Becoming Customer-Centric and managing your business with Customer Lifetime Value (CLV) is a winning strategy. That is the central message of Peter Fader and Sarah Toms’ 2018 book, The Customer-Centricity Playbook. Read it. It’s short (128 pages), concise and packed with data. It also includes case studies that exemplify customer-centricity over product-centricity.
I’ve organized the concepts and takeaways under the following:
- Not All Customers Are the Same
- Customer-Centricity over Product-Centricity
- Use Demographics and Personas with Caution
- Use CLV for Customer-Centric Acquisition, Retention, and Development
- Apply Agile Methodologies to Implement Customer-Centricity
- Closing Thoughts on the Playbook
Sidebar: Peter Fader is a Professor of Marketing at The Wharton School. He is the leading expert in using behavioral data to forecast purchases and CLV (Twitter, LinkedIn). Sarah Toms (LinkedIn) is the Co-Founder and Executive Director of Wharton Interactive. I had the fortune of studying with Professor Fader during my time at Wharton. There, I studied the power (and elegance) of using CLV to manage strategy and marketing decisions.
Not All Customers Are the Same
Think about your business (or any business, really). Are all clients the same? Do they buy the same things, with the same frequency, and spend? Are you — as a consumer or product user — the same as the person next to you?
With 100% certainty, the answer is a resounding no. This isn’t an existential question. This is purely behavioral. Your customers, like you, have their own preferences, idiosyncrasies, and tendencies. This applies to products purchased and services consumed.
The core idea is that not all customers are the same. We have to celebrate customer heterogeneity. Once we understand unique customer aspects, we can truly be customer-centric.
Fader and Toms define customer goodness (or customer uniqueness) as a composition of:
- Preferences — alignment of customer needs to your offering and their likelihood to choose you over the competitor
- Propensity — the likelihood that the customer will be loyal to you and/or buy high-value goods
- Potential — how much future value does the customer inherently have
Customer-Centricity over Product-Centricity
A couple of definitions to level set…
Customer-Centric: Pursuing strategies that align products and services to the needs of your highest-value customers
Product-Centric: Pursuing strategies that focus on selling as many products and services as possible to an generic entity. Usually referred to as “the customer”.
Customer-centric strategies embrace the differences between customers. They also know what value different customers bring to the table. As such, customer-centric organizations are able to allocate resources to maximize CLV. Product-centric strategies are wasteful because you build products for and market to generic customers.
You might say, “But wait, we have amazing personas and demographic segmentation”. Hold that thought for later. I’ll summarize the authors’ thoughts on Personas and Demographics further down.
Of all the companies I’ve worked for, Xbox did an exemplary job of being customer-centric. At Xbox, our business intelligence team analyzed the gameplay and buying behavior of ~40 million Xbox users. From this behavioral data:
- We were able to build personas from the ground up. We used them to inform our platform investments, content portfolio, go-to-market, partnerships, and so on.
- We had reliable data on the CLV of each group and could tailor marketing to convert users into a higher value group.
- We knew when exactly to market to a specific group (e.g., hardcore gamers, casual gamers) in the platform lifecycle. This was possible through persona knowledge blended with temporal purchase/adoption data.
Use Demographics and Personas with Caution
There’s a very good chance that you have “figured out” what your target demographics and user personas are. The following takeaways aren’t meant to belittle or dismiss the work you’ve done. Instead, they highlight the potential pitfalls of the typical demographics and persona definition.
Pitfalls of Demographics and Personas Segmentation
- The Streetlight Effect (observational bias): People tend to look for things wherever it’s easiest or convenient to find them.
- The fallacy of “accurate” demographics: Fader and Bruce Hardie found that variation of CLV was usually greater within segments than the differences across segments.
- “Personas are demographics on steroids”: Teams tend to use existing behavior, attitude, and demographic data to define personas. This could lead to the fallacy above.
The Resolution to the Pitfalls
- Start with individual-level CLV and cluster them into different tiers (e.g., high, medium, low)
- Find the common characteristics that differentiate the highest-value customers from the others
All in all, the difference is how you define your segments. Instead of going top-down the way most of us have been doing, opt for a bottom-up approach that starts with CLV.
Examples of the Pitfalls
Earlier I mentioned how Xbox used CLV to group behaviors into segments. Unfortunately, not all organizations that I’ve worked for have been so nuanced.
- I was talking to one of my CEOs about refining our segmentation for Product Management and Go-to-Market. He told me that we only had three segments: administrators, end-users, and managers. He leads a global multibillion-dollar company that sells dozens of SKUs into all industries and company sizes.
