Wharton Professor & Co-founder of Theta Equity Partners, Peter Fader

Julia Raymond:
Hi. Welcome to this episode of RETHINK Retail. Our guest today is Peter Fader, 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. Much of his research highlights the consistent, but often surprising, behavioral patterns that exist across these industries in seemingly different domains. These insights are reflected in his books on customer centricity.
Professor Fader, will you first describe more about yourself and what you do?

Peter Fader:
Sure. Let’s just cut right to the chase. I’m a number cruncher. I just love looking at patterns and data and predicting who’s going to do what when, and for how long, for how much money. And then understanding the strategic implications of all that stuff. It really is a golden age for someone like me who enjoys data but is also very passionate about the retail world.

Julia Raymond:
A great combination, which is also probably the reason just two years ago Advertising Age named you one of its inaugural 25 Marketing Technology Trailblazers. I noted that you were the only academic on the list. It seems to me like retailers are increasingly looking to the academics of the world for help in shaping the future of retail. What’s your perspective on that?

Peter Fader:
It is happening increasingly. But again, we have to be honest about it, and most retailers, most practitioners in general, will look to academia and say that 99% of what we do over here is kind of Ivory Tower garbage. And you know what? They’re right. But the difference is that if you can find that 1% of stuff that really is practical, it’s pure gold.

So for years retailers, and again other practitioners, would just kind of ignore us because it was like kind of looking for a needle in a haystack or something. But companies, again retailers, have just become much more sophisticated. They’re much more willing to sort through a bunch of technical articles. They’re more able to see the gems, and also more able to then figure out how to leverage some of those insights to make better decisions and make more money.

There really has been much more collaboration, much more productive collaboration going on these days. Sometimes the conversations that we’re having, you know, if you hear me talking about retail or maybe it’s a conference or something like that, you couldn’t even necessarily tell who was the academic and who was the retailer. There’s just a greater degree of sophistication and alignment. And that’s just great. It really should be the case that we’re talking and really working more interchangeably like that.

Julia Raymond:
Yes. 100%. And speaking of this convergence, I read that you sold one of your companies to Nike just last year. Predictive analytics firm called Zodiac. How long ago was Zodiac founded?

Peter Fader:
That’s right. We founded that firm in 2015 but it really leverages work that I’ve been doing for most of my, goodness, 33 years on the Wharton faculty. Again, just developing predictive models. For years and years a lot of people, again I don’t mean to besmirch retailers specifically, again practitioners in general, would look at the work and say, oh it’s just a bunch of Ivory Tower stuff. But eventually it kind of caught on and they realized that what we were going and how we were doing it, which is to say calculating customer lifetime value at full commercial scale, was valid, it was actionable, and to get a little pretentious about it, in some cases it was truly transformative.

So it was just great working in a wide variety of firms to help them make decisions about their customers. More on the basis of what we think they’ll be worth, as opposed to just looking backwards and doing things because of what they’ve done in the past. And it was just wonderful to come to work with a variety of firms, retail more than anything else, and to help these companies come up with a wide variety of use cases, some of which they just could have never imagined before, that really helped them fully leverage these forward looking estimates of what customers will likely be worth.

Julia Raymond:
Right. And just hearing that 2015 was the year that you founded Zodiac based on the years of experience you had with Wharton, it seems fast. To go from launching a company to selling it three years later to a 30 billion dollar global brand like Nike. What were the use cases that they were so interested in? Was it customer lifetime value, or how far does it go?

Peter Fader:
For me it was not only a wonderful validation of the model, hey look, they really work. But it was a great learning experience to see these use cases arise often from the clients themselves. So you’d have kind of obvious things like, you know, which email should we send to which customer which time? So just a lot of pretty obvious things and if you could get a sense of what a customer is worth you will know how to treat them better. And then that spills over to customer acquisition. Let’s get a little bit smarter about which kinds of customers we ought to try to acquire and how much we should be willing to pay to do so. So instead of just trying to bring in as many customers as we can as cheaply as possible, let’s get really smart and strategic about how we make these, I really mean investments in customer acquisition.

