it.
- 7:50 Customer centricity and why Amazon started out as a book business.
- 11:06 Why Peter believes demographic and persona targeting is antiquated, and what you should be doing instead.
- 14:01 Calculating customer lifetime value – with and without demographics.
- 15:49 How Electronic Arts is rising to the top as a customer-centric company.
- 20:20 The danger of acquisition addiction and scaling too quickly without considering customer quality.
- 23:04 How to tell if your company is setting itself up for a crash.
- 26:27 Quality interactions with customers vs quantity interactions.
- 29:50 The distinction between contractual versus non-contractual business and how to think about customer churn.
- 29:50 Distinction between contractual versus non-contractual businesses
- 32:22 The metrics non-contractual businesses should be examining to measure their success.
- 34:49 CRMs: expectation vs. reality and how to get the most from yours.
Links And Resources
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Austin Brawner: What’s up everybody, welcome to another episode of the eCommerce Influence Podcast. My name is Austin Brawner.
Andrew Foxwell: And I’m Santa Claus. How are you? Oh, sorry. Geez. I was kind of in the Christmas mood still, you know? I’m just feeling it.
Austin Brawner: And you’re actually going to be delivering another present.
Andrew Foxwell: And just on a rooftop right now, super casual, Rudolph and I just had a beer. You know, not a big deal.
Austin Brawner: Rudolph’s drinking beer and not milk now?
Andrew Foxwell: Yeah, little bit of both.
Austin Brawner: 2018, you know?
Andrew Foxwell: Yeah, it’s a milk stout, so that’s what makes sense.
Austin Brawner: Well, we’re-
Andrew Foxwell: Yeah, we’re excited to be here.
Austin Brawner: Yeah, I hope you guys all had a great Christmas and holidays. We’re kind of right through it now, but we do want to deliver you guys one more gift, and it’s the gift of this wonderful interview with Peter Fader from Wharton University.
Andrew Foxwell: Yeah, just an insanely useful episode. This would be, potentially, on my top five listens this year from this podcast, just talks through customer centricity, what it is, lifetime value, thinking about people, and cohorts of lifetime value. It’s just one those episodes that I just was furiously taking notes, and I feel like I learned just as much interviewing him as you’ll learn listening to it.
Austin Brawner: No question, and one of the … This is a … He’s a two-time guest. We brought Peter back. He was on about two years ago. One of the reasons we want to bring him back on is because we always get questions about lifetime value, how do you calculate lifetime value, how do you calculate predictive lifetime value, what models we should be using. And this is what Peter really is an expert in. He’s spent his entire career focusing on this predictive modeling.
And so, in this episode, he’s going to go into it. He’s going to talk about the difference between contractual businesses and subscription businesses. He’s going to talk about some big name eCommerce businesses that, you know, they’re on track to go out of business because of their product-centric model.
And so, we’ll dive all the way into that. It’s kind of a deep dive into customer centricity, lifetime value, and it’s something I think you guys will enjoy.
So, we’ll welcome Peter here to the show.
Peter Fader: Wonderful to talk to you guys, and great to have the opportunity to spread the gospel a little bit.
Austin Brawner: 100%. You know, we’ve given our listeners a little bit of your background, talked a little bit about what you do. But why don’t you take a minute or two and tell us about who you are personally. Give us an overview of the gospel that you are preaching, your marketing expertise.
Peter Fader: Love it. So, a professor at the Wharton School for 30 something years now, doing pretty much the same thing that whole time, building predictive models to try to say who’s going to do what, when, and for how long. Methods work super well, and I’ve always found it frustrating that companies don’t use them as frequently and aggressively as they should.
So, went out there and wrote one book a few years ago, a brand new one that I’m sure we’ll talk about, founded one startup, a company called Zodiac that we recently sold to Nike, and just started up yet another one, Theta Equity Partners. So, whether it’s the academic work, whether it’s getting out there in practice, whether it’s the teaching, whether it’s the research, on all dimensions trying to spread the gospel of customer centricity and customer valuation.
