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On Customer Lifetime Value and the Importance of Data-Driven Marketing: A Conversation With Dr. Peter Fader

Kate Johnston

Customer lifetime value. It’s a popular topic on many marketers’ minds. How can you cultivate the strongest possible relationships with your most valuable customers? If you could know your high-value customers from the beginning, how would you treat them differently? And, if you decide a customer-centric approach is right for you — how do you get started?

Sidecar’s own Mike Perekupka sat down with one of the top influencers in the world of predicting customer behavior, Peter Fader, Ph.D., Professor of Marketing at the Wharton School of the University of Pennsylvania, to discuss customer lifetime value and the advantages of adopting a customer-centric approach.

This can’t-miss conversation speaks to anyone who lies awake contemplating customer acquisition or retention, and will help you define what a highly valuable customer really means to you.

Dr. Fader believes in the power of data-driven marketing, and his beliefs are well-informed. After all, he’s been studying marketing and analytics of behavioral data to predict future shopping activities for over 30 years.

He wrote the book on customer centricity and was the 2009 recipient of the 25-year Consortium Fellow Research Excellence Award from the American Marketing Association. In addition to his current role at UPenn, Dr. Fader recently co-founded Zodiac, a predictive analytics firm that strives to bring customer valuation models and insights to data-driven organizations.

His predictive models identify the oft-surprising, but consistent, behavioral patterns that determine customer purchase habits, and companies use these models to determine customer lifetime value. Based on this data, his research has shifted, and in some cases started, the conversation around what it means to be customer-centric.

Peter Fader discusses customer lifetime value
Dr. Peter Fader and Mike Perekupka in the Sidecar studio

Top Sound Bites

(edited for brevity and clarity)

On customer lifetime value:

[5:20] “It’s not only a matter of when will this customer buy from me next and how much will they pay at that time, but it’s going further out. So how many more purchases will they make? How long will the overall relationship last? So if you think about those three questions, how long the relationship will last, how many interactions of economic value — whether it’s transactions, whether it’s contact with customer service, whether it’s referrals, whatever — how many valuable interactions will occur over that horizon and how valuable will they be? If you add all that up, that’s the overall value of the customer.”

On customer centricity:

[9:49] “Because one of the things that I’ve discovered … is that there is no ‘the’ customer. There is this incredible variety of customers and you don’t want to be aiming at the middle. You don’t want to be aiming at the bottom. You want to be aiming at the top. You want to celebrate. You want to understand the differences across the customers. And so, instead of putting ‘the’ customer at the center of everything we do, we want to put the ‘valuable’ customers at the center of everything we do.”

On operational efficiency versus customer centricity:

[15:25] “Operational efficiency often gets in the way of customer centricity. If you’re really into the customer-centric thing, you have to be willing to invest, you have to be willing to actually raise your costs to actually spend more money to serve the right kinds of customers or to acquire the right ones.”

On adopting a customer-centric strategy:

[19:12] “For me, customer centricity isn’t just a new flavor-of-the-month marketing. It is a corporate-wide strategy that everybody has to be involved with. Of course, with marketing right in the center. It really has to start at the top. The CEO can’t just give lip service to it, but he or she really has to understand what this means and create a strong alignment across all the functional areas. So that’s number one.”

Customer Centricity by Peter Fader

On predictive data:

[23:03]Let’s just look at the data. I’m not talking about models or anything like that. Which bits of data tend to be more predictive? And our forefathers in direct marketing handed us the most wonderful gift — RFM. Enough said. Recency, frequency, monetary value.”

On the future of product marketing strategies:

[28:44] “I want to change the way we do the accounting for products. So instead of judging a product on the basis of how many units of it do we sell, I want to judge the goodness of a product based on the customer lifetime value of the customers who buy it.”

To learn more about Peter Fader, check him out on Twitter at @faderp. And, for a deeper dive into customer centricity, check out his book, “Customer Centricity: Focus on the Right Customers for Strategic Advantage.”

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