And then it would spill over to things like customer retention and development. So if customers are tweeting at us with complaints or requests, we know how to prioritize them based on their forward looking values. On and on and on. We had dozens of different use cases. Again, some of which were merged pretty naturally, others of which companies would bring to us and we’d say, well that’s really clever. It was just glorious to see how companies, on their own, would break the mold and think about other ways that they can use these kinds of metrics to make better decisions. That was great.

Julia Raymond:
That is great. And it sounds like it was a bit of a two way street, where your company brought ideas that Nike hadn’t thought of and vice versa since they had a unique bird’s eye view of their brand and specific needs. And you were able to come in and create models that met those needs.

Peter Fader:
That’s right. And in fact I only told you one part of that two way street. So besides coming up with other use cases and applications from the strategic side, it was also quite interesting and valuable from the purely technical side. We had these models, they work quite well, but every company would have different kinds of data challenges, or would have some kinds of patterns in their data that we hadn’t seen before. So it was also an opportunity to refine the models well above and beyond the kinds of work that I had done purely in the academic setting.

And that goes back to my earlier point. It really helped us build a bridge to start with something from the Ivory Tower but to really adapt it to the constraints, idiosyncrasies, the messiness of the real world. And like I said, it was glorious to see how well the models were able to adopt and how companies were therefore able to take advantage of academic stuff that they might have otherwise ignored.

Julia Raymond:
Absolutely. And for Nike specifically, it seems like maybe the investments are supporting an overarching innovation strategy.

Peter Fader:
Yeah. Once again, innovation means a lot of different things. So part of it would be analytics innovation, part of it would be process innovation. And one of the big surprises was actually product innovation. Instead of just going to the R&D lab in the company and saying, hey, what’s the next new thing we should come up with? It was let’s flip that conversation around and say, hey we have these lifetime values over here, we’ve got these really valuable customers. What can we do for them? What makes them different and how can we better accommodate them and acquire more like them?

So it was really great to see how companies would kind of take a big leap like that and change entirely the kinds of products they would develop and how they would develop them.

Julia Raymond:
Yes. Focusing on analyzing and understanding those customers with higher CLV. For Nike, was it first party data that they’ve been able to derive a lot of the value from?

Peter Fader:
I’ve gotta give Nike so much credit, not only for buying my company. Obviously I’m kind of biased in that regard. But here’s a company operating from a position of strength. They’re riding high. And they said, we’re going to make this a strategic priority. So on their own, going out there to come up with all kinds of different ways of collecting first party data. Again this was long before they ever bought or perhaps were even aware of Zodiac, but they knew that it was important to be able to tag and track individuals, and then Zodiac was just a way to really help them take that data and do great things with it. It was and still is a wonderful marriage and not only a great outcome commercially, but a great validation that these models and the use cases that arise from them are really very meaningful. Absolutely one of the proudest moments in my entire career.

Julia Raymond:
Definitely. And we talk about Nike pretty frequently, especially with the opening of its House of Innovation Lab in New York City last November, which has six levels of floors and a sneaker bar where customers can co-create their custom shoes. When you think about these more immersive brand experiences, will retailers increasingly focus on newer metrics? So beyond the heat mapping and tracking people’s movements through the stores, will we actually see data on individual customer interactions with store elements like product displays?

Peter Fader:
I’m going to surprise you with my answer, because of course you’re right. The sky is the limit about what kinds of data is conceivable to create. But I really think that retail, all firms, but I think especially retailers, need to walk before they can run. I think there is so much value in boring, un-sexy, old school transaction log data. The first thing we need to do is to look at who bought what when, and to squeeze all the value we can out of that before we turn to the heat maps or the biometrics or the neuro-this or the social-that. And I think a lot of firms, and a lot of retailers, are kind of getting the cart before the horse and I think it’s really important to leverage what you have, leverage the kind of data that comes naturally, the kind of data that’s basically universal, and then start to layer in some of these more exotic data sources.

So even though I’m pushing the leading edge, I’m also pretty old school and want to make sure that we proceed in a fairly disciplined manner.

Julia Raymond:
That makes sense. So walking before running and building up those foundational capabilities.