Austin Brawner: No, I think that’s been something that you’d stuck a flag in the ground and have done a great job of communicating. That’s one of the things that I’ve always enjoyed about your books, listening to you on podcasts, is your ability to communicate what customer centricity is.
So, tell us a little bit about this. So you’re not just a professor like you said, you’ve also started a company called Zodiac that ended up being sold to Nike earlier this year. Tell us about the work you did with Zodiac, and why a company like Nike would want to buy it.
Peter Fader: Yeah, so, for all these years I’ve been developing these models, these predictive analytics, these models of customer lifetime value. And one of the reasons why … because a lot of companies just would not believe it. They’d say well, there’s so much that could happen in the future, there could be competition, or changes in tastes, or whatever, whatever, whatever, and they would just reject the idea of running their business on forward-looking metrics.
So I kind of had to take matters into my own hands. And so, I went out there and developed these models, worked with a wonderful variety of companies to show them that, you know what? We really can predict the future, and do it at a fairly granular level, and do it in a very not only accurate way, but with dollars and cents to say this is what this customer will be worth over the next two years. And once we win them over in terms of credibility, that’s when the use cases kick in. So once we have that magic wand, and we can see what different customers are worth, here’s the 50 fun things to do with it.
So Zodiac was just a platform to facilitate all that, to basically bring the numbers to the light, and then to … not to do it for companies, but to encourage them to go out there and do bold things, and account for their success on the basis of future value created, not merely sales booked in the past.
So that was Zodiac, and then Nike was just a client. And as we were about to do our A round Nike came to us and said, “We want it all,” and they basically gave us a … just a very nice offer, and in March we accepted.
So I can’t really say much about what Nike is doing with the Zodiac platform other than to say they’re using it, very, very actively. It’s wonderful to see, but I’m just forbidden from talking much about that. Little disappointing, because I love some of the cases that are going on there. All I can say it go check out the new Nike flagship store up in New York and you’ll see just some amazing technology in action up there.
So, it was really … it was wonderful for me to see my models come to life at full commercial scale, and with a variety of companies, to get that legitimization that a wonderful company like Nike would want to have it all. And again, to see all these different use cases, a variety of ways that customer valuation can drive a business, including many that, I’ll be the first to admit, I hadn’t even thought of before.ina
Andrew Foxwell: It’s really interesting to hear that story. And I think, you know, we think about companies that are trying to be customer-centric, and I, as a consumer of Nike, a big Nike fan, I feel it, actually. I feel that they have done a better job at understanding me over time, which is really interesting, in their marketing, in the way that I’m being treated as a customer.
It makes … It brings to mind another behemoth, of course, in Amazon, when it launched in ’95 it was supposed to be the most customer-centric company in the world. Can you describe this concept of customer centricity, and then why did Bezos want to be the most customer-centric company in the world? I mean, why did he sell books? It’s like … Talk about that a little bit, if you don’t mind.
Peter Fader: Sure thing. So, the reason why he sold books, according to his own words, is quite different than the other apocryphal stories that go around. But I found a really great interview with him in the New Yorker, which I write about in the new book, that basically says it had nothing to do with the fact that books could be digitized, or are relatively easy to ship, it had to do with the kind of people who buy them.
And his notion of customer centricity, not too different from mine, is let’s find the right customers. Question is, how do we know whether someone’s going to be right? For me, it’s all about lifetime value. For him, in the absence of any data, before the company was founded, he used income as a proxy. Let’s go out there and find a bunch of rich people because then we can sell them a lot of different stuff.
And so, he needed to find some kind of product that rich people buy a lot of, that not so rich people don’t buy as much of, so it would be a really good way to kind of ferret out rich people in a disproportional way. And that was books. If you think about it, it kind of makes sense. It skews towards higher incomes. Now, I’m not a big fan of using income as a proxy for CLV, but in the absence of any real behavioral data, yeah, it’s not bad.
