The OG of Customer Lifetime Value: A Conversation with Wharton’s Pete Fader

[00:00:00] MRII Announcer: Welcome MRII’s Insights and Innovators podcast, where we talk to top market research professionals to get their inside stories about innovative and enduring best practices. Today’s episode is sponsored by Question Pro. Question Pro is the web-based software for creating and distributing surveys with our intuitive wizard interface, digital distribution of surveys and tools for analyzing and viewing results.

[00:00:26] MRII Announcer: Question Pro delivers answers in real time. Now, here’s your host for today’s episode. 

[00:00:31] Jon Last: Welcome to today’s episode, the OG of Customer Lifetime Value on what really Drives Business Impact. A conversation with Wharton’s Pete Fader. I’m your host and former MRII, president John Last, our guest, Pete Fader, a true pioneer in the field and dare we say, the OG of Customer lifetime value Analytics as the Frances and Pei-Yuan Chia, professor of marketing at the Wharton School.

[00:00:56] Jon Last: Pete has transformed how companies think about customer centricity, [00:01:00] predictive analysis, and what it really takes to turn data into decisions. He’s also a successful entrepreneur, co-founding Zodiac, uh, acquired by Nike, and now leading Theta Equity partners, bringing his academic ideas to life In the boardroom, we talk with Pete about the power of behavioral data.

[00:01:18] Jon Last: How to separate interesting from impactful insights and the skills today’s professionals need to thrive in a rapidly changing analytics landscapes. A 2017 adage, Pete was named one of its inaugural 25 top marketing technology trailblazers, and the only academic on that list. And whether you’re an executive, a student, or somewhere in between, this conversation is packed with sharp insights and big ideas that you won’t want to miss.

[00:01:45] Jon Last: And I can speak firsthand on this knowledge because Pete was actually my professor back when I was at Wharton, when, you know, both of us were about 15 years old, um, talking about marketing and analytics. Um, and the impact was very impactful for me as well as for [00:02:00] other students who took the marketing research curriculum.

[00:02:04] Jon Last: Pete, welcome to Insights and Innovators, and let’s start at the top. Your work has transformed how we think about customer lifetime value and customer centricity. And what first drew you to this area of research and, and why does it remain so important 

[00:02:18] Pete Fader: today? Uh, it is not just that it remains so important, it’s getting more and more important.

[00:02:22] Pete Fader: Because way back when, when you were in my class, taking that, you know, old school market research course, uh, the idea of having the kinds of behavioral data, knowing who bought what or who did what, when, uh, it was kind of unimaginable back then, it really was all about attitudinal questions. So what do you want?

[00:02:43] Pete Fader: What do you think? What would you like? Uh, so, so much of our quantitative curriculum was just more around. What people are saying as opposed to what they’re doing. But with the advent of, well, the internet and just all kinds of other, uh, kind of tracking technologies, the, the [00:03:00] ability to, to know who’s buying what, when, and who’s doing what when, and, and with whom, uh, has, has just greatly improved.

[00:03:08] Pete Fader: Um, my mentor back when I was a. PhD student at MIT woman named Lee McAllister. She said this is early 1980s. She’s saying we are building the electron microscope of the customer. Pretty soon we’ll be able to tag and track and predict and, and make better decisions. And I thought she was a bit of a nutcase, but she was, uh, really visionary and, and here we are.

[00:03:31] Pete Fader: It’s just amazing data that are just kind of begging for these more behavioral models. Uh, and I’ve just been riding that wave and having a real good time doing so. 

[00:03:43] Jon Last: No, it’s, it’s, it’s, it’s great. And I, I know it had an influence on me. We, we actually at our company meld a lot of behavioral data with attitudinal data in the sports and casino industry in particular, where there’s an awful lot of great.

[00:03:54] Jon Last: Data you, you’ve written about the difference between being customer centric and product centric. Something [00:04:00] that, that I guess I’ve also kind of grasped onto in my career. Can, can you unpack what, what true customer centricity looks like and what organizations still tend to get it wrong? 

[00:04:09] Pete Fader: Yes, and, and, and part of it is, is my fault.

[00:04:13] Pete Fader: ’cause those words, customer centricity, they’re. Kind of vague, and they, they can really mean different things to different people. So whenever I talk to executives, they’ll say, oh yeah, we’re customer centric. We, we can’t sleep at night until at least happy customers, satisfied the customer’s job one. I’ll say all this kind of nice sounding stuff, and I don’t really believe that.

[00:04:32] Pete Fader: Uh, so one of the great things about all this rich behavioral data is we could start to see the differences across our customers. We can celebrate heterogeneity, we can say, mm-hmm. What makes the really good customers different? And I’m not just saying ’cause they buy more and they stay longer and they recommend us, but what makes them different in terms of how they talk about us?

