EPISODE 085 : 10/27/2022
Peter Fader is the Frances and Pei-Yuan Chia 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/purchasing activities. He works with firms from a wide range of industries, such as telecommunications, financial services, gaming/entertainment, retailing, and pharmaceuticals. Managerial applications focus on topics such as customer relationship management, lifetime value of the customer, and sales forecasting for new products. Much of his research highlights the consistent (but often surprising) behavioral patterns that exist across these industries and other seemingly different domains.
Host: Ned Hayes and Kira Cleveland
Guest: Peter Fader
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Topics discussed in this episode
- Detailed small business insights from Olympia, Washington
- Small business resiliency and adaptation during COVID
- Doubling community outreach during the pandemic
- Opportunities for small business loyalty programs
Watch Spark Loyalty’s Small Business Success Channel
Ned Hayes [00:00:00] Welcome to Spark Plug, where we talk to smart people working at the intersection of business and technology brought to you by SnowShoe, your smarter loyalty leader. SparkPlug is happy to welcome Pete Fader to the podcast today. Peter is a successful behavioral data and marketing expert who has been named by Advertising Age as one of the 25 inaugural technology trailblazers. So today he is a professor of marketing at the Wharton School at University of Pennsylvania and the co-founder and director of Theta Equity Partners. So welcome to the podcast, Pete.
Peter Fader [00:00:37] It’s great to be with you.
Kira Cleveland [00:00:39] Yes, it’s a really great to have you here, Pete. And we’d love to hear more about your role as a professor of marketing at the Wharton School. What does it mean to be open shop professor of marketing?
Peter Fader [00:00:51] Well, let’s just start with being the professor of marketing first. It’s the coolest job in the world. The fact that I get to mix it up with just the smartest kids, very often I’d convince them that the stuff that I do with predictive models and marketing, even though none of them ever dreamed about stuff like that, and that it’s interesting and something they want to learn more about and maybe even pursue as a career. So it’s great. It’s really great to have some influence on students, but it’s also great to have a wonderful group of colleagues. People associate the word school is kind of a finance place. And of course we have a terrific finance department, but it is the greatest marketing department in the world by any standard number of publications, number of editorial boards, impact on industry. And so it’s phenomenal. It’s fortunate to be part of such a great group. I’ve been here for 36 years now, and when you stay in one place long enough, they throw more titles at you. And I’m honored to be the Point Shop Professor of Marketing. Hey, was the he was a senior executive at Citibank years and years ago and made a donation to the school. And I’m very fortunate to be the beneficiary of that. So it doesn’t kind of change what I do day to day, still publish or perish out there teaching my classes and spreading the gospel about good marketing research practices. And I love every day of it of research.
Ned Hayes [00:02:16] You get to study behavioral patterns, right? Like what human beings do. So could you tell us some about your research? What kind of behavioral patterns do you find interesting?
Peter Fader [00:02:26] You know, that’s what makes the job so fun is because it is a chance to kind of introspect and kind of look at myself and look at others and then go out there and actually get data on what happens to ask, is our intuition correct or does the data tells a different story? So to get more specific about it, what I’ve been doing for most of my 30 odd years on the faculty is building these forecasting models of customer behavior. So how many customers are we going to acquire and how long are they going to stay with us and how often will they buy from us and how much will they spend when they do? And then so what? So how do we as a company reallocate our resources, realign our tactics to better take advantage, to better capitalize on those customer patterns. So it really is fun. And then to be able to do it in pretty much any domain you think of. So whether it’s looking at a new salad dressing or whether it’s looking at a professional sports team or a new hotel chain or a new pharmaceutical, it’s amazing how broadly applicable these models are and what fun it is to go from one domain to another and to talk to leaders in all of these industries.
Ned Hayes [00:03:43] Well, I’m really interested in the retail industry, so I’m curious if you could speak specifically to the kinds of patterns that you’ve seen in retail.