So that’s the basic idea is let’s figure out who the right customers are, again, right being defined in terms of what their future value will be. Let’s surround them with a variety of products and services. Let’s build that relationship real deep. Let’s create that kind of trusted advisor status, as Amazon has done, because the last time you bought something from Amazon, you probably have no idea what you paid for it. Let’s create that kind of relationship with our customers, and then find more like them.
If we can do that, if we can build our business around our customers, the right kinds of customers, then we can make more money than if we just obsess over version 2.0 of the product.
Austin Brawner: So, talking about customer centricity, right? And Amazon has done a fantastic job. It’s what their focus has been, it’s been-
Peter Fader: But, you know, let’s … Let me interrupt here and say even though that was the origin story of Amazon, and I give them full credit for that, and even though they use those words at every opportunity, I actually don’t believe that that’s the case any longer.
Now, there’s no question that they raised the bar in terms of customer centricity, but what really sets Amazon aside isn’t its understanding of customers, but it really is more about its distribution capabilities, its operational efficiency. That’s what puts Amazon above and beyond everybody else.
So they’re really good at the customer-centric thing, again, I’m not taking any credit away, but it was their ability just to get stuff out there cheaply, efficiently, quickly, with minimum hassle, that’s what makes Amazon, Amazon. The customer centricity thing is number two. It’s just that their number two is better than most companies’ number one-
Austin Brawner: Sure.
Peter Fader: … if that makes any sense.
Austin Brawner: That does make sense. Well, one thing you mentioned earlier, when you were talking about books, you mentioned you don’t like using income as a proxy for CLV. And in the book you talk about this, that you’re not a big fan of demographic targeting and personas, you talk about how it’s a little bit antiquated. But a lot of people are still using demographic and persona targeting. Why are they still using demographics and personas if they’re not that effective, and what would you recommend instead?
Peter Fader: Sure thing. So why are they still using it? A couple of bad reasons. Number one, because that’s what their boss, or their boss’ boss, that’s what their parents did. That’s just how you run the business is you look for the 18 to 34 year old females, or whatever nonsense that got kind of passed down over the years. Back then that might have been the only way to kind of size up customers. Today we can do a lot better than that.
Secondly, the reason why demographics became so popular is because it’s really easy to look at someone and know what bucket they’re in, so the segmentation analysis becomes super easy to do. But my goal isn’t to make segmentation easy. My goal is to make segmentation effective.
And again, back in the old days, they didn’t have much choice. But today, with the kinds of behavioral data that we have, we can see who’s buying what when and for how much. That’s just so much better. It’s so much more meaningful than demographics. It’s so much more predictive than demographics, and it’s so much more actionable.
So today there is no excuse to be relying on demographics. And I’m happy to see that bit by bit, every time I write some kind of snarky blog about it, the number of people agreeing with me, and jumping on the bandwagon, it’s just much greater than even five years ago, when people would disagree and think I’m a nutcase.
So we’re getting there, but it really is a generational thing. And I hope that when my kids are CEOs, as if, that they’ll be looking only at behavioral data.
Austin Brawner: And so, when you’re looking at behavioral data, just to kind of clarify that, because I do think that Facebook Lookalike Audiences have had a huge impact on people accepting that sort of a … that sort of profiling. What else do you … What else do people look at, or what else should people be looking at when they are trying to find, I guess, similar people to their best customers? How else should they be approaching it?
Peter Fader: Ah, you raise a good question, and which … it shows how poor my answer was. Actually, I’m a huge fan of Facebook Lookalikes. I mean, it’s probably the number one application, and the number one source of wow, that we had at Zodiac.
Here’s the difference. Let me try to reconcile it. When it comes to calculating a customer lifetime value, leave the demographics out. When I want to come up with each person’s score, it’s going to be based purely, and boringly, on what they bought when, and for how much. Recency, frequency, monetary value. You just give me past transaction log data and I’ll give you a surprisingly accurate assessment of what this customer will be worth in the future.