Peter Fader:
That’s right. And the other nice thing about starting with the old school transaction log data isn’t only because it’s abundant and retailers understand it, but it’s also going to help create more alignment with other parts of the organization. Because that’s the same kind of data that we can then use for supply chain purposes and even for finance purposes, for a lot of that other kind of sexy interesting stuff. It’s a little bit more marketing specific.

The first thing I want to do is to get the entire company aligned around insights we can get from transactional log data to really build the kind of trust and collaboration between marketing and finance and supply chain and R&D, then build from there. So I’m really kind of all in on focusing on transaction logs, even though that might not be really popular and interesting with a lot of retailers and a lot of data analytics people.

Julia Raymond:
Right. Essentially, retailers should focus on the core, the transactional log data, which might not be as sexy, but will in turn help optimize other areas of the business that need to really step it up.

Peter Fader:
That is right. I kind of hate to sound like the schoolmarm and give companies the impression that I’m holding them back, but once they start to see some of the value that arises from the data that they just might not have seen before, it’s kind of nice that they are willing to listen and to act in a more deliberate, thoughtful, strategic manner rather than just reaching for a lot of different things all at once.

Julia Raymond:
Makes total sense. And bridging from those ideas, I would love to hear more about Theta Equity Partners, which you co-founded last year, and the focus on what you call customer-based corporate valuation. Will you tell us a little bit more about that?

Peter Fader:
One of the really, really surprising use cases that I was talking about before from our first company Zodiac was exactly this idea of customer-based corporate valuation. It’s a concept that I’ve been talking about for years and year and years, but it was more aspirational. This idea that if we can track individual customers, and if we can project how many we’re going to acquire, and how long they’re going to stay, and how many transaction they’re going to make, we can do at least as good a job as the folks on Wall Street at saying what this company is worth. In other words, we can do a good job with corporate valuation and in the process really went over the trust and support of the people in the financial organization.

So it’s something I’ve been talking about forever as a concept, but there was a private equity firm that was a client of Zodiac and it was incredible to see the kind of success they were getting. In other words, they were going out there and buying a lot of retailers just using that granular customer level data and the forward looking metrics that arose from it. So as we sold Zodiac to Nike, immediately we saw that opportunity. Let’s double down on this one use case. That’s why we set up Theta Equity Partners and we’re working with a number of different private equity firms, late stage VCs, other kinds of investors. And the vast majority of the deals that we’re looking at are in the retail space. We’re going to help an investor get an early sniff test or a deep dive to say what is this retailer really worth? Don’t just give me the top line revenue, because that can often be misleading. I want to really break it down and sort out the quality versus the quantity of the customers and how that quality is changing over time. Are the new customers better or worse than the old ones? And to really come up with a good valuation and then really strong operational guidance about why that company is doing well or what needs to be addressed.

I have to say, as nice as the Zodiac experience was, and it was indeed incredible, seeing how well finance people have embraced these ideas, how finance people have for the first time said, you know these marketing models are actually kind of relevant and interesting, tell us more, to get that kind of buy in from them and for them to start with the CFO and then have the CFO go to marketing and say, hey you ought to check this stuff out too, wow. I mean, lions sleeping with lambs, it’s just wonderful to see how the organization comes together and how starting with finance, we can really change decisions in a very dramatic way beyond just fine tuning our email marketing strategy and so on.

Julia Raymond:
Right. And so many investors love a good bet with predictability, yet we see all these D-to-C brands that are still not profitable, but opening physical stores.

Peter Fader:
That’s right. And we’re working with a lot of them. We’re getting private equity firms that are doing diligence on a lot of those firms. And so this is the perfect story. What’s up with these D-to-C firms that aren’t making any money? Why are people spending money on them? And we see it because, I’m not making universal statement but for many of them there’s so much asset value locked up in those customers that Wall Street ordinarily wouldn’t be looking at because those customer metrics don’t show up on the balance sheet or the income statement. But we see it, and it’s true. So if we can bring visibility to it in a very credible, scientific way to basically justify to those investors or any stakeholder that’s interested that there is genuine value here, even if it hasn’t manifested in cash just yet, it will.

And of course there’s a lot that do go the other way. Plenty of firms that are grossly overvalued because they’ve been focusing on very expensive growth and trading off a long run value. In other words, acquiring a lot of bad customers in an expensive manner rather than building it to last. So we’ll see it both ways where we have no bias one way or the other. But it’s really interesting to see how people react to it, and again the actions they take as a result.