[00:04:53] Pete Fader: Which products do they use? Uh, just uh, how did we acquire them in the first place? That’s what customer [00:05:00] centricity is all about, is to understand which customers we wanna be centered around which customers are, are, will propel us to profitable growth for you. To come and which are the ones that, yeah, sure.

[00:05:12] Pete Fader: You know, we’re happy to sell to you, but you know. Um, uh, don’t expect the special treatment Today. We have the data to help us, uh, tell the differences. We have the opportunity to leverage those differences. We have the competitive imperative to use those differences to. Distinguish us from our competitors.

[00:05:32] Pete Fader: So there’s a host of different reasons why it not only becomes feasible, but essential for companies to lean into the differences across the customer base and let those differences drive the decisions that they make. Drive the accountability, the ROI, on those decisions, uh, and to have the customer differences drive product development and other kinds of tactics as opposed to the other way round.

[00:05:58] Jon Last: And, and obviously behavioral data [00:06:00] plays such a role in not only understanding those, those behaviors, but forecasting, uh, the actions that customers take. I, I’m curious, you know, as, as we’ve gotten better at it, how central is predictive analytics to the companies you advise and, and, and does it kind of relegate traditional research methods to be a little bit less, less relevant or, or do they compliment each other?

[00:06:21] Pete Fader: Two, two great questions. So I’d say that the, these predictive models, these, these forward-looking understanding of, of custom behavior, whether it’s B2B or B2C, product or service, big company, small company, uh, again, absolutely essential. Just being able to anticipate what they’re going to look like in the future individually and collectively, and start, you know, skating to where the hockey puck is going as opposed to where it is to use that old Wayne Gretzky g quote, Gretsky.

[00:06:49] Pete Fader: I wonder if he actually said that, but, um, but that, but that is essential is, is understanding that our customers, both on an individual level and a kind of a cohort level are dynamic. [00:07:00] But it’s amazing is just how predictive that behavior is. Everyone says, oh, our customers are different, or, oh, we’re constantly being disrupted.

[00:07:09] Pete Fader: But when you just step back and look at that behavioral data, it’s just remarkable. If you build the right models, just how accurate they can be and how diagnostic and how actionable. So it’s, it’s just great, great stuff. And it doesn’t. Push traditional market research to the backseat at all. It just gives it a different kind of role because like I said before, I want to understand what makes those good customers different, and that’s where the market research comes in.

[00:07:37] Pete Fader: So instead of just doing these broad surveys and saying what features, what capabilities are just most broadly popular for our customers, we’re gonna ask the same kind of question in a narrower way. So which features, which capabilities? Are the, the, the ones that distinguish our high value customers from our Sosa ones so we can be more tailored, more [00:08:00] precise in the kinds of questions that we ask and to whom we ask them.

[00:08:04] Pete Fader: But the, but layering on those why questions on top of the who, what, when questions. It’s still essential and all the behavioral data in the world, uh, can’t answer those questions for you. 

[00:08:18] Jon Last: And I, and I find sometimes when, you know, in, in our work, when you marry those behaviors with certain attitudes, it can certainly lead to copy and o you know, other ways of communicating effectively with them.

[00:08:30] Jon Last: It, it kind of speaks to how you take insights. That are interesting and make them actionable. A, any advice exactly you might, might have on that in terms of bridging that gap between, you know, what’s merely good to know versus what’s really impactful from a business standpoint? 

[00:08:47] Pete Fader: So a great example of this would be net promoter score.

[00:08:51] Pete Fader: See, and, and I have great admiration for it, unlike most academics. Uh, I think that that, uh, NPS really did, uh, move the [00:09:00] needle. Not, not say it’s the only way to assess customer satisfaction and so on, but, but it really did get the attention of c level people unlike any other kind of, you know, marketing metric ever did before it.

[00:09:11] Pete Fader: But at the same time, it is just, it, it, it is kind of a nice to know metric when you take it. By itself, you know, would you recommend us or not? Yeah. To be able to go that next step to say, uh, okay, that, that’s great, but how often will you recommend us? And to whom will you recommend us? And how much more valuable are you as a customer than you, than uh, you were before?

[00:09:34] Pete Fader: Uh, to be able to take the kind of the spirit of net promoter score again or other survey oriented methodologies and augment them with. Actual dollar and cents outcomes. Uh, it gives us this, this one plus one equals three kind of synergy and can help us put a, a, a real ROI dollar value on a lot of that, those, those research activities that we’re doing.

[00:09:59] Pete Fader: So it’s not [00:10:00] just that, you know, the customers are happier. They’re more valuable that that happiness is showing up as revenue, cash flow, ebit a, uh, to be able to, to bridge that gap, to show, to understand what is just cheap talk and what is, uh, kind of a forward looking indication of just a healthier business.

[00:10:19] Pete Fader: Uh, that’s terrific and I love being part of that. 

