Entrepreneur to Professor: Peter Fader (Part 1)
- by Paul J. Shrater
The concept of strategic thinking is often a topic of executive staff meetings or one burrowed deep in the mind of a business owner. I found a great source of inspiration on the topic through a professor from the Wharton School, Peter Fader, Wharton’s Frances and Pei-Yuan Chia Professor and co-director of the Wharton Customer Analytics Initiative, who is at the forefront of the business community around the concept of customer centricity.
So what is customer centricity and why should we care as business owners?
The idea, as Fader puts it, is to “figure out who are the good customers, and then roll out the red carpet in order to increase their financial value, extracting that value by offering the products and services that are right for them.”
It seems easy enough, but as a business owner, it is more difficult to take that idea and make actionable tasks out of it. To help understand how to approach it, it is important to get a sense of what businesses have been doing, both right and wrong, and then look at ways one might be able to strategize using a customer-centric model.
Fader notes that, in the 20th century, businesses in the U.S. had been focused on:
• Building a blockbuster product or service
• Doing things at scale to be as efficient as possible
• Defining market segments by age, gender or geography
• Product profitability versus customer profitability
• Retention versus acquisition
• Immediate sales goals versus future value of a customer
These all seem like sound business principles. So, what is wrong with them? Why do something different?
Fader proposes that some of the answers lie in the improvements that have been made in the way we can gather data on customers and shifting from the mindset that data isn’t just about numbers, but about getting to the real story that is being told.
Fader notes that “creating a blockbuster product or service is increasingly hard to do, especially given increased competition.” Companies can adjust by “doing what a lot of small businesses have figured out implicitly—understand customers’ unique value and their unique needs.” Businesses can change the focus from what is being presented to the customer (the product), and instead find out what the customer really needs. The idea is that it is better to look at it from the perspective of the most important grouping of customers versus looking at it from the point of view of making or selling products.
And why not scale things for efficiency? Why not automate as much as possible?
Fader notes that, in this regard, “American retailing actually took a step backwards. Making strides in operational excellence was good, but there is only so much more that can be achieved. The focus needs to change.” He notes that big companies should be looking to replicate the mom-and-pop feel of smaller businesses. Do you outsource your customer service overseas, or hire an army of hand-holders to work with every customer? The answer probably lies somewhere in between.
How should we look at market segmentation differently?
Fader points out that “with today’s ability to obtain better data and the computing technology to process that data, combined with a better understanding of analytics, we can gain a better understanding of customers than ever before.” For example, defining the market segments based on product usage might be a different approach that can allow for better segmenting. Instead of defining a segment as “middle-income moms in their 30s,” we might define a segment as “people who go camping.” Thus, what you’d offer someone based on how they’d use it for camping would have more value than targeting the customer based on gender or age.
OK, so we’ve determined a better way to segment our customers, but so what?
We need to determine the profitability of each segment to target the customers with the most value. And, as Fader notes, “the ability to define the profitability of the segment needs to also include the concepts of projecting what the customer is worth in the future, and where the customers is on the buying cycle trajectory.”
Fader notes that companies are often scared of budgeting based on guesswork versus hard data, and guesswork about the future is not as comfortable as hard historical data. And, one does have to be smart about the guesswork. There may be a segment that “looks” great, only to uncover that it is a segment filled with once-in-a-lifetime buyers who are hard to access.
Editor’s note: In Part 2 of his Peter Fader recap, Paul will discuss why marketers ought to ditch the product-segmenting approach, and what should replace it. Find it live here: http://whartonmagazine.com/blogs/entrepreneur-to-professor-peter-fader-part-2/.