Peter Fader [00:03:50] I love it, love it, love it, because that is absolutely number one on the list for me. Again, part of it’s just a personal choice that you know, well, I like to shop part of it’s a family choice that my wife actually runs the Baker Retailing Center at the Wharton School. So we spend a lot of time over the dinner table talking about emerging retail practices and when what’s faddish and what’s here to stay. And how do these models make retailers more informed? And I have such a kind of love hate relationship with retail because on one hand, it’s such a perfect playground for these models because you have the ability to tag and track individual customers, you have the ability to interact with them while they browse your your real your virtual store. You have the ability to realign the products that you offer and the merchandizing around them to meet the needs of different kinds of customers. So on one hand, it’s it’s perfect, perfect, perfect. But on the other hand, it seems like so many retailers out there, specially the older, more established ones, take this old school view on things, you know. Grandfather first established this company. He did it by working in the mail room and working his way up. And there’s just a lot of other kind of old practices that that continue to predominate. When you look at the kind of data and analytics and technology that we have over the last few years, and it really is start to change, it’s time to kind of wake up and view customers differently. So I’m trying to be the Pied Piper to lead a lot of retailers into a new era. And it’s it’s been just really, really interesting.
Kira Cleveland [00:05:31] It’s fantastic. Within that Pied Piper role that you’re taking on, what are some of the most significant changes you have been seeing in the marketing landscape? And what are you trying to get people to focus on?
Peter Fader [00:05:41] The customer, the customer, the customer or the customers? The most companies, retailers included, are product centric because that’s the visceral, visible, tangible thing. And for most companies, customers traditionally have been this kind of faceless name was entities that just kind of show up, buy things and go away. And all we tend to know is how many units of the product that we sell, but we tend not to know how many different customers boss from us this period who bought the most, who bought the least, and what does that distribution look like and among the most valuable customers? How are they different in terms of how they use the product and what other products they want to join it with? So a lot of those kinds of questions were impossible to answer until recently. But today we can. And not only should we answer them, but instead of just making the product the center of everything we do, how we really should be looking at the customers and saying, who are the more valuable ones and what kinds of products should we be developing for them and others like that? So that’s a great big pivot there, which is what I call it. All these books that I write, customer centricity, not the idea that we’re centered around the customer, but we want to figure out which customers we want to be centered around in terms of product development, service delivery and so on. That’s a pretty radical way of looking at things. But over the last ten, 15 years, I’ve been getting a lot of companies to start changing their practices and their perspectives.
Ned Hayes [00:07:20] Well, you’ve seen a lot of change for students and for faculty as well. I know this last year, Wharton, I believe, had the executive chairman of Johnson and Johnson and the head of the Black Entertainment Television don’t speak at commencement. So I’m curious, you’ve also been through many classes there and seen many students. What have you seen change in students and their understanding of marketing there?
Peter Fader [00:07:43] Oh, it’s been great. There’s been a couple of changes that I’ve seen. One is that it’s hard to imagine this is true given Wharton’s kind of, you know, premium status for four decades. But the quality of the students is getting even better because we’ve always had some great students kind of at the top. But then there are always some who kind of come in for some family connection or something like that. Like, that’s all gone. Everybody’s just awesome now. So great groups to work with. That’s number one. Number two, and a very kind of personal, selfish level. All the stuff that I do, data analytics that wasn’t cool 30 years ago, but boy, oh boy, is it cool now? And so it’s just great. I look at the numbers of students in my classes and I teach these very technical, horrible math classes, you know, how to take all the customer data, predict things. And I used to be lucky to get 20 and I’ll have 280. So that’s just great. I’m enjoying my moment in the sun. And then third big trend that I’m seeing is much more diversity about what students want to do, because it used to be that everybody would want to go into investment banking or consulting. That was it got to get with Goldman Sachs or McKinsey. And those companies are great and others like them are terrific. And so many students go to them. But it’s great to see students going in so many other directions, retailing being a great example, or media and entertainment or maybe professional sports students are just more willing to take chances. They’re more willing to do stuff that’s just not the conventional path. And they’re actually looking for work life balance instead of just making as much money as they can. So it’s just really gratifying to see a different people pursuing different paths and not feeling compelled to do what their friends are doing.