But once I have those lifetime value scores, then it’s time to slice and dice the customer base. So what is it that makes these high-value customers different than these low-value ones? That’s where demographics might be able to kick in. They don’t do so very reliably. They don’t do very strongly, but I’m open to it.
So I’m fine with using demographics, or if you think about the other inputs into the Facebook Lookalike algorithms, media usage, where someone’s located in the social graph, all of that stuff is fine for profiling and targeting, we just don’t use it in the predictive model itself. That’s an important distinction.
Andrew Foxwell: Yeah, it’s interesting, the … I’m glad to clear that up. It’s interesting to hear your take on that being a big part of what you did at Zodiac. Jumping back to the customer centricity piece a little bit more, to kind of go more on your book, one thing I heard you talk recently about, EA Sports being an example of a customer-centric company.
What are some actions that EA Sports has taken, or other customer-centric companies have taken? I know that some of it’s CRM data, and investigating that, and understanding the difference of platinum kind of programs and things like that. But what are some things that EA Sports has done that you want to call out specifically?
Peter Fader: I’m happy to do so. And of course, it’s not just EA Sports, it’s all of Electronic Arts, which is an important point by itself, the fact that they have broad, corporate-wide buy-in. It’s not just one little division or one group of people.
So, let me give you just two of many examples. Number one, EA does not have an ad agency. I mean, they’ll use agencies to do a little bit of media buying, but it comes to creating the creative they do it on their own. And how do they do it? They do it on the basis of lifetime value.
So every day, every single day they’re looking at what games you’re playing, for how long, what micropayments you’re making in those games, and how much more valuable are you today than you were yesterday? So, first of all, that’s an incredible technical achievement, but then it’s what they do with it.
For instance, on the advertising side, they look to see what kinds of customers have had the greatest increase in lifetime value over the last few months, and they say what is it with those people? What games are they playing? What scenes do they enjoy? What aspects of the game do they utilize most? And in their next set of ads they’ll feature those kinds of games and activities.
So they’re actually letting changes in customer lifetime value drive the choice of what ads to film. I mean, that’s incredible! It’s just brilliant. They say hey, these are the customers who have shown the greatest increases in value, let’s find more like them by featuring the kinds of game usage that make them different. That’s pretty special right there.
And from a similar mindset, but a different set of tactics, they’ll use lifetime value as a way to gauge the success of a new game. So instead of simply saying how many units did we ship? Their chief analytics officer, Zack Anderson, has a great story to tell.
Suppose we create a new game, and the only people who buy it are people who have never bought anything from us before, and will never buy anything again. In that case, it doesn’t really matter how many units we sell, because there’s no recurring revenue from them. But if we can sell fewer units, but to more valuable customers who will stay more engaged, and will do more stuff with us, then that smaller game will be worth 10 or 100 times more than that kind of one-shot game. So let’s judge the success of the products that we develop based on lifetime value elevated and not merely units shipped.
So everything they’re looking at, whether it’s their products, whether it’s their promotional activities, they’re looking at through the lens of lifetime value changed. And that’s just wonderful, and I wish that was more rule than an exception.
Andrew Foxwell: Yeah, that’s something that I think gaming as an industry does a lot better is looking at the lifetime value, because they have to, in many cases, to recover customer acquisition costs, and to be able to look and look at the payback periods and things like that. And in eCommerce, the subject of this podcast, of course, so many of our people focus on the initial customer acquisition. So that’s where we run into a little bit of difference there.
Peter Fader: But I don’t see the difference. I don’t see why it’s different for gaming versus selling luxury apparel online. I think the … first of all, the basic patterns of customers buying things, buying products through eCommerce versus playing games, are shockingly similar. It’s amazing that we’ll take the exact same model that we’ll use for an online digitally native firm versus a gaming company. And I think it’s the same issues with unit economic supply.
