Redefine Customer Centricity to Focus on Profitable Shoppers

There are retailers known for providing truly excellent customer service. There are others that maintain highly granular databases detailing every scrap of information about their customers, down to each online click and mobile search. But neither of these accomplishments makes these retailers truly customer-centric, at least according to Peter Fader, co-director of the Wharton Customer Analytics Initiative at the University of Pennsylvania.

To Fader, who delivered the keynote address on "Establishing Competitive Advantage through Customer Centricity" at last week's RIS Retail Executive Summit, customer centricity means retailers identify who their truly valuable customers are and treat them differently – that is, better than – the rest of their customer base.

Fader, who is the Frances and Pei-Yuan Chia professor of marketing at the University of Pennsylvania's Wharton School, comes to this definition of customer centricity from direct marketing, which he describes as "a successful business model based on tracking individual customers.

"The individual customer is the unit of analysis, and we should acknowledge and celebrate the differences between customers," said Fader. "Some customers are more profitable, and we should work on making them even more profitable. Other customers, the 'eh' customers, should be treated differently. Most retailers treat everyone pretty much the same way."

Fader added that the less-valuable customers shouldn't be dismissed altogether, merely that retailers should concentrate on those customers that are already profitable for them or are likely to become profitable. "It's important to have a healthy proportion of 'eh' customers to add a high degree of stability and robustness to the overall customer base," said Fader. "They are like the cash or bonds in an investment portfolio."

Consistently Measure CLV

Retailers today have a number of sophisticated tools available to discover the Customer Lifetime Value (CLV) of each of their customers. "A smart company will calculate the lifetime value of every customer on a regular basis," said Fader. "This measurement capability offers retailers a tremendous opportunity that we didn't have before. Using the CLV means rewarding customers not on what they've done, but on what they're likely to do.

"The science behind CLV is becoming fairly standardized," he added. "The hard part is getting companies to bet on it."

One of the advantages of being customer-centric in this way is that it helps retailers avoid competing in terms of product innovation or price. "Relationship expertise – what you know about customers, your ability to anticipate their needs and to squeeze more value out of them – can never be commoditized," said Fader. "Retailers know these things exclusively, but they are currently doing a bad job of using it."

Fader's five takeaways on this topic are:

1. There are already cracks in the product-centric model most companies have traditionally used, and the list of these cracks continues to grow.
2. Customer centricity "isn't super-duper customer service; that's inefficient. It's showing your best service to those that deserve it," said Fader.
3. Celebrate heterogeneity: "There is no 'the customer,' there's a vast array of customers. Companies should choose performance metrics, incentive schemes and organizational structures that properly reflect this," he added.
4. Walk before you run: In moving toward customer centricity, try limited experiments and be patient with them.
5. Customer centricity is not for everyone: An industry with a mix of strategies may be the best practice.

This ad will auto-close in 10 seconds