Kira Cleveland [00:09:33] That’s fantastic. You know, a little more of the business that you do. Could you tell us how does behavioral data help you kind of forecast the customer trends in your work at Theta? Does this help create a better retail experience for customers and merchants?
Peter Fader [00:09:47] So yeah, I’m not sure we we predict customer trends per say, but we do predict customer behavior that we do really well. And once again, if we can predict how many customers the company is going to require, but more. Certainly how long those customers going to stay around, what are they going to do over that horizon? That could be immensely valuable. So I’ve been developing these methods. I’ve been writing them up. I’ve been pushing people to read them, think about them, act on them for years and years. And it’s been kind of frustrating that a lot of companies would kind of ignore it. So again, we have our way of doing things. We don’t need to listen to you an academic. Why should we listen to you? Or I talk to executives and they say, well, you know, that stuff that you talk about, all that data and I like, yeah, that’s interesting. You know, there’s someone who works for someone who works for me and she does that stuff. You go talk to her. But, you know, I’m the CMO. I need to focus on brand. So I’ve been kind of fighting this battle to kind of when companies don’t actually care about these behavioral patterns. And to quantify that and to say, what’s the actual dollar value of each and every one of those customers? So a lot of my work is on customer lifetime value. If I can show dollars and cents the impact of one kind of, you know, customer experience campaign or one kind of new product launch and say let’s use that to gauge and guide our decisions, then folks start to sit up and and pay attention. So the first company that I founded, a company called Zodiac, that’s exactly what we did, is we brought customer lifetime value to life at full commercial scale and work with all kinds of retailers and hotel chains and pharmaceuticals and telcos and others to make them see the value of their customers and then to use that to drive all of their marketing tactics. And that was great fun. Sold that company to Nike a couple years back and then founded the new one Theta to basically take the same model, same patterns and all that, but use them more on the investment side. Let’s focus on the CFO or on private equity firm to get them to value a company through the lens of how valuable are its customers. So try to go after a new audience by using the same models and same ideas about customer behavior.
Kira Cleveland [00:12:14] So with that, how do you use managerial applications really like on the court to focus on customer relationship management and that lifetime value of the customer?
Peter Fader [00:12:24] So many levels, if you think about the four fundamental behaviors that I mentioned, acquisition, retention, repeat, purchase, spend. So if we can understand each of those better, then we can start to answer questions like How much should we pay to acquire good customers? Because there are too many companies that we want to acquire them as cheaply as possible. But once you start to see the value of the customers, it’s like, maybe if we spend more, we get more. So we can start to figure out that kind of question or how much should we spend on acquisition versus the retention and development of the existing customers. And as we do those retention development efforts, what should we be doing? Should it be a premium service? Should it be a loyalty program? Should it be a referral program? So these are questions that companies already are asking, but they’re not necessarily doing so in a really kind of really rigorous way. I want to bring rigor. I want to bring science to these kinds of activities and make them of at least as much interest to the folks in finance as they are to the folks in marketing.
Ned Hayes [00:13:31] Wow. Well, could you tell us a little bit more about what was so appealing to Nike about Zodiac? Why did they pursue your company?
Peter Fader [00:13:38] You know, it’s it is such an interesting story and it’s and it’s so gratifying. It really is emblematic of this big shift that we’re seeing in the retail sector and the world as a whole. And if you think about the way Nike operated for most of its existence, what did they do? They would make shoes and they would sell boxes of shoes to Foot Locker and Wal-Mart, and that was it. And they had no visibility into who was buying those shoes. They knew nothing about what other kinds of activities are people doing while they’re wearing those shoes. And they decided under their previous CEO, Mark Parker, he said, this is unacceptable. We need to understand those end users at least as well as we understand the retailers that we sell to. We want to have a direct relationship with them. We want to understand how they’re different from each other. We want to understand who the best ones are, and we want to understand things that we can be doing to make them even more valuable and to acquire more customers like that. Well, that’s exactly what we were doing in Zodiac. So as Nike set out to have this whole Nike Direct initiative, which has been phenomenally successful, they basically needed the kinds of tools and insights and just overall people skills that Zodiac has. So when they approached us first, I was kind of surprised, but then I was delighted because it was great to see not only was it just a nice exit and that’s just a wonderful thing, but it’s been a great case study because a lot of other companies either ignore this customer stuff they said before, or they only turn to it when they’re desperate like nothing else is working. Okay, let’s try the customer thing. Well, Nike came to it from a position of strength, a company doing very well and wanting to do even better. And so it made these same practices aspirational for many other companies. And again, it kind of just it just opened up the doors and gotten a lot of other people to pay attention to the kinds of stuff that I do in a way that would have never happened if Nike had bought it.