So, I think it’s more about kind of culture and mindset, and-
Andrew Foxwell: Oh, no. I totally agree.
Peter Fader: Yep.
Andrew Foxwell: I’m saying I think that there is a difference, but I don’t think there should be. I agree with you.
You know, because one thing that’s novel, even in the Facebook advertising world and Instagram advertising world, that we have really started to see come into popularity in the last, I don’t know, maybe two years, is targeting previous buyers. This is not something, really, that we did a lot before. It was very much a growth mode, finding people, et cetera. So the fact that we’re doing that, I think, is big.
And I know, Austin, you have something specifically you want to talk about with an example with Nasty Gal, right?
Austin Brawner: Yeah, well, I mean, I think, echoing what Andrew says, in our industry customer acquisition is extremely sexy, and you see companies scale up so, so quickly, $30 million a year in a couple of years, or $100 million a year in a couple years.
Nasty Gal was a $100 million company in six years, now they’re bankrupt. Blue Apron did $800 million, almost, in sales, and then it’s … now you look at it and it’s kind of a … it’s one of those things you can pop out at Wall Street and look at as kind of a failure.
As companies have success in customer acquisition, why does it then become dangerous for companies like that? And why do we keep seeing these companies that scale so quickly and then kind of crater when they hit certain levels?
Peter Fader: Yeah, yeah, yeah. I was … This is great, and a fun thing is, besides the 20/20 hindsight examples that you just mentioned, we’re in a position right now with my new startup, Theta Equity Partners, to tell you about companies that are about to do that kind of cratering-
Austin Brawner: That’s fantastic.
Peter Fader: Because what the problem is that too many investors are kind of naïve, and they look at a dollar is a dollar, and they don’t really care whether it’s coming from a new customer versus a repeat one, or they might actually favor those dollars coming from a new customer versus a repeat one. So let’s go out there and just acquire customers.
We’ll have this idea that we talk about in the book of acquisition addiction. Just got to bring a lot of new customers, bring a lot of new customers, and then we’ll train them to become good customers. We’ll educate them. They’ll see the goodness of the products we sell and the services that we offer. And that just doesn’t happen. At least, it doesn’t happen automatically like that.
And that’s why you need to be sizing up customers not just in pure kind of volumetric terms, how many did we bring in? But in terms of quality. What’s their lifetime value?
And we’re looking at companies … Well, let’s name names, a company like Wayfair. I mean, they are doomed to crash, and we’re already starting to see some of it in the last month or two, because of the same reason, that their acquisition numbers are way, way, way outstripping their repeat buying numbers, and investors just don’t want to look at that breakdown. They don’t want to be bothered with facts. They just like to see hockey stick curves in the aggregate, and that’s not only hopelessly naïve, but it’s really, really dangerous.
eCommerce firms are in a wonderful position to be able to see the depth of repeat purchasing, much more than brick and mortar firms, and it’s just shameful, it’s irresponsible when they don’t take full advantage of those rich data assets.
Austin Brawner: What are some other examples, besides Wayfair, that you guys have dove into, that … maybe an example of … obviously, you talked about EA being a good example, some other examples that you … are growth stories, but are in a position where you can kind of tell, by looking at some of their numbers, that they’re going to be struggling going forward.
Peter Fader: I’ve got to be careful about naming names, because in some cases we’re doing this with publicly available data, as in the case of Wayfair. But we’ve been working with a lot of private equity firms, and they’ll give us the data from some kind of catalog or eCommerce firm.
And that’s the first thing we’ll do is we’ll kind of just slice it out into adoption versus repeat buying, and say you know what? Let’s not look at the aggregate numbers at all, they’re meaningless. Let’s look at this decomposition, understand what’s the health of the ongoing customer base, and to go to them and say you know what? You don’t want to buy that company, or at least you don’t want to pay nearly as much as you thought you would for it.
