Interview: Dr Peter Fader

Columbia Road: How did you arrive at the concept of customer-based valuation?

Peter: I’ve spent my 35 years at the Wharton School building models to predict various things. Around the turn of the millennium, three things happened: firstly, even though we were continuously coming out with better forecasting models the academic journals were losing interest in the incremental improvements from one paper to another. Secondly, the evolution of the internet meant we were starting to get richer data sources, and thirdly, companies started to raise new, customer-related issues that they hadn’t considered before. These three developments provided a perfect setting to focus on the commercial opportunities.

Even though we were giving companies the basic “academic” code which they could apply to project their customers’ lifetime value, they couldn’t replicate all the “bells and whistles” in the more complex models as well as we could, so we founded Zodiac, which was hugely successful and saw us working with lots of firms all over the world. In early 2018 Nike approached to buy the company; Nike embraced and internalised the concept — seeing a world-class company doing it for the right reasons was great.

CR: So, you have been advancing the topic of data-based customer focus now for more than 20 years. What are the typical obstacles that companies are facing today?

Peter: Back in the day the main challenge used to be that companies simply weren’t interested in measuring the lifetime value of their customers — the primary interest of marketing people was related to the brand or product. Today, the level of awareness and ambition for turning the focus from transaction centricity to customer lifetime value management is starting to mature. Many companies are asking the right questions but too often their technical approach isn’t optimal, resulting in a lack of rigour, accountability and standardisation.

Many companies think it’s best to build their own customer lifetime value formula rather than using something that’s been created by academics — the intent is good, but it rarely works as well as the top-notch specifications we’ve developed. When that happens, some will acknowledge it whereas others will change the way they ask questions or evaluate the models in order to avoid admitting that their in-house version is sub-par. Companies are often inconsistent and don’t hold themselves accountable to the accuracy of their predictions. It’s also important that different stakeholders share a common vocabulary and shared perspective on the topic.

I want to make CLV tangible, and to achieve this I focus on three components: firstly, how long until the customer relationship ends, secondly, how many purchases they’ll make before then and thirdly, how much they’ll spend on these purchases. Having a concrete and tangible basis to start from before going deeper into the models helps make the predictions more concrete, comparable and accountable.

CR: How do companies typically wake up to the need for measuring customer lifetime value and taking initiatives based on that?

Peter: Depending on the company there are three typical paths — the one that makes me happiest is when they approach me saying something like, “everyone else is doing the CLV thing, we should too!” What’s more common is that they have a broad strategic problem, for example their growth is too slow. Normally at this stage they’re not focused on data or models, but on figuring out the problem, so I point them in the direction of my books and they see that looking at lifetime value is the way to achieve customer centricity. The third way is when the CFO is looking into CBCV — once they’re comfortable with that, it’s a small hop into CLV.

CR: Does the customer lifetime value model vary for different companies?

Peter: Yes it does, but to keep things as simple as possible we’ve come up with five lifetime value models, and we believe any business in the world can use one of them. First, we have the simple service contractual model — this is for companies like Spotify, Netflix, Slack or insurance companies and it’s the simplest model but far from the most common.

The second model is multi-service contractual, for companies that provide a portfolio of services over time – say, retail banks, telecommunications companies or business services companies where services are added and dropped over time.

Thirdly we have the retail model, where there’s no contract so it’s just a question of how many purchases and how often – this is the most common and also the model that Zodiac used, and it relates to businesses like retail, travel and hospitality.

Next you have a model for multiple levels of non-contractual transactions, such as mobile gaming where people can play for free but make in-app purchases. The questions we’re asking here could be how often they play the game, how long they play before starting to spend money and how often and how much they spend once they do.

Finally, we have a model for when there’s a mix of contractual and non-contractual transactions, like Amazon Prime or a gym — there’s a contract and you pay a regular subscription or membership fee, but they’re also selling individual items on top of that such as entertainment in the case of Amazon Prime, or classes, food and gear in the case of a gym.

CR: Have you seen many companies adopting CLV as a key metric that is continuously measured and used for directing operative actions and strategic decisions?

Peter: This was exactly the original intention of Zodiac: to make CLV so essential that the models would be run on a daily basis for all kinds of things. Now we have seen that continuous measurement of CLV, let alone adopting it as a KPI, hasn’t been as frequent as I’d hoped — companies are more likely to run it once and then again three months later to see what’s changed, or as a special project that gets pulled out once in a while for specific questions, rather than making it part of the daily workflow. We currently have plans to create the next iteration of Zodiac, where the principle would be more around automation and self-serve. The vision would be that a customer can “just press a button” to run the models rather than needing to come to us — hopefully that will help companies to get the full value out of it.

CR: How did Nike utilise Zodiac’s know-how?

Peter: The key challenge for them was to figure out how to bring together all the many sources of customer data, such as the loyalty programme, fitness trackers with athletic data and so on. What’s interesting is that whereas many companies turn to this model in desperation, Nike was coming from a position of strength: they were already doing great with their brand and their products, but they knew they could do even better with their customer data. I think the primary impact of Zodiac for Nike was being a driver of cultural change. The initially standalone Zodiac team has become deeply woven into the company culture. I wish I could point to it and say, “there’s Zodiac and that’s what they’re doing for Nike” but you can no longer distinguish the Zodiac-type activities from Nike’s other ongoing initiatives — and that’s a good thing!

CR: You’ve mentioned your books a couple of times – are you working on any at the moment?

Peter: So far I’ve written two and there are at least two more to come. Customer Centricity is about the basic ideas and how CLV is radically different from the current way of doing things while also talking about some well-beloved companies that aren’t customer centric — although a lot of those have come around to the idea since the book was written. The Customer Centricity Playbook is more about how a company can incorporate these central ideas.

The third book, The Customer-Base Audit, will be published in summer 2022, and it is almost like a prequel to the first one. The message is, let’s forget about the models for a moment and look at the data we have and what it tells us about our customers and start to understand how and why we should build our business around them. And the fourth one is about making these things part of the company culture — it’s one thing to have these great models, and a company may have buy-in from the CEO, but to really succeed in this area they need the right culture too.

That cultural aspect is critical — asking how we can build our culture around our customers rather than products and brand is a very different mindset. We have seen the benefits of creating a customer-centric corporate culture and this book lays out new frameworks that will help companies succeed with customer centricity.

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PETER FADER is a Professor of Marketing at The Wharton School of the University of Pennsylvania. Peter has spent much of his career working on models for customer lifetime valuation (CLV) and customer-based corporate valuation (CBCV), and is a recognised author on the subject. With his colleague Dan McCarthy he has also founded Zodiac, which is now part of Nike, and Theta. Customer Centricity and The Customer Centricity Playbook are available on Amazon. The Customer-Base Audit will be available for pre-order soon.