[00:10:22] Jon Last: And you alluded to it a couple minutes ago, and, and certainly I’ve seen it in in my career, there’s some companies that get it, that, that really are able to take things like customer lifetime value and behavioral data and truly integrate them into decision making versus those who struggle in, in, in your work, are there any characteristics of those organizations that are better able to, to weave it all together?

[00:10:46] Pete Fader: You know what’s interesting? I’m gonna give you a specific answer. I’m not gonna dance around it, but what’s interesting is it, it’s hard to find broad characteristics. I mean, one, one obvious one would be you have to be a company where you can easily [00:11:00] tag and track customers. You know, who’s buying what when, uh, and you have both the.

[00:11:06] Pete Fader: The, the, the technical abilities and even though you kind of legal and ethical ability to then, uh, leverage that, that, that data. But there’s a lot of companies that can do that. Many, many, many companies that can, but. Don’t. And so the, the ones who for whatever reason have really broke it out of the pack, there’s a couple of sectors where we’ll see a lot of it, um, uh, gaming, for instance, whether we’re talking about a company like Electronic Arts that’s developing the games or a lot of, uh, uh, say the casinos or, or the, the, the online betting firms, uh, they’re.

[00:11:40] Pete Fader: Just way better than, than most of them. Not to say they’re all terrific, there’s still differences there. Um, again, related to that would be hospitality. So hotel chains tend to be a little bit better. Uh, if we look at retailers, those that are, are kind of digitally native will just take. More that will take to this stuff like, like ducks to water [00:12:00] much more than the folks who were kind of born and raised and maybe still primarily in, in brick and mortar.

[00:12:05] Pete Fader: Um, so, so we will see some firms that, that just lean into it more than others. But there’s so many who either. Surprise me that they’re so into it. ’cause they’re not in sectors where I’d expect it. Company like Allergan Aesthetics, the company that makes Botox and CoolSculpting, they’re phenomenal at this kind of stuff.

[00:12:26] Pete Fader: Even though you wouldn’t expect a kind of a pharmaceutical type firm to do so, where, whereas there’s plenty of others that, that have all the rich data at their fingertips and are not, not really taking advantage of it. 

[00:12:39] Jon Last: No, it’s, it’s, and it is interesting, some of the sectors you mentioned are ones that, that, that we’ve seen it and, and I’ve kind of held up as best practices as well.

[00:12:46] Jon Last: It, it, it kind of, you know, it’s an interesting arc that you’ve, you’ve traveled, you know, in the days, you know, since we worked together very closely or I worked closely, I worked hard for you. Um, you, [00:13:00] you co-founded Zodiac, which Nike acquired and you now you lead Theta Equity partners. So you’ve got that practical side of building businesses around your academic work, and, and I’m interested, you know, being able to bridge that gap.

[00:13:13] Jon Last: How has that shaped your perspective on the way insights are valued in the C-suite today? 

[00:13:18] Pete Fader: Oh, boy have I learned so much. I’ve learned on, on so many levels. How to run a business. Um, uh, how do, uh, uh, understanding which parts of the academic work really are commercially relevant and, and, and appealing. And which parts are, well, these models are awesome, but we don’t know what to do with them.

[00:13:35] Pete Fader: Uh, so it’s been just an incredible education for me. And while, you know, my day job is still the professor thing, I’m teaching as much, if not more than ever, um, I’m less interested in, in writing articles for the academic journals, just for the sake of doing so. Still dupe some of that. Uh, but, but I’m more interested in really understanding what kind of r and d do we need, uh, to, to [00:14:00] just help companies get smarter about this stuff.

[00:14:03] Pete Fader: And a big part of it is understanding how to broaden the appeal of the model so they’re not just a marketing thing. Uh, like the, you mentioned Theta a couple of times now. One of things that distinguishes it is we’re. Marketing oriented customer behavior models, but not just to figure out which email to send to which customer at which time.

[00:14:23] Pete Fader: But for corporate valuation, working with lots of private equity firms and investment banks to say, what is that digitally native men’s underwear company actually worth? And so we end up having far more impact when we’re talking to the people in finance, uh, and to be able to have a more aligned conversation between finance and accounting, and even have a new startup in Compass Labs that’s looking at the HR assessment side.

[00:14:51] Pete Fader: So let’s build bridges over there as well. So my goal these days is much. Broader. It’s not just to improve marketing, but it’s to take a lot of the, the [00:15:00] stuff that maybe marketers are generally the only ones to appreciate and make it the, the, the heart of an enterprise wide strategy, uh, to help us just run our business more effectively through this, this lens of customer behavior.

[00:15:15] Jon Last: So, so we’re we, we’ve got a few moments left and I, I want to cover two areas, a little bit different areas, but, but one that I really want to get your, your, your perspective on is that elephant in the room that all of us who are practitioners of, of market research and insights today, um, have to grapple with, and that’s the concerns about data quality.

