Customer Centricity: Focus on the Right Customers for Strategic Advantage (Wharton Executive Essentials)

by Peter Fader

Customer centricity is a strategy to fundamentally align a company’s products and services with the wants and needs of its most valuable customers. That strategy has a specific aim: more profits for the long term.

the leaders of British retailer Tesco, who state very openly that the data they gather from their customer-centric initiatives drive every major strategic decision they make.

Companies don’t make and sell the products they think their customers will want; they make and sell products they know their customers will want.

Once you have identified your right customers the next steps are obvious. You mine those customers for information. You find out what they want, what they need, and what they will demand going forward. You find out how to acquire new customers who share some of the key characteristics that distinguish your best customers. And then you position your company, from the very top of the corporate structure right down to the on-the-ground sales force, to deliver on these ideas-because by identifying and serving those customers (and in some sense ignoring the rest), you will be doing precisely what is necessary to maximize their long-term value and your company’s profits. To get there, though, you’ll have to utterly transform

So the question now is obvious. Given all the risk, given all the work required, and given the time and money that must be invested, why should you even bother? Well, simply because in many cases the rewards of customer centricity are simply too great. Yes, product centricity works. But for many companies and in many industries, customer centricity will work better.

Those long-term profits are realized because customer centricity allows companies to excel in three key areas: Customer acquisition. Customer centricity can allow your company to better understand the true cost (and value) of new customer acquisition, help you better understand where your company should look for new customers, and can increase the number and quality of referrals from your existing customers-thereby helping you gather even more highly committed customers moving forward. Customer retention. Customer centricity can lengthen the relationship between you and your best customers and allow you to maintain these relationships at lower cost. Customer development. Customer centricity can boost the frequency with which your customers purchase a particular product or service from you, allow you to sell more varied products to your customers via cross-selling, allow you to realize a price premium from your best customers for an existing product or service, and allow you to up-sell your best customers to higher margin products or services.

Customer retention. Customer centricity can lengthen the relationship between you and your best customers and allow you to maintain these relationships at lower cost.

Customer development. Customer centricity can boost the frequency with which your customers purchase a particular product or service from you, allow you to sell more varied products to your customers via cross-selling, allow you to realize a price premium from your best customers for an existing product or service, ...

Customer centricity can allow your organization to make far more money from your most valuable customers who will buy from you more often and spend more when they do buy from you. Customer centricity can help you create a passionate, committed customer base that will spread word of your company’s attributes to potential new customers. Customer centricity can improve the way your customers view you-even as those customers pour more money into your coffers.

Through its massively successful and ever-expanding Clubcard customer loyalty program, first introduced in 1995, Tesco has over the past two decades aimed to both better understand on the macro-level scale what kind of marketing initiatives and promotions and sales are working on a company-wide basis and also drill down to the micro-level scale to every individual customer and initiate company-customer interactions that make each and every one of those customers feel valued-and in the process, generate value back to the company.

Every time a Clubcard patron buys something at Tesco, those patrons get points that are paid back to them four times per year and can be used, of course, to buy more Tesco products. So the customer wins. But Tesco wins too. It wins with data.

With each transaction made under the Clubcard program, Tesco gathers data about what was purchased, how much was spent, where the purchases were made, and more. In other words, through the Clubcard program, Tesco collects knowledge about each of its millions of customers-knowledge it can use (and does use, with enormous success) to target individual customers with offers, deals, or specials specifically customized to their wants, needs, and habits. On a larger scale, the company also uses that data to determine what kinds of stores to build in different markets and even how individual stores should be laid out.

book Scoring Points: How Tesco Is Winning Customer Loyalty,

customer data collected through the Clubcard initiative guide many of the key business decisions made by Tesco executives.

The Paradox of Customer Centricity: What about Your Other Customers?

In order to do customer centricity right, you need to know almost everything there is to know about your customers, and knowing everything there is to know about your customer requires resources-people, technology, man-hours. It’s a big mountain to climb. In the long term, of course, I believe these huge efforts-this massive expenditure of time and money-can and will pay equally huge dividends. But in the short term, well, there is the simple reality of paying the bills, making payroll, and staying in business.

What I’m suggesting here is that you should view these other customers as low-hanging fruit.

They are easy money. They are, in essence, the ballast that will allow you to continue on your path to long-term customer-centric success. In that sense, they remain every bit as important to your company as the right customers.

Customer equity is the sum of the customer lifetime values across a firm’s entire customer base.

The implications of this straightforward definition are fairly obvious. If we are to agree (and I think we do) that every company’s objective is to maximize its overall equity, and if we agree (and I think we do) that customer equity can and should be counted toward a company’s overall equity, then we must also agree that companies should dedicate the resources necessary to do whatever it takes to maximize that customer equity.

And as my definition suggests, we can’t do that until we know the value-the customer lifetime value (CLV)-of each and every one of our customers. There are quite a few different models and equations out there that claim to be able to do precisely this. Some are mostly correct, some are a little bit correct, and some are wildly off the mark, but all of these various formulas agree on the point we’ve already touched on: a company’s total customer equity is calculated by adding up the CLV of all its individual customers.

Among those insights-which I agree with, it should be noted-are the following: Contractual firms (e.g., those that utilize subscription models, such as Comcast, a health club, or a performing arts organization) are more likely to find value in customer equity; noncontractual firms will tend toward brand equity. Companies that sell highly customized offerings (e.g., investment advisors and grocery stores, in which every customer’s portfolio or cart full of items looks very different) are more likely to find value in customer equity; companies that sell noncustomizable, commoditized offerings (e.g., ice-cream stores and laser eye surgeons) should focus more on brand equity. Companies that sell highly visible products-think sneakers or high-end clothing-are more likely to find value in brand equity. Companies that have powerful intermediaries standing between them and their end users (e.g., a consumer packaged-good manufacturer, a publisher, or a pharmaceutical firm) are more likely to find value in brand equity. Companies that inherently establish long-term relationships with their customers (e.g., insurance companies and educational institutions) are more likely to find value in customer equity. Companies that sell services are more generally likely to find value in customer equity than product-oriented firms. Companies that can’t easily obtain customer-level data (for technological or regulatory reasons) are more inclined to focus on brand equity. Of course, none of these ...

