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The Real Definition of Customer-Centricity

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By: Peter Fader , Frances and Pei-Yuan Chia Professor of Marketing

We recently sat down with Prof. Peter Fader to set the record straight about all things customer-centricity. We covered everything from defining what it actually means, to how it differs from being customer service oriented, to how companies can approach making the shift.

Help us define customer-centricity, as it relates to your own work.

When we invented marketing as we know it back in the 1950s — the era of Mad Men, soap operas, and big, scalable mass media — marketing energies and resources were concentrated on figuring out what pitch to use that would get the customer on board. Soon after, marketers realized that their customers weren’t all the same as each other, that they each have different wants and needs, and that this meant they were going to have to come up with different versions of the message or the product. That realization was a nuisance for most companies. It meant more expense, more complexity, more uncertainty, and it didn’t scale. So they ignored it. They continued to try just to shout very loud, with one message that would be as appealing to as many people as possible. And that really has been the guiding principle for marketing for the last half-century.

My view is the opposite of that, instead of saying, “The customers are different. How can we align them around our product?” we should embrace the reality that customers are different, and that some are going to be inherently more valuable than others. So instead of trying to be everybody’s best friend, which is the what we always talk about in marketing (but shouldn’t), marketers should strive to understand those differences at a deep level, figure out which customers are best aligned and born to be with them, and then build their business around them.

It’s about gaining a strategic advantage by focusing on the right customer.

Customer-centricity is not the idea of being centered around “the customer” in some faceless, nameless, generic way. It’s about understanding which customers to be centered around. It’s about gaining a strategic advantage by focusing on the right customer. And then to have the insight, the courage, the ability, and the corporate alignment to prioritize those customers over the others. It’s hard for companies to do that, but there’s tremendous upside for those that do so properly.

In a sense, this is just about aligning with the reality of the 80/20 principle. It’s not a theory. Over 20+ years of modeling and analysis, data consistently reaffirms that a small minority of customers are responsible for an outsized portion of revenue and growth.

How does this idea of customer-centricity differ from traditional definitions of customer service or customer care?

Customer service is a classic example of the one-size-fits-all approach. There’s this fashionable idea, inspired by the late Tony Hsieh and others, that every customer should be treated with the same level of care and attention. It’s a noble idea, but it’s neither efficient nor effective for a business to try and surprise and delight everyone at once.

Customer service and customer experience are a function of the product. It’s important to have high standards for it. But customer-centricity is about understanding who can live with the basic standard and who warrants some extra attention, knowing where to draw the line and manage both simultaneously.

That’s where the money is, and few companies are really thinking this way.

How should companies tackle customer-centricity when they don’t know who their best customers are yet?

Early on, companies don’t know who their best customers are. So you can’t really be customer-centric right out of the gate, and that’s what’s paradoxical about it.

Many companies need a couple of years to build all that infrastructure for identifying and targeting their top 20%. Even once you have the CRM system, it’s still not enough to look at the customers on the top of that list and give them the white glove service. While they might be more valuable than the other customers you’ve gotten so far, but they might not be the best possible ones. Companies need to be patient, and constantly be fishing for even better customers. There could always be better ones out there, and they could be changing. The ones that you thought were the best yesterday may not be the best tomorrow.

It’s a constant focus on customer acquisition. Too many companies get distracted by the fact that it costs so much more to acquire customers than it does to retain them. While that’s true, it’s critical to invest the resources to figure out who those best customers are, because it’s going to be much more effective to find them and then build your business around them, rather than just looking at the ones you have and trying to make them great.

It takes time. It’s a never-ending process. And even when you find success, you can’t stop. Too often companies declare victory because they think they’ve found the right ones, then they tend to take their foot off the pedal with customer acquisition. When they do that, they are sub-optimizing their next generation of customers.

Even when companies attain an understanding of their top customers, it seems like there’s still a pretty big shift in mindset to then concentrate resources on those customers to the exclusion of others. Operationally, there’s still a lot of inertia behind the one-size-fits-all approach.