[00:15:33] Jon Last: How do you advise leaders as well as your partners about making sure that the data that they’re using is clean and trustworthy and, and really fit for purpose? 

[00:15:43] Pete Fader: So there’s several levels to that question. First it’s walk before you run. Uh, there there are so many companies who are just ized thinking that, oh, we’re gonna have data problems here, whether it’s technical problems, collect.

[00:15:56] Pete Fader: Things storing, uh, leveraging the data or legal problems like, [00:16:00] like GDPR. And so they’re, they’re paralyzed into indecision saying, why even bother? Why, why even collect this stuff if we’re not gonna fully leverage it? I hate that. So, like I said, walk before you run. Let, let’s go out there and maybe let’s start small.

[00:16:14] Pete Fader: Let’s, uh, before building this, you know, the, the, the full and the full CRM system for everybody. Let’s start with the mobile app or the loyalty program. Let, let’s, let’s start small to see what can we collect, what insights can we pull out of it, uh, and then start to grow from there. So I wanna see companies dip their, their toes in the water to see at least what they’re capable of.

[00:16:37] Pete Fader: Before doing some big giant multimillion dollar initiative and expecting money to show up moments later. So, uh, so it, it’s, it’s in some sense building the right corporate culture to, to kind of enable the data collection and the, and, and the kind of leveraging of it. Um, rather than, than kind of starting with, with data per se.

[00:16:59] Pete Fader: [00:17:00] And then as we do move further along and, and we start to then bump into some of those limitations, we’ve squeezed this, we think we’ve squeezed. As much insight as possible. Um, there, there’s always ways to go further and that that’s where, uh, we start to turn, uh, less to the data and more to the models.

[00:17:18] Pete Fader: So let’s be able to extrapolate, let’s be able to fill in the blank. Let’s be able to fuse different data sets together. So that’s where the stuff that I do for a living, again, the, the, the, the, the models, uh, uh, really start to, to shine and add value. Above and beyond the data. So there, there’s just a, a natural progression, a trajectory, a maturity cycle for companies to follow.

[00:17:41] Pete Fader: And so much of my work isn’t just, Hey, here’s a model, but here’s the, the, the steps, the stages that you need to go through in order to be as savvy as possible with it. 

[00:17:50] Jon Last: And, and, and that kind of feeds right into the final question I want to ask as, as we’re just about at the time limit here. There’s so many skills, [00:18:00] both hard and soft skills that now become part of, of, of insights.

[00:18:04] Jon Last: I I, I like to joke around that the difference between, you know, today’s successful insights company and a traditional management consultant is only the cost of the engagement. Um. Without kind of, you know, seeding or guiding you, leading you towards that response. What are the skill sets? What’s the balance between technical skills and business acumen and storytelling that people in, in, in earlier career stages really will need to be focusing on to be successful in this space going forward?

[00:18:33] Pete Fader: I, boy, I’ve learned the answer to that. Excellent question. The hard way, because I’m a technical guy, I just like to build these models, but like I said before, I’ve recognized that having the, the, the great model. You need more than that. Um, so I’ve, I’ve really grown a, an, an appreciation of whether you want a corporate, call it corporate culture or corporate, uh, call it corporate politics, uh, to be able to find ways to win over.

[00:18:58] Pete Fader: Your partners in other parts of the [00:19:00] organization and the folks outside the organization, your investors, your, your suppliers, you know, just the other firms that you might collaborate with. So being able to tell that story, being able to find metrics that might not matter that much to the marketing folks, but gonna matter an awful lot to the supply chain, the talent management, the, the, the finance people, um, and, and hopefully doing so off of the same data set and off of the same model.

[00:19:26] Pete Fader: So we don’t have to invent an entirely different narrative or method methodology for these different groups, but to find ways to just slightly reorient what we’re doing to make it appealing to these other folks. So learning how to play that game dance, that dance talk, that talk has been, like you said, a real education for me.

[00:19:45] Pete Fader: Uh, and I continue to learn as much about those kinds of soft skills. Uh, as I do about, you know, here’s a, a, a better way to, to do the forecasting. And I think likewise, the, the education that our students get has to be much more balanced in that same way. [00:20:00] 

[00:20:00] Jon Last: No, it’s, it’s, it’s, it’s fascinating to be a part of it, you know, then and now, and to see where it’s gone.

[00:20:06] Jon Last: I thank you so much for being on Insights and Innovators and I, I thank you again for continuing to teach me things, you know, even this many years later from, from, from the pure academic standpoint. Great to have you on and, and great to see you. 

[00:20:18] Pete Fader: Good to talk to you, John. Let, let’s see who’s calling, but uh, uh, thanks very much.

[00:20:23] Pete Fader: Really, really good to talk to you. 

 

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