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How Can Customer Centricity Be Profitable?
The webinar discusses the concept of customer centricity and its profitability benefits, emphasizing the need to focus on valuable customers rather than a conventional product-centric approach. Key points include the importance of understanding customer heterogeneity, utilizing customer lifetime value (CLV) as a metric for acquisition, retention, and development strategies, and avoiding the pitfalls of average customer calculations. Ultimately, it advocates for a balanced approach, prioritizing acquisition while recognizing the limits of retention and development efforts.
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How Can Customer Centricity Be Profitable?
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- 2. Tips for WebinarAttendees • Audio problems? Click the “Problem Dialing In” link or switch to the webinar phone bridge and make sure your phone is muted. • Use the “Question” box within GoToWebinar to ask a question or use the webinar hashtag #monetatewebinar • A recording of the webinar with the slide deck will be available at monetate.com/webinars within 1 or 2 business days. #monetatewebinar
- 3. Peter Fader Professor ofMarketing Wharton School at the University of Pennsylvania Bruce Ernst Vice President Product Management Monetate #monetatewebinar
- 4. How Can Customer Centricity Be Profitable? Professor Peter Fader The Wharton School, University of Pennsylvania Co-‐director, Wharton Customer Analy=cs Ini=a=ve faderp@wharton.upenn.edu www.petefader.com TwiCer: @faderp #monetatewebinar
- 5. “Customer Centricity: Focus on the Right Customers for Strategic Advantage” • The tradi=onal product-‐centric business model is showing some cracks – Commodi=za=on, well-‐informed customers, globaliza=on, etc. • Customer centricity is a promising alterna=ve but is not clearly understood – Many firms that are touted to be customer centric really aren’t… • Celebrate customer heterogeneity: dis=nguish the profitable customers from the less profitable ones – Emerging metrics such as customer life=me value (CLV) make this possible • So where do higher profits come from? – That is our focus today… #monetatewebinar
- 6. Show me the money! Customer centricity can lead to improved profitability through greater effec=veness/efficiency in: • Customer acquisi=on • Customer reten=on • Customer development You can’t expect to be world-‐class on all three dimensions, but doing very well at even one of these could be highly lucra=ve for the company as a whole. But mastering each of these cri=cal func=ons is a lot trickier than you think… #monetatewebinar
- 7. Mo money Balancing acquisi=on, reten=on, and development requires considerable skill (and analy=cal insight) If you had an extra dollar to spend, which of these ac=vi=es would you allocate it to? Let’s examine each tac=c separately in order to learn the answer… #monetatewebinar
- 8. Customer acquisi=on • What metric is used by most firms to gauge and guide their acquisi=on ac=vi=es? • CPA (cost per acquisi=on) • Big mistake! • Would you use it for other kinds of acquisi=on ac=vi=es (e.g., employees, technology, lawyers)? • Firms should focus instead on: – VPA – “Value per acquisi=on” à which is CLV! #monetatewebinar
- 9. “Customers acquired fromGoogle on average have a higher lifetime value (mean CLV at $1,002) than customers acquired from other channels (mean CLV at $808). The difference is even larger for those whose firsttime purchase was off-line (mean CLV at $1,226 versus $959, respectively)…” Marke&ng Science, Sept./Oct. 2011, p. 837-‐850 #monetatewebinar
- 10. Customer acquisi=on: summary • You must ac=vely avoid having a “CPA mentality” – Focus on ceilings instead of floors… • Celebrate heterogeneity by using CLV to drive acquisi=on strategies and tac=cs – Be more pa=ent/forward-‐looking when judging acquisi=on efforts • In general, firms tend to underspend on acquisi=on, and underachieve as well #monetatewebinar
- 11. Customer reten=on • What metric is used by most firms to gauge and guide their reten=on ac=vi=es? • Churn/aCri=on rate (or reten=on rate) • This is a good metric, but you need to examine it at the right level… #monetatewebinar
