Peter Fader is a leading authority on customer analytics and the author of the best-selling book “Customer Centricity”.
Just about every CMO will tell you their top priority is growing topline revenue. Where they might differ is how they go about achieving that growth.
There are two prevailing schools of thought.
The first is that growth comes primarily from attracting as many category buyers as possible, even if most of them are occasional users who buy infrequently. The opposing side argues that the cost of going after everyone in the market is a waste of resources: it makes far more sense to simply encourage existing customers to buy more, more often. Brand loyalty pays off in the long term, they argue, because it is much less costly to retain a customer than to acquire one.
This debate has been going on for years with all the shrillness of an ideological shouting match. On one side you have the Ehrenberg-Bass Institute for Marketing Science led by the iconoclast Byron Sharp whose immensely popular book “How Brands Grow” debunked a lot of taken-for-granted marketing principles. In a groundbreaking paper he wrote in 2002, he declared, “when brands grow, they can expect most of their sales revenue growth to come from having a larger customer base, rather than from an increased buying rate”. He based his conclusions on the NBD-Dirichlet mathematical model of brand choice developed in 1984 by his mentor Andrew Ehrenberg.
Sharp’s polarizing views certainly contradict the equally fervent beliefs of loyalty proponents who feel that marketers should apply disproportionate effort to increasing the value of current customers over their lifetime. Probably the best known advocate is Frederick Reichheld of Bain and Company who created the Net Promoter Score. In his classic book “The Loyalty Effect” published in 1996 he famously wrote that “improving the retention rate by five percentage points doubles the profit margin”. He goes on to conclude that according to Bain’s economic modelling, “Revenues and market share grow as the best customers are swept into the company’s business.” He doubles down on that business case in his latest book “Winning on Purpose” where he introduces the concept of “Earned Growth Rate” which refers to the revenue growth generated by “Brand Promoters” as a result of increased sales and referrals.
Like most abstract debates in marketing the truth lies somewhere in between. Companies certainly need to spend money acquiring new customers, although that becomes more expensive over time as the pool of potential first-time buyers contracts. But companies also need to invest in maximizing the value of current customers to drive profitable growth. In fact, customers should be thought of as assets whose value appreciates over time. The tricky part, of course, is to find the right balance between acquisition and retention spending.
That’s where Peter Fader comes into the picture. The Wharton School Marketing Professor believes passionately in a “barbell marketing strategy” which involves using acquisition dollars prudently to go after heavy category users while at the same time doing everything possible to please high value customers. The right balance is determined by doing a bottom-up study of behavioural patterns within the existing customer base. This analysis can pinpoint exactly how much untapped revenue potential there is amongst the high value customers who are the most likely candidates to expand their relationship with the brand. He calls this process a “customer-base audit” which he describes in detail in his latest book of the same name.
I began by asking Peter why as a math guy he chose to pursue marketing as a career.
Peter Fader(PF): I didn’t, is the answer. Yeah. I was a straight math guy, always just looking for, you know, I was a hammer looking for nails and found some interesting nails lying around at the Sloan School at MIT. And then this one professor who came up to me while I was in undergrad and said, “You ought to get a Ph.D. in marketing.” And I said to her, “You ought to get your head checked. I’m not going into marketing. What’s wrong with you?” But she was very, very persistent and persuasive, and she just ground me down.
Stephen Shaw (SS): What made her suggest to you marketing as an option?