And it goes the other way, too. Not only are we out there destroying value, but we’re also enhancing it. We’re identifying companies that are being undervalued because what they’re selling isn’t sexy enough, or just for whatever reason, investors and other stakeholders aren’t seeing the stickiness in the customer base.
So as one example … Well, it sort of played out somewhat middle of the road, but about a month or ago there was an IPO for Farfetch online luxury retail marketplace, and we were looking at this company with a very strong, very sticky customer base. And we came in with a … based on the numbers in their S-1 filing, did a bottom-up analysis to look at the adoption versus the repeat, and said this is a very good business.
It was interesting to see how the prices rose as they approached and went through their IPO. They’ve settled down a little bit since then, but I think they’re in a good place. I don’t think that they’re overvalued nearly as much as a lot of these other eCommerce firms are.
And again, there’s others, and I could talk about some, but not all. But the key thing is to separate out just initial adoptions versus ongoing repeat buying and to really be looking very carefully at both metrics.
And also, one step further, to be doing this not just in the aggregate, but on a cohort by cohort basis. So let’s look at all the customers that we acquired in Q1 2014, and Q2 2014, and kind of roll it forward to say how were the cohorts of customers changing over time? And once again, we’ll see some systemic patterns there with very strong operational implications.
Andrew Foxwell: Yeah, I think … So, what you’re saying is … it just opened so many doors in my mind of thinking about these concepts. And I think that one of the opportunities that presents itself to a lot of our listeners is thinking about, as you said, the lifetime value longer, and thinking about it in cohorts, that they’re behaving very differently. It’s not just all previous purchasers as their own bucket, right? And trying to separate that out.
One thing that is tied into this that I think struck me from another interview you did was talking about the inclination of brands to … you know, you start to do this work and you find your premium people. You find your return customers, your best LTV customers within a certain timeframe, and the inclination is to just hit them with email, and message and every sort of thing that you can to try to get them to convert again.
And your point is, actually, one thing that you can do is these people had been surveyed, I think it was a survey you discussed, and they actually don’t … they want to be talked to less. They want to have a quality interaction, not a quantity of interactions. Can you talk about that concept a little bit, of how brands can do that?
Peter Fader: Yeah, it’s the distinction between playing offense and defense, and with your best, best, best customers, while you … certainly, you want to create more value with them, no doubt about it, but the main objective with them is just to keep them not unhappy.
You know that there’s a good reason why they became great customers. It wasn’t because you were giving them glasses of champagne when you first met them. It wasn’t because you were kind of annoying them with other offers and kind of gratuitous, frivolous just greetings and information.
You just want to be there to play defense with them, that if they have the slightest hint of a problem, jump on it. But don’t follow them around the store. Don’t be excessively, unnaturally warm with them, just keep an eye out, and if they’re having questions, if they’re having concerns, if there’s some product that you don’t stock and maybe you should, be very responsive to them.
The problem is that in trying to be responsive some companies are spreading themselves so thin, they’re being hyper-responsive to everybody, and whenever anyone has a complaint, “oh, we’re on it! We’re going to take care of that!”
Companies live in mortal fear that someone will complain, and then that complaint will go viral. And so, they deal with every single complaint, even though a lot of these customers aren’t really very good, and they don’t really have a lot to worry about. Meanwhile, the good customers might be suffering a little bit, and you’re not dealing with it.
So it’s a matter of allocating resources the right way, which means to offense versus defense, and to kind of high-value customers versus so-so ones. It’s a very simple two by two, and just knowing what tactics do you associate with each of those sales, and when you want to kind of double down on some and cut back on others. That’s what it’s all about.
Austin Brawner: One of the questions that I get from … A lot of times clients will reach out, or companies will reach out, and they don’t have a subscription business, but they’re quite concerned with, quote-unquote, customer churn, all right? And they ask questions like how should we be thinking about customer churn?
