Customer Centricity

"The customer is not always right. The right customers are always right."

— Peter Fader

Fader is a marketing professor at Wharton, where he holds the Frances and Pei-Yuan Chia chair, and has devoted his career to measuring and predicting customers' buying behavior. In 2015 he cofounded Zodiac, a predictive analytics firm that Nike bought in 2018, and later Theta Equity Partners, which values companies based on the value of their customer base. He wrote this short book to bring order to a concept every company defined in its own way.

Almost all companies are organized around their products: the org chart, the incentives, the metrics and even the internal language revolve around what they sell. That model, which comes from Henry Ford's assembly line, worked as long as a good product could be defended for years. Today technology is imitated fast, markets open up and the customer has more information and more power, so differentiating on product alone is increasingly fragile.

Fader distinguishes between a customer-friendly company and a customer-centric one. Apple, Nordstrom and Starbucks give excellent service, but treat all their customers more or less the same. Being customer-centric is something else: a strategy to align the company's products and services with the wants and needs of its most valuable customers, with the goal of generating more profit over the long term.

To achieve it, Fader proposes:

• Recognize that the average customer doesn't exist. Customers differ greatly in how much they buy, how much they refer you and how they respond to an offer. That difference is not a problem to be averaged away, but the opportunity to choose whom to invest in.
• Measure customer lifetime value. CLV is the present value of the net cash flows each customer will leave in the future. It looks forward, not only at historical profitability, and is calculated by segment, because a single formula for everyone gives unreliable results.
• Segment by value, not demographics. The most valuable customers get more attention, offers and service designed for them. The rest are neither ignored nor mistreated, because their revenue also funds the strategy.
• Organize by customer type. Fader proposes segment heads with as much weight as product heads, and measuring the company by its customer equity: the sum of the lifetime value of its entire customer base.
• Start with a simple CRM. Simple data and simple queries, and more complexity only when needed. A huge CRM fed with bad data produces bad decisions.

The book's best-known case is a customer-service legend. In 1975, in Fairbanks, Alaska, a man came to return some used tires to a newly opened Nordstrom store, which had never sold tires. The store refunded his money and the story became an example in business schools. Fader, a loyal Nordstrom customer for years, says it was probably a bad business decision. The right answer depended on data nobody consulted: whether that man shopped frequently, how much he spent and how much his relationship was worth going forward. If he was one of the best customers, the refund was an investment; if not, it was just a cost.

Fader also warns that this strategy isn't for every company. It requires two conditions: knowing each customer in enough detail to separate the valuable ones from the rest, and having the operational capacity to offer different things to different customer types. Without both, the strategy can't be executed.

How to start this process? Take the customer base from the last two years and sort it by the profit each one left. Identify the small group that explains most of that profit and answer three questions: what they have in common, which channel they came through and what you do differently for them today. If the answer to the last one is "nothing," that's your first action for this week.

As a founder it will help you decide which customers to go after, which ones to invest in and how much you can pay to acquire each, comparing CAC against LTV by segment. It will also help you present your customer base to your investors as an asset with measurable value, not just a user count.