Julia Raymond:
Yeah. And it’s somewhat still of a new arena for investors. Do you think this might be something that becomes standardized?

Peter Fader:
I do believe that’s true. I really believe. Right now it is more kind of exception than rule, but it’s such a compelling story. The models work so well, the alignment within the organization is such a desirable thing to have, that it’s not going to happen tomorrow. But more and more companies, both the retailers themselves as well as the investors, as well as other stakeholders who are just looking over the whole ecosystem, are embracing it. My one company Theta Equity Partners is doing very very well, but it’s sparking a broader conversation. And I even dare say without getting into specifics we even have a dialogue going with the SEC, the Securities and Exchange Commission, because they’re starting to wonder about some of these customer metrics and asking all these kinds of questions about well, which metrics should be disclosed and what kinds of statements could be made about them and should there be any guidance about what companies disclose and say and do?

I want to be at the forefront of that conversation and I want to make sure that it’s not just a bunch of finance people talking to each other, but the marketers have both input and benefit from the conversation as well. If you look at the home page of Theta Equity Partners, our top line is that we are revolutionizing finance through customer-based corporate valuation. And it’s kind of a bold statement for anyone to make, especially a marketing professor, but I really do believe it. And I’m very much in it for the long run. Both the commercial receptivity as well as just how my students and even my colleagues in finance and accounting and others are saying you know, there’s something here, it just keeps me really, really energized in every way.

Julia Raymond:
Totally. It’s the future of evaluating these newer model retailers.

Peter Fader:
Yeah. And of course what’s great about these new model retailers, to make a more general statement above and beyond just customer-based corporate valuation, is that the old school retailers used to dismiss them, thinking ah it’s just a tiny niche, or ah it’s just a passing fad. But they’re realizing that they can’t do that anymore. So they’re either acquiring them, they’re hiring their senior management. I think the biggest way that we’re seeing the traditional retailers learn and change is through their, perhaps reluctant but genuine, embrace of the D-to-Cs. Again that’s a change that’s so well aligned with the kinds of revolutions that I’m sparking as well. It just seems like all the forces are coming together. And again, this revolution isn’t ending tomorrow or a year after. It’s going to take years, but it just feels really good. And at the same time that everyone is all worried about Amazon, I’m actually really, really hopeful that even traditional retailers are in a much better position to control their destiny than they might have thought even just a year or two ago.

Julia Raymond:
Yeah. And it’s funny you brought that up because Amazon is mentioned on almost very podcast since we are talking about retail, and they’re a disruptor. In your opinion, is Amazon not as big of a threat as the hype suggests?

Peter Fader:
Well, no. It is a huge threat. I’d be lying if I said otherwise. But there’s a way out. It’s not just a matter of giving up the ship or just cutting prices and try to beat Amazon at it’s own game. Let’s face it, Amazon wins, or at least does very well, primarily because of their operational efficiency. Just an incredible discipline to keep the goods flowing quickly and cheaply. But my big thing is this idea of customer centricity. If we can figure out who the right customers are and build our business around them and find more like them, we can actually do pretty well. And we can avoid the Amazons instead of getting caught in their trap.

So a lot of really nice success stories that we’ll see, again not limited to the D-to-C world, but just in retail in general, are as companies start to get more focused, start to get more understanding about how their customers differ from each other and who are the kinds of customers we really want to work with. So I think that’s the escape hatch from Amazon that because they’re so big and broad, they don’t have the capability to focus quite as well as a smaller, more agile retailer can.

Julia Raymond:
Agreed. And this idea is a good segue into the books you’ve written on the topic of customer centricity. Because customer centricity has been top of mind for you for so many years, and I’d like to know your perspective on how customer lifetime value, or the CLV metric, has evolved.