I always find this to be a difficult question to answer, because it is dependent on the business, buying cycles, that sort of thing. Like we’ve mentioned, retention and repeat purchases, clearly very important. But how should these businesses that aren’t necessarily subscription businesses think about customer churn?
Peter Fader: Yep. So, I hope we have a few hours to talk about this, because it’s so, so important. First, let’s talk about the distinction between the … what I like to call contractual versus non-contractual businesses. They are different from each other, square peg, round hole, apple, orange, use whatever bad metaphor you want.
You can’t take a non-contractual business, whether you’re a retailer, a hotel chain, a pharmaceutical company, a gaming company, and treat it as contractual. There is no such thing as a retention rate when you’re in a non-subscription business because you don’t even know how many customers you have at any given point time.
So you need different metrics, different mindset. You need to take into account the fact that the purchase is going to be much more variable over time, and the sizes of them are going to be much more variable. It’s just a different way to run a business. So if you’re running one you need to run it differently, and if you’re an investor in one you need to be using different metrics for it. I just go nuts when I see people talk about a retention rate for a non-subscription business.
So, number one, they’re different, different metrics, different practices. Number two, having said all that, there are things that you can do to a non-contractual, a non-subscription firm, to try to nudge it in that direction. So what a lot of companies have done is let’s try to take things that you tend to buy in a completely non-contractual way and turn it into a subscription business.
So a lot of the meal kits, you referred to Blue Apron before, that’s one of the things that they tried to do is let’s try to turn meals into a subscription. We’ll see lots of other companies out there that either on their own are setting up some kind of subscription process, or these third-party vendors that are doing it for them.
And so, if you can turn it into some kind of subscribe and save sort of thing, that’s great. Then, all of a sudden, you can start to adopt the more subscription or contractual business practices. And maybe the right answer is both, that for some customers they do want to have this ongoing, period relationship with us, but for some, in fact, most, they’d rather just be buying once or twice a year without any kind of expectation of periodicity.
So it’s really important to not only understand those differences but to accept them and adapt to them, and we’re getting there. I’m feeling better about that today than even a couple of years ago, but there’s still some more work to do.
Austin Brawner: So, diving into that a little bit further, so for the companies that are not contractual, right, what are the metrics they should be looking at, and how should they be approaching … What would you even describe it? Would you describe it as retention, or what … How would you describe … Not retention, because we just talked about it, right?
Peter Fader: No, no, no, no, no. So, let’s save the word retention for the contractual setting when we know how many customers we had last period, we know how many we have this period, so we can say what percent of them did we retain? That language doesn’t apply in a non-contractual setting, because let’s go back to mighty Amazon, they have no idea how many customers they have. It’s impossible for a non-contractual firm to know.
Now, you could say how many customers did something with me over the past month, or quarter, or year, and I really like that metric there. So you think about the gaming companies, or Facebook, that obsesses over DAU and MAU, that’s good. That’s one metric that we should be looking at. So in a non-contractual setting the number of active users over a fixed period of time, that’s a very … really good one.
In fact, if we go back to the Wayfair example that I mentioned, one of the reasons why … I’ve looked at Wayfair. I have no relationship with them. They don’t like me. Is because they disclose a lot of really rich metrics about themselves. One of them is exactly that one, the active users metric. In their case, it’s annual active users.
But the other metric that they put out there, which very few other companies do, and therefore I’m very grateful to the Wayfairs and … that do it, and I also wonder why, would be what we call, or what they call, QTO, quarterly total orders. So if you can me, in a given quarter, or month, or whatever period of time, how many total orders were placed, and how many people placed those orders, if you can give me those two metrics over time then I can back out the parameters of my repeat purchasing model almost as accurately as if I had the raw transaction log data.
So those are two really, really good metrics, and anybody who’s investing in an eCommerce retailer, assuming it is a non-contractual business, should be pounding on the door demanding to see those metrics on a regular basis, and not just the overall aggregate sales numbers, a very, very diagnostic.