Kira Cleveland [00:15:46] That’s an amazing story. I’m really grateful that you’re able to share that with us.
Peter Fader [00:15:51] I’m grateful that I was able to live it again. It was a big surprise. It’s not like I sat down one day and said, Hmm, let me come up with something that a company like Nike would buy. It really is serendipitous that it ended up happening that way, and I don’t take it for granted.
Kira Cleveland [00:16:06] Part of the beauty, the entrepreneurial journey, right? Being where you can end up.
Peter Fader [00:16:10] And do.
Kira Cleveland [00:16:11] Well with respect to really getting to know the customers. Can you share about some of the retail storefront behaviors you’ve seen over the years, and what are some of those actions marketing experts can take to bring value moving forward?
Peter Fader [00:16:26] Well, I’m going to sound like a broken record, but I really do mean that every time we do something, we need to again, whether it’s a new promotional campaign, whether it’s a redesign of the store or oh, I cringe when I say it Black Friday, the way we manage the holiday season, instead of judging those kinds of activities in terms of how much stuff that we sell, which is the way they’ve tended to do it, we want to judge it in terms of what’s the value of the customers who participated in those campaigns and how much more valuable are they after participating in it? So you look at something like Black Friday, which I just love to rant about because it’s such a dumb idea. But one time of year where we take all of our worst, worst customers and have them line up and treat them like royalty, instead of using it as an opportunity to reward our better customers and help acquire more good customers like that. So really try to get retailers to focus less on just sheer volume and more on long run value that they can create or destroy through different kinds of activities. And again, a lot of them just continue marching down the lane the way they have before. All of them are starting to wake up and try some of these things out. And, you know, everyone that does start to pivot in this direction, I take great pride in seeing whether they’re working with me or not. And I want those kinds of companies to become more real, that exception in the years to come.
Kira Cleveland [00:18:05] Absolutely. And, you know, kind of within jumping off of that Black Friday madness, that event that we won’t say. Could you kind of touch on that until you die model and how that affects retail forecasting?
Peter Fader [00:18:17] I love it. I’ve done your homework and I wish everyone else would as well. Now, this was another life changing moment for me because I’ve been modeling, repeat purchasing forever. And back in 2002, I was building some model for an academic journal, not that interesting, and reviewers of the journal said You need to benchmark your model against a buy til you die. Model A what? Long story short, it turns out that these models that were developed by other people 30 years ago are incredible. Their ability to capture, repeat, purchasing behavior over a long horizon with very strong. So what value? If you think about the kind of crazy name of it by til you die. It sounds kind of grim, right. But that’s the basic story is that people kind of buy not necessarily like clockwork, but they buy at a kind of a certain overall rate. And then at some point they’re gone. We don’t know why. Is it because they don’t like our products anymore? They switched to someone else. Maybe they moved, maybe. Maybe they died. We don’t really know. But these models, which sound kind of harsh and artificial and seem almost less realistic than other repeat purchase stories we could tell have just an incredible track record of forecasting and again, providing insights about behavior. So I kind of again stumbled into them and said, This stuff is amazing, though I didn’t invent these things that I spent 20 years promoting them. Refining them and really focusing on the. So what story? So again, if people are to read my books on customers and. CHRISTIE I’m not sure I even mentioned those models by name because it does sound kind of scary and technical, but the implications that arise from those models are really, really important. Of course, the main implication is the one I’ve been talking about all along, which is not all customers are created equal and those high value customers are so much more valuable than you think that if we can focus on those high value customers, we can make more money in a sustainable, defendable, ethical way than if we try to be everybody’s best friend. I mean, that’s, again, a very strong statement to make, but it follows directly from the statistical models that I was forced to learn a couple of decades ago. Right. Well, you speak.