Peter Fader:
In terms of customer lifetime value itself… just what that metric means and the inputs into it and how we calculate it, it’s no different than it was when direct marketers started talking about it let’s say 30, maybe even 40 years ago. And that’s actually really good. There’s actually something really robust and consistent about the metric itself. Where the evolution has occurred is just the way that companies used it and their willingness to do so. And I find such joy these days when I’m talking to a bunch of retailers and say, how many of you at least have CLV or LTV as part of your working vocabulary? Let’s not even talk about how you calculate it or what you do with it, but how many of you have even mentioned those letters sometime in the last month and how many hands go up?

So there’s real embrace of the concept now. It is my job to make sure that it is used properly, that it is calculated correctly, that the statements that we make about it are appropriately aligned with what that metric allows for us. I worry about companies overreaching, either again doing the calculations wrong, overstate their capabilities, or in some cases doing things that are just downright illegal or unethical with it. So I want to make sure that we’re disciplined about it, but it’s just great to see that people want to have that conversation in a way that I honestly couldn’t have even dream of five, ten years ago.

Julia Raymond:
So you’re saying that how CLV is evaluated has not changed, but the ways companies are using the metric has?

Peter Fader:
That’s right. It’s a) the fact that they are using it at all or even contemplating it, that’s tremendous, but then as I was saying earlier, just the breadth of the use cases, the high level within the organization where these metrics are now being considered instead of just a couple of nerds in analytics deep in the bowels of the organization. So yeah, people are all on board with it. Again, I just want to make sure that they’re using it correctly and carefully. This is a happy problem to have. And I think that the best opportunities for it, and the best examples of it, are still yet to come.

Julia Raymond:
Yes. And so it sounds like it’s increasingly important to measure customer lifetime value and perhaps additional KPIs related to customer experience. And I recall interviewing the Warby Parker co-founder and co-CEO Dave Gilboa actually at NRF earlier this year. And one of the first things he mentioned was just the intense focus on customer experience and their NPS, or Net Promoter Score, which is very high. And it was something they were very proud of.

Peter Fader:
Yeah. It’s no surprise, no coincidence that I remember when I had the four Warby Parker founders sitting right here in my office back in 2009 just talking about some of these ideas. Honestly most of the ideas were more on the product side and distribution side, but just starting to plant those seeds about hey, not all customers are created equal and you really need to keep those differences in mind from the earliest days of the company and to find ways to leverage it. And they, and others, have done such a great job of that.

At the same time, even though it’s great to hear Neil and Dave talk about the central role of CLV, it’s not what they’re known for. They’re known more for the products and the experience and the service. So it’s just part of the glue that just kind of makes things fit together and work well. But you still have to run an organization in kind of traditional ways. You have to have a good product, you have to have good employees, you have to have good culture. That’s what really makes them and some of these other digitally native firms so special.

Julia Raymond:
Definitely. And this whole notion of being customer-obsessed or customer-focused reminds me of something I also ran across which is your Customer Centricity simulation.

Peter Fader:
Oh bless your heart for pointing that out. So many people, so many students, so many practitioners have gone through some kind of business simulation. Lots of different ones floating around, many, many, many of your listeners have done it either when they were in school or perhaps some kind of offsite team building exercise. And the problems with most of the simulations, it’s all about hey, we have the product, who should we sell it to? They’re very product-centric.

So we came up with the opposite of that: a Customer Centricity simulation, where the goal is to build as profitable a customer base as possible. It’s less about what we’re selling and who we’re selling it to. So which kinds of customers do we want to acquire, how much should we be willing to spend to acquire them, what are the trade offs that we face between things like customer acquisition and the loyalty program and the CRM system and the referral program and the premium service? All of these tactics that a lot of companies are spending a lot of time focusing on these days to try to bring them altogether and give people, without giving them the right answer, but just a little bit more appreciation of how these things fit together and which ones of these tools do you want to use for which customers at which time?

And it’s been so interesting to take this simulation that basically was built for internal purposes, just for my own MBAs, and now we’re seeing dozens of schools around the world and lots of companies using it. It’s really nice that this kind of experiential thing has been right there on the forefront of this conversation about customer centricity. And it’s again very gratifying to see how people talk about it and their eagerness to jump in and embrace it instead of the resistance that I was sensing a few years ago.

Julia Raymond:
Right. And it speaks to the need to have a simulation like this in the market. Out of my own curiosity, is there a right answer when you’re running the simulation and playing the role of CMO?