Big time! It’s not just the sheer inertia (which is very real), but also the demands by external stakeholders to focus on volume, cost, topline revenue; all of this is so woven into our processes and society that it’s very difficult to escape.

Leaders that adopt a customer-centric approach often get pushback. What about all these other customers? What about these other markets? What about the cost of this technology and these analytics? I’ve tried hard to not only motivate companies to break out of their inertia but to give them the tools and the ammunition to really sell these ideas to their internal and external stakeholders.

Companies need to be patient, and constantly have to be fishing for even better customers.

Who in a consumer-facing enterprise is responsible for customer-centricity?

There’s no easy answer. The most obvious would be to say Marketing because they’re the ones who, in theory, would be managing the customer stuff. I think that’s why we see the category of CDP, for example, become defined by the marketing use cases. We also see a lot of CTOs lead the charge, like the ones putting together all the data systems and all that infrastructure. But what I see more and more these days is CFOs taking the lead.

A big focus of my work just in the last couple of years is the idea of customer-based corporate valuation. We go to the CFO and say, “We’re going to help you to do your job better, both in terms of overall valuation and in terms of forecasting revenue,” and we do that by giving them an understanding of the customer behavior underneath the traditional metrics, and the differences among those customers.

What we’ve seen is that, when you win over the CFO, then the other parts of your organization fall like dominoes. I’m not saying that all companies must start that way, but on the other hand, if you don’t get the CFO on board as an active partner, it’s going to be hard to make things happen. This buy-in from the CFO has opened up a lot of doors. It’s gotten a lot of companies to wake up and smell that customer-level data and to leverage it in a way that they would never do if it were only a marketing issue.

How does the CFO’s corporate balance sheet change when you layer in this focus on customer analytics?

For the most part, the balance sheet and other key statements don’t change. But when it comes to reporting revenue or cash flow, it’s very useful to include customer metrics that help the investor/analyst understand the present and future value of those cash flows. That’s the mission we’re on right now. There should be some real regulations, guidelines, discipline, and common understanding about these things. So what we’ve seen is a lot of companies, when they’re going public, will throw these metrics out there. And we’re getting very, very smart about what to do with those metrics. How do we interpret them? That’s a lot of the work I’m doing with my new startup Theta Equity Partners. But it shouldn’t be limited to IPOs – it should be a standard part of the periodic reporting for every publicly traded company.

How have companies navigated changes in customer habits, changes in ways to relate to those customers, and changes to the channels themselves?

These changes demanded by COVID represented an opportunity to understand how customers are different from each other, what makes one more valuable than another, and what are the features and products and services that they want and that they can start developing. But it hasn’t panned out that way.

I think a lot of companies were just pursuing short-term operational fixes, maybe cutting back marketing spend, or introducing curbside pickup. At the very moment when companies were in a position to see their customers in a way they never saw them before, the data analytics people were often among the first ones furloughed.

So for me, the pandemic was actually a missed opportunity for many companies. Many are kind of where they were a year ago – at best. That’s understandable because this was an unprecedented crisis and companies were all desperate to sell stuff. But it’s also a shame from a strategic growth perspective.

What are some of the resources to learn more about customer-centricity?

Well, obviously the CDPa is doing fine work around this topic. It’s great to be able to collaborate and learn from others going through similar journeys. I have also written a couple books, with more on the way: 

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About the Author

Peter Fader

Professor Peter Fader is the Frances and Pei-Yuan Chia Professor of Marketing at The Wharton School of the University of Pennsylvania. His expertise centers around the analysis of behavioral data to understand and forecast customer shopping and purchasing activities. He works with firms from a wide range of industries and his focus is on topics such as customer relationship management, lifetime value of the customer, and sales forecasting for new products.  Professor Fader co-founded (and continues to run) Theta Equity Partners to commercialize his more recent work on “customer-based corporate valuation.”

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