Ned Hayes [00:20:45] About some of these models in your book, customer centricity, focus on the right customers for a strategic advantage. And you also have a playbook by the same name. So could you tell us a little bit about how your ideas play out in those books?
Peter Fader [00:21:00] Yes, indeed. I’m happy to. So again, these books are born out of frustration of companies kind of ignoring these models, ignoring my advice, saying, you know what, I can’t just be pushing academic papers in front of people and expect them to read them and act on them. That’s not reasonable. So start writing the books around ten years ago to try to to again, I don’t want to say it dumbed down the models, but but rather to put a whole facade around them to make people really care. Let’s focus on the implications of following the models or of ignoring the models. And that’s where the first book came in, which is kind of let’s clarify what we mean by customer centricity. Again, not all customers are created equal, focused on the right customers. All the stuff, I would say. So let’s clarify what we’re talking about and why that it’s not enough just to stand behind the product and just hope that the next blockbuster will show up behind it, that those days are gone. And it’s more important than ever to really understand our customers at a granular level, etc., etc.. Book number two is less about the what and the why and more about the how. As the name implies, the customer centricity playbook or even the subtitle implement a winning strategy driven by customer lifetime value. So let’s get a little bit more into the tactics. Some of the things I was talking about before, like loyalty programs and premium services. Which of those cards do we play when in order to to really build an effective strategy? And then there’s book number three coming out soon. Happy to talk about that one, too.
Kira Cleveland [00:22:37] Well, I mean, since you brought it up, how is your book coming along? Like, where can I listeners find your word?
Peter Fader [00:22:43] Well, book number three will be published on November 1st, 2022. And in some ways it’s kind of weird that it is the third of three, but sort of like almost like Star Wars or Lord of the Rings or one of those things. It’s actually a prequel. And so book number three is called The Customer Base Audit, and I’ll say more about that in a moment. But the subtitle, The First Step on the Journey to Customer Centricity that says it all. Because I talk about customer centricity and not all customers are created equal and all that sort of thing. But should you really trust me? Should you just put all your faith in what I’m saying? Or do you want to see for yourself? So what you want to do first would be a customer base audit. First thing you want to do is to look at all that customer data and just even before you forecast anything, before you come up with lifetime value models, let’s just look at that historical data and just see the patterns lurking in it. And so a lot of these issues that we’re talking about, acquisition, retention and so on, what’s let’s think of yourself then once you see them, you can’t unsee them. And that’s what kind of then kind of opens the door to the other two books. So you’re really excited about the customer base audit. And it goes back to another thing that I mentioned a few minutes ago, which is if we want to have great success with marketing, we must win over the CFO. And so if we can do a proper accountable audit of our customers in the same way that we’ll do that of our of our finances, that’s going to just it’s just going to shed more light on what we do. It’s going to maybe provide some tailwinds that let us do even more to enhance that that that value. So a lot of it is building that bridge between marketing and finance and time will tell. We’ll see how the book is received. But I’m very, very excited about it.
Ned Hayes [00:24:41] Well, I know you’ve also written about repeat purchase modeling, so could you tell us about the customer lifecycle and how that affects the retail? I’m sure you can teach a whole class on this.
Peter Fader [00:24:50] Right? And I do. I do. I have a whole course on managing the value of customer relationships. It’s all about repeat purchasing. And it’s so important because for too many companies, their primary growth strategy is just bring in more customers, bring in more customers. That the real key to growth is acquisition. And I’m not saying that acquisition is a bad thing, but, you know, if we can get existing customers to come back more often, first of all, that’s going to be cheaper than acquiring new customers, etc.. It’s going to be more reliable and predictable and it’s just going to make it easier for us to serve them too. So really kind of enhancing repeat purchasing should be job one. And I’m not saying that companies necessarily ignore that, but they do tend to overplay the acquisition piece of it. So it’s educating people about the importance of repeat purchasing, about what the basic patterns are and the implications that arise from it in terms of how we run the business and how we should be spending that next dollar towards those customers.