Peter Fader:
Yeah, that’s actually one of the problems with the simulation is that there is no right answer. It’s not like some kind of video game where you achieve a certain level and then you declare victory. Look, you take all the tactics that I just mentioned, acquisition, retention, development, loyalty programs, all that sort of stuff. It’s really complicated. And for a lot of firms, that’s been one of the reasons why they’ve hesitated to go into it because there’s just so many moving parts and each one of them is relatively unfamiliar compared to the usual way that retailers have operated for decades if not centuries.

So it’s hard to come up with the right answer because it depends. For instance, we can find great success by going after the high end of the market, or we can find great success by doing things a little bit differently at the kind of low to medium end of the market. So I’m not trying to drive people one way or the other, I’m just saying once you come up with your strategic objectives I just want to make sure that you choose and align the right tactics around it.

So it’s sounding a little wishy washy on my part, saying it depends. But that is the reality of it and I just want people to realize that there are many paths to customer-centric success.

Julia Raymond:
Yeah. So it sounds like there are many paths and no quote right answers.

Peter Fader:
I will say at the same time there are wrong answers. So for instance, just making a lot of blah blah statements about your customer, “The customer comes first. We will do anything. We won’t sleep at night until the customer is satisfied.” There’s a bunch that will give you lip service but they’re not really making these kinds of investments. There’s a lot of people doing exactly what I just did, which is to talk about the customer in some kind of singular manner as if they’re all the same. So there are definitely some bad things to do and you get punished for it. So that’s the first thing we want to do is kind of wipe out the bad and then start to worry much more about refining the good.

Julia Raymond:
Absolutely. And to jump over to one last question, you’ve emphasized in your books the importance of finetuning investments in customer acquisition, retention and development tactics based on customer heterogeneity. And I wonder, how much do you see hyperpersonalization playing a role here?

Peter Fader:
Oh my goodness. You are setting me up here so nicely. I’m actually not at all a big fan of that. I think this is one of these areas where companies are way, way overreaching. So again I’m building, maybe little arrogant about it, but say among the world’s best lifetime value models. And I know my limitations. As much as I can come up with a guess of how valuable you or this customer will be in the future, I also know that there’s a tremendous amount of uncertainty and variability around that.

So if I do too much over-personalization or customization, it’s a really risky payoff. I’m not at all into one to one marketing. I don’t think we’re there today, I’m not sure that we’ll ever get there to be honest. Having said that, I think we can start to work very effectively with ever smaller micro-segments. So instead of just having the product or the customer, or instead of saying we have the one for men and the one for women, we can get into some fairly small micro-segments of customers who are linked by relevant behavioral patterns. But I really don’t think that we’ll ever have quite enough clarity about our customers to get down to that one to one level. And I’m frankly quite skeptical both of vendors that make those claims, and retailers that aspire to do that.

So once again, it’s all about discipline. It’s all about limits. It’s all about let’s not start slicing things too thinly, especially before we’ve fully mastered things that are at a slightly more aggregate level. I’m fairly cautious on that very important topic.

Julia Raymond:
Excellent. Well I really appreciate your insights and candid perspectives, not only on the topic of personalization, but also throughout our discussion today.

Peter Fader:
Yeah. That’s why I appreciate the opportunity to put some of these perspectives and of course the supporting models and methods out there.

Julia Raymond:
Yes, I appreciate it. And before you go, will you let our listeners know where they can find a copy of your books?

Peter Fader:
Well of course Amazon. There’s two books. There’s the first one, The Customer Centricity: Focus on the Right Customers for Strategic Advantage. That’s the one that’s more about well what do we mean by this stuff, and more about definitions, aspirations, motivations. And then the newer one, The Customer Centricity Playbook: Implement the Winning Strategy Driven by Customer Lifetime Value as the name implies is much more about the how do we do this stuff? So they’re both broadly available, and of course I’m just delighted to connect with anyone through LinkedIn or Twitter who wants to keep the conversation going. But I really appreciate your willingness to hear me out, entertain some of these notions, and help spread the gospel.

Julia Raymond:
Happy to do so. And I enjoyed having you on the show.

Peter Fader:
My pleasure.

Julia Raymond:
Have a great day.