- 12. Vodafone aCri=on rate (quarterly annualized %) Source: Vodafone Germany Analyst & Investor Day presenta=on (2004-‐09-‐27) #monetatewebinar
- 13. % customers Celebrate heterogeneity! ACri=on rate Source: “Vodafone Achievement and Challenges in Italy” presenta=on (2006-‐09-‐12) #monetatewebinar
- 14. Transla=on to CLV Attrition rate % customers Low risk 0.06 70 Medium risk 0.35 20 High risk 0.65 10 % customers Cluster Average aCri=on rate: 0.177 (0.06 × 0.70 + 0.35 × 0.20 + 0.65 × 0.10 = 0.177) Expected life=me using this average aCri=on rate: 5.6 years ACri=on rate Ø What’s wrong with this calcula=on? #monetatewebinar
- 15. The key insight… Because we can’t get accurate calcula=ons with averages, we must work with the actual rates for each separate class of customers.” “ Reichheld, “The Loyalty Effect,” p. 54 #monetatewebinar
- 16. Cluster Attrition rate % customers Expected lifetime Low risk 0.06 70 16.7 Mediumrisk 0.35 20 2.9 High risk 0.65 10 1.5 % customers Transla=on to CLV Average aCri=on rate: 0.177 (0.06 × 0.70 + 0.35 × 0.20 + 0.65 × 0.10 = 0.177) ACri=on rate Expected life=me using this average aCri=on rate: 5.6 years Correct average life=me: 12.4 years (16.7 × 0.70 + 2.9 × 0.20 + 1.5 × 0.10 = 12.4) #monetatewebinar
- 17. Customer reten=on: summary • There is no “average” customer, and calcula=ons based on such a no=on will always underes=mate the value of a customer base – And the difference can be huge! • When heterogeneity is accounted for, the “aCri=on elas=city” is much lower than in the homogeneous case – Investments in reducing aCri=on will have more modest returns than expected #monetatewebinar
- 18. Customer development: quick summary • It is useful to look for development opportuni=es, but the upside to these ac=vi=es is more limited than most managers think • Due to massive customer heterogeneity, there is more opportunity to “move the needle” via acquisi=on than development • S=ll, it’s important to pursue development tac=cs, but think about them as “icing on the cake” #monetatewebinar
- 19. Balancing acquisi=on, reten=on, and development If you had an extra dollar to spend, which of these ac=vi=es would you allocate it to? Not to minimize the importance of reten=on and development, but at the margin I favor acquisi=on… Consider the conven=onal wisdom: “it costs 5-‐10 =mes more to acquire a new customer than to retain one, so work hard to keep the ones you have…” This may be true, but it totally misses the point: focus on value instead of costs #monetatewebinar
- 20. Overall summary • Customer centricity can only succeed by “celebra=ng heterogeneity” • The greatest upside to improve customer profitability arises through “smart acquisi=on” • Don’t overspend on reten=on – the flighty customers will fly away no maCer what you do (or they’ll be unprofitable) • View development as “icing on the cake.” ACemp=ng to turn persistent “detractors” into “promoters” is a difficult task, and the resources required to do so can be beCer invested elsewhere • Don’t have blind faith in the conven=onal wisdom about these tac=cs #monetatewebinar
- 21. Professor Peter Fader faderp@wharton.upenn.edu www.petefader.com TwiCer: @faderp “Customer Centricity: Focus on the Right Customers for Strategic Advantage” hCp://bit.ly/FaderCC #monetatewebinar
- 22. Customer Centricity in the Digital World Bruce Ernst Vice President, Product Management Monetate #monetatewebinar
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- 24. 40% Marketers who don’t target any customer or visitor segments to create personalized website experiences. Econsultancy, The Reali&es of Online Personaliza&on, 2013 28% Marketers who say they do not know which high-‐value customers to focus their markeKng on. BRITE/NYAMA Marke&ng in Transi&on Study, 2012 #monetatewebinar
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- 34. SegmentaKon • Is Real • Is Possible • Will make a difference to your business #monetatewebinar
- 35. Questions & Answers PeterFader Professor of Marketing Wharton School at the University of Pennsylvania Bruce Ernst Vice President Product Management Monetate #monetatewebinar