Ned Hayes [00:25:58] Well, so our sponsor and company for this podcast talks a lot about retail innovation and technology solutions out there. But we’re not here to talk about ourselves. We’re here to talk about use. So I’m curious. What innovations have you seen that have really impressed you in the technical fields for retail recently?
Peter Fader [00:26:16] Well, it depends how you define recently. Let’s go back a few years. When I was an undergraduate math major at MIT and this one Nutty Professor came to me and said, You want to get a Ph.D. in marketing? And I said, You got to get your head checked. And I go into marketing of a data guy and she painted a picture. This is 1982 or three, and she painted a picture of what she called the electron microscope of the customer that one day soon, we’re going to be able to see everything that customers are doing, and we’re going to be able to tag and track them over time. And we’re going to know all the stuff that they’re buying and kind of who they’re buying it with and how they’re using it. And of course, she was 100% right. And that’s why I’m so thankful that I listened to her advice and became a professor. And I think that that vision is as accurate and interesting today as it was. What was that 40 years ago? That the things that we do help us get more granularity about who’s buying what, when and what other activities are associated with it. I just love that stuff. And we’re getting more and better technologies all the time, whether it’s technologies that let us follow customers as they move around in the retail store. So we can know not only what they were buying, but what they were browsing and really understand the interplay between the two. We’re technologies that will let us better understand the social aspects of shopping. So no, no man is an island and the influence of other people. It’s important to understand that it was impossible before. So there’s just so many ways that the electron microscope is getting even more granular, more accurate. And it’s not my job so much to focus on those technologies per say. I don’t even understand what is acknowledging going into that stuff, but I look at the rich delicious data coming out of it and saying, Oh man, I can have a good time using this data to make different kinds of predictions or more accurate predictions or more actionable implications arising from those predictions. And that’s what keeps me going. That’s what keeps the field of marketing going.
Kira Cleveland [00:28:28] Those fantastic story, I have to say, it’s a great thing when you can come across an instructor that can help guide you towards your passion and to see all the people that you now get to impact and expand this field through with just that one recommendation. That’s really amazing. You know, it looks I love your animation and your energy. Like I can imagine your classes are fantastic. I would love to sit on one sometime, but truly, you know, as a final question for you, Peter, we would love to kind of ask it’s our favorite question. What do you believe your legacy will be?
Peter Fader [00:29:00] How do you find that? Great. Well, it fits beautifully with that passion for teaching. How do you think that’s where the biggest part of the legacy will be? I think it’s going to be less about the startups despite their success. It’s going to be more about getting smart people to see the opportunity to see the fun of quantitative marketing. Again, I am so thankful to this one. Professor Lee McAlister, who dragged me into it and so much of my life has been paying it forward, is finding other kids who also love math or love marketing and say, Follow me, I have something fun for you to do. And by the way, you can make a good living doing it. So yeah, whether it’s through the students and directing them down a path that they find rewarding or the companies raising their quantitative literacy, getting them to take a chance to listen to me and put and do the customer centric thing. But having that kind of impact. Basically through the teaching. It’s so gratifying. And that’s why I teach far more than the Wharton School requires me to do, because they just have so much fun doing it. And it’s always could be that there’s just some students in that next class who could become a co-founder of the new company. And so I better not miss out on that opportunity.
Kira Cleveland [00:30:19] What a beautiful passion. Thank you for sharing that. Yeah, thank you for your time today, Dave. I’d like Kira. I’d love to sit in on some of your classes and maybe we can have you back some time to share some more wisdom. Thank you.
Peter Fader [00:30:31] It is truly my pleasure. Excellent questions and I appreciate the chance to talk to you.
Ned Hayes [00:30:36] This sparkplug is a wholly owned property of SnowShoe. Copyright 2022 2023 Sparkplug Media.