Contractual firms (e.g., those that utilize subscription models, such as Comcast, a health club, or a performing arts organization) are more likely to find value in customer equity; noncontractual firms will tend toward brand equity. Companies that sell highly customized offerings (e.g., investment advisors and grocery stores, in which every customer’s portfolio or cart full of items looks very different) are more likely to find value in customer equity; companies that sell noncustomizable, commoditized offerings (e.g., ice-cream stores and laser eye surgeons) should focus more on brand equity. Companies that sell highly visible products-think sneakers or high-end clothing-are more likely to find value in brand equity. Companies that have powerful intermediaries standing between them and their end users (e.g., a consumer packaged-good manufacturer, a publisher, or a pharmaceutical firm) are more likely to find value in brand equity. Companies that inherently establish long-term relationships with their customers (e.g., insurance companies and educational institutions) are more likely to find value in customer equity. Companies that sell services are more generally likely to find value in customer equity than product-oriented firms.

Companies that can’t easily obtain customer-level data (for technological or regulatory reasons) are more inc...

CLV is the very unit of measurement upon which customer centricity and customer-centric firms are built. CLV is the unit of measurement that creates customer equity, which in turn creates greater firm value. CLV helps us value our customers individually and collectively, establishes an upper bound on what we should be willing to spend to acquire new customers, and enables us to make better decisions about the allocation of marketing resources across the customer base.

Customer lifetime value is the present value of the future (net) cash flows associated with a particular customer.

What we are most concerned with (and rightly so) is how much Joe Smith is going to be worth tomorrow. And next week. And next month. And next year. In other words, we are interested in finding out how much money Joe Smith could potentially make for our company from now until eternity, and therefore, how much money we should be willing to spend to keep him.

To my way of thinking, only those dollars specifically associated with a specific customer should be considered when running these calculations. To do otherwise would potentially skew the results and sabotage your CLV efforts.

CLV calculations are predictive, not precise.

CLV-for example, that Joe Smith’s CLV is $1,500,000-it is actually making a prediction for Joe Smith’s CLV. We are making a guess-an educated guess, but a guess nonetheless. This must always be acknowledged. There is plenty of variability involved in that guess, and we should never forget it.

The most fundamental flaw of traditional methods for calculating CLV (and by extension, customer equity) is the idea that one formula can be applied to all customers and give companies a clear idea of what their customers are worth.

Through segmentation, we acknowledge that some customers will have very tails-prone retention coins, which means they will leave us very early in our relationship. Others are much more heads-prone, which we could possible attribute to loyalty or just inertia. But here’s the key: when those tails-prone customers start to drop off in the first few periods, we are left with a much more homogeneous group that largely consists of fairly heads-prone customers. This is why the survival curve drops quickly, then levels off.

the retention dynamics that we tend to see in a contractual setting have little or nothing to do with customers becoming more loyal over time (unlike the conventional wisdom that virtually every company on Earth subscribes to).

they should simply count on the natural selection process to weed out the good from the bad and spend their resources finding more new customers who resemble the good ones.

frequency. Some are more likely to renew, and others are significantly less likely to renew. As a result, when working to understand its overall customer equity, the company doesn’t just look at the average renewal rate of all of its customers; instead, it breaks those customers down into three customer segments, each grouped by their propensity to renew. This segmentation may on its face seem to do little to change the average renewal rate, the expected lifetime of a customer, or a predictive CLV. But as it turns out, the difference is a fairly significant one-and quite illustrative, I think, of how segmenting customers can paint a much truer picture of the value of your customer base.

when companies fail to apply segmentation to the study of their customer base, they will grossly undervalue that customer base.

State-of-the-art CLV models capture this issue by focusing on the interplay between recency and frequency of each customer’s transaction history. Along with monetary value (i.e., spend per transaction) the noncontractual firm has three key variables that should drive its CLV calculations. And although such models can indeed be fairly complex, the origins of the recency-frequency-monetary value rubric go back to Lester Wunderman and the other pioneers of direct marketing.

At Natasha’s, the customers keep coming back and sending their friends and family too.

How has Natasha pulled it off? Simple. In her own way, she built her beauty shop, her business, and her livelihood through customer centricity powered by CRM.

The average CLV of all customers who have bought that hair-care product more than once.

Among new customers who first tried Natasha’s services based on that promotion, the percentage that have made at least one repeat visit since then.

The weighted average CLV of customers associated with each payment method.

The number of customers who use Yulia but none of Natasha’s other services.

Tesco, a company we first examined back in chapter 2, has been one of the firms carrying the torch for CRM, showing jaded marketers across all sectors that CRM really can work-provided, of course, that it is put to work properly, conceived of correctly, and viewed not as an end-all, be-all but rather as just one crucial element of a broader customer-centric strategy.

The Clubcard program on which Tesco’s CRM strategy is built does precisely what customer-centric initiatives are supposed to do.

Clive Humby,

it actually made it easier to do things badly for customers.

and individual relationships that count-and

relationship-building first and sales second.

But the truly customer-centric ones know their success is not based just on those products and services; their success is based, instead, on the means they use to leverage those products and services-the things they do behind the scenes through customer-centric strategy