Andrew Foxwell: One thing I want to ask you, Peter, before we let you go, is to talk about … you know, with another concept in your book, about CRMs, and how we use CRMs, and well intended, now we’ve lost our way using CRMs, and how a company, or your company, or my company, can properly put a CRM to use. What are some of the foundational aspects of that that are important to mention here on this podcast?
Peter Fader: Think before you act, it’s as simple as that, but it’s as difficult as that. So, you go back to when CRM first became part of our vocabulary, we’re talking 20 odd years ago, when it first became possible for companies to tag, and track, and get that 360-degree view, and they were let’s just collect everything! Let’s build these massive systems and let’s pull it all together because once we do the money will come raining down from the sky!
Except that it didn’t happen that way, and CRM was basically a disaster back then, just as big data is becoming today. We’re just amassing everything just hoping that insight will just flow from it. Well, it doesn’t work that way.
You gotta think before you act. You have to understand what these patterns look like. All the stuff that we’re talking about here. The distinctions between acquisition, versus retention, versus development. The differences across the value of customers within a cohort. The differences across the cohorts themselves.
You have to know what you’re looking for. You have to anticipate what these patterns are going to look like. And you have to ask yourself if the patterns look this way versus that, what kinds of actions am I going to take?
The insight doesn’t just arise from the CRM system, nor does it arise from traditional data science. There’s no science in data science, really, it’s just mushing data around.
So I want to see people thinking much more carefully about what these patterns look like, how to diagnose the nature of problems and the appropriate next actions to take. And again, we’re making great progress in that regard, and we’re starting to see CRM become not just a useful tool, but an essential one for those who are doing the right kind of things.
Austin Brawner: This has been great, Peter. You know, I think we want to … kind of coming up on the end here, and really have appreciated you coming on and just explaining customer centricity the way that you have been so good at doing, and also kind of giving some tips and ideas. If people are listening and they’re interested in learning more about Theta Equity Partners or what you’re doing, where would you direct them to get in touch with you?
Peter Fader: Well, just Google my name or go to PeteFader.com, that takes you to my academic page, and you can see a lot of the research, and some of the just other knowledge creation stuff.
But yeah, I think it is worthy of giving a shout out to Theta Equity Partners, ThetaEquity.com. Whether you’re a private equity firm or not, or you just simply want to understand what these patterns look like, and therefore, for your own small eCommerce firm, to know the kinds of things that you should be looking at internally, and what you should anticipate that a smart investor might be asking you for. You’ll see just a lot of really nice case studies there, some we’re naming names, others we’re keeping it private, but just the kinds of metrics that we’re putting out there.
And, of course, the new book itself, The Customer Centricity Playbook. Unlike the first book, where it was like what is this idea of customer centricity and why should we pursue it? Starting to get down to the tactics, like these different kinds of two by two frameworks that I’ve already referred to, encouraging companies to go out there and do it, and don’t just contemplate it.
And it’s been really nice to see a lot of companies coming forward, big and small, products, and services, domestic and international, saying you know what? We’re starting to dip our toes in the water, we’re taking those baby steps, we’re seeing some things that are working, not everything, necessarily.
And then, you know what? Get back in touch with me. I want to hear your stories, good and bad. I want to hear your questions. I want to hear what vendors you’re working with, what kind of data and experiments have you found success with, because even though I’ve written two books on it, I’ve been spending a lot of time on it. And like I said before, it really is a generational kind of thing, and the very best stories are yet to be written.
Austin Brawner: Awesome stuff. Yeah, go take it. Go pick up the book. It’s a read you can get through in a couple of hours, maybe three hours, and put it to use right away. I really enjoyed it.
So, Peter, thanks so much for joining us, and we’ll be in touch. Talk to you soon.
Andrew Foxwell: Thank you, Peter.
Peter Fader: It is my pleasure. Thanks for helping with the gospels, buddy.
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