- Another CEO I worked for told me outright that “Apple doesn’t do research”. He then lectured me on the extremely overplayed Ford vs. Faster Horses anecdote. He got booted out of the company two years later and that company now no longer exists. Last I heard they were selling the office furniture so investors could recoup whatever they put in.
- I’ve listened to “strategic discovery calls” with our existing enterprise clients. The conversation would usually boil down to: “We’re wanting to build this product. Here are some mockups. Do you like it? Would you buy it?” This business also served clients from all industries and organizational maturities. The Streetlight Effect is strong with this one.
Customer-Centric Customer Acquisition
In a nutshell, the primary activities of a business are Customer Acquisition, Retention, and Development. For each of these categories, CLV (and customer-centricity) can and should be used to select the appropriate activities.
Some takeaways about Acquisition:
- Choose your customers wisely. “You often have more control over the kinds of customers you bring in as opposed to trying to change them after they’ve been acquired.”
- Even if a client is good in one aspect (preference, propensity, potential), it doesn’t mean that she is good in every aspect.
- The paradox of customer-centricity. The more an organization focuses on only its highest-value customer, the more the risk increases. Competitors notice success and will shift to do the same.
- Blend your approach to attract high-value clients while pursuing low-value customers to balance risk.
Two Dimensions of Acquisition Strategy
The primary dimension is on the breadth of your approach.
- Broad Acquisition strategies cast a wide net. They are appropriate for new businesses, new products or offerings where repeat purchases are limited.
- Selective Acquisition strategies work well when there are capacity constraints (long or expensive sales cycles). Selective approaches also work where there are high switching costs for clients.
The secondary dimension is the directness of your approach.
- Direct approaches use specific targetting like profiling and push activities like telemarketing.
- Indirect approaches rely on the forceful and fast dispersal of information through networks to attract clients. These include referrals or mass-market tactics.
The fundamental operation here is to use CLV to distinguish high-value and low-value targets. Depending on the contexts of the “segments”, choose the appropriate combination of broad/selective and direct/indirect.
Customer-Centric Retention and Development
Once you’ve acquired a customer, the job is to ensure the best and highest-value customers remain loyal. Customer retention is concerned with making sure clients stay. Development is focused on increasing their value.
Considerations when developing Retention and Development programs
- Targeting: Who is the focus of the programs — high-value or low-value customers
- Tactical Approach: Are you playing offense and looking to increase the CLV for the target (aka Growth)? Or, are you playing defense to make sure they Stay (Retention)?
If you envision a 2×2 grid that maps Targets and Tactics, the goal is to figure out whether your over- or under-investing in each quadrant.
Other thoughts and takeaways
- When cross-selling, break out customers into CLV tiers to identify their cross-buying probabilities. (Remember, not all clients behave the same).
- Cross-selling (as a growth tactic) sometimes destroys value. A study showed that 1-in-5 cross-buying customers account for 70% of “customer loss” — when COGS and Cost of Marketing exceed revenue.
- CX measures like NPS or CSAT are often aggregated and not used to update the expected CLV of a client.
- CX (retention) programs should articulate where the value is being created. Also, make the appropriate measurements before and after. This will signal whether CX programs are worth it or not.
Apply Agile Methodology to Implement Customer-Centric Strategies
The last set of takeaways is about the transformation towards customer-centricity. The authors suggest using an iterative process, like Agile, to define and implement a strategic transformation.
In general, the steps would be:
- Develop and validate the CLV model for your business.
- Refine your CLV model by profiling from the bottom-up.
- Use experiments to test acquisition, retention and development programs.
- Develop the appropriate metrics to measure the effectiveness of programs — e.g., CLV or other North Star Metrics.
- As learnings come in from experiments, re-align priorities to maximize value.
Closing Thoughts on Customer-Centricity and the “Playbook”
The shift from product-centric strategies to becoming customer-centric requires a significant mindset shift from decision-makers. It also requires reliable data upon which you can build CLV models and extract customer goodness.
The Playbook doesn’t go into how to shift outdated mindsets or how/where to get this data. That’s a challenge for you to figure out and address within your organization. (For example, see the CEO conversations I had above.)
As an aside, the book doesn’t go into CLV calculations. There are plenty of resources on how to compute CLV. Here’s a good primer on a simple version of the calculation: How to Calculate CLV to Market to High-Value Customers. For more sophisticated statistical models, look no further than Bruce Hardie’s resources.
Now, seriously, go check out the book.