How To Find Your Most Valuable Customers
Zodiac co-founders Peter Fader and Artem Mariychin on Customer Lifetime Value
Leading companies have always understood the importance of delighting their customers. But not all customers are of equal value, and businesses can do better by focusing on those who offer the most profitable future. To do so, companies first need to know who they are.
To identify them, Wharton marketing professor Peter Fader has developed a metric called Customer Lifetime Value (CLV), which projects what people will likely spend with a company in the future based on past buying trends. He has teamed up with Wharton alumni and others to co-found Zodiac, a New York startup whose platform, based on CLV, is to help businesses find their most valuable customers.
Fader and Zodiac CEO Artem Mariychin, one of his former students at Wharton, talked about their startup and the application of CLV on the [email protected] Show on Wharton Business Radio, which airs on SiriusXM Channel 111.
An edited transcript of the conversation follows.
Peter Fader: It’s an interesting story. So as I celebrate year 30 on the faculty here, I’ve spent about half that time — well, I’ve spent all that time building mathematical models to predict different things about consumer behavior. But I spent about half that time on this notion of customer lifetime value. Can we look at what a customer has done in the past and make a pretty accurate projection of what they are likely to do in the future?
And it’s not only coming up with a single number, it’s breaking it down into how long will this customer maintain the relationship with us? How many more transactions will they have? What will be the size of those transactions? So it takes in a number of different predictive elements that, when you combine them all together, gives you CLV [Customer Lifetime Value].
I’ve been doing this with — not just me and my co-authors and my students — but lots of other people around the world, developing these models, and they’re really accurate and they’re really diagnostic, and they’re really actual, and they’re really good. I’ve been going to companies and saying, “Here is a cool new thing that can really help you run your business better,” and a lot of companies, especially retailers, have been saying, “Ah, we’re busy. We can’t deal with all of that math stuff, we’re trying to sell things here.”
And so I’ve been trying to find different ways to get retailers, not only to pay attention to this stuff, but to embrace it. One strategy was a book that I’ve written, I’ve spoken about in this studio many times, on customer-centricity. Let’s try to motivate retailers, or the companies, gaming companies, pharmaceutical firms, telecommunications firms, by thinking about this big, broad strategy of putting the right customers at the center of everything that we do. And that’s great, and that’s been good, and it’s been getting some companies to pay attention.
But part of it is to make these models really, really accessible. Let’s build a platform where it makes it super easy to run these models, super clear to see what it all means, super fun to actually take action on the basis of the models, and for companies just to get smarter and make more money.
“Can we look at what a customer has done in the past and make a pretty accurate projection of what they are likely to do in the future?”–Peter Fader
That’s what led to Zodiac. It was a matter of pulling together not just Artem but actually two other alums as well. It’s a great team of folks, all of whom went here, but have different skills. And to figure out ways to commercialize this stuff, spread the gospel about it, and not only have a start-up that can maybe make some money, but really to me, equally important, as an amped megaphone to get the word out about these models, and the strategic practices that arise from them.
[email protected]: Artem, what was your experience in terms of taking what you learned here at Wharton, and then being part of that group to build out what Zodiac has become?
Artem Mariychin: I was always interested in, how can I understand the cash flow and the future performance of the business? And the fundamental question for a lot of companies, those that actually deal with customers is, what is an individual customer worth? The opportunity at Zodiac to develop a model and to commercialize it where companies can for the first time understand, ‘what is the value of each consumer and how can you change your business strategies and operations to take advantage of that,’ is incredibly powerful.
All of us on the team, with Pete, other alumni, the co-founding team, … really believe in that notion of customer-centricity and that what we’re bringing to market at Zodiac can dramatically improve how companies interact with their customers and the value their customers are receiving from their actions with businesses.
[email protected]: It looks like from the website that you are doing that. There are several retailers that are involved in this. American Apparel, Dress Barn I see are part of this.
Fader: There’s lots of other companies that see this idea of customer valuation, and again the strategies associated with it, as the secret sauce that’s going to differentiate them from everybody else. So there’s a bunch of other firms we’re working with that are choosing not to be identified, but it’s just really gratifying to see that they are not just getting these numbers and plugging it in, but they’re really thinking big and broadly about how they can do a lot of things differently, not just the marketing operations.
[email protected]: A lot of these companies have had this information available to them. And they just didn’t take the time to look at that data, and look at this as a way to be able to understand their business and the consumer?
Mariychin: Prior to the last couple of years, the technological infrastructure, the data … and skill sets in the market were just broadly not available to a lot of companies to understand individual behavior.… The idea of a persona or an average customer was the typical way that marketers would think about their customer base. But now with advancements in technology, with modeling, with more available [data and] skill sets, they are able to understand and predict future behavior at more granular levels, and it’s a dramatic shift that’s happening. It started in a lot of e-commerce businesses but now is spreading to bricks-and-mortar more traditional industries as well.
Fader: It’s more than just the marketing, folks, it’s not just a shiny object for them. You think about Artem’s background and pretty much everyone on the team with the exception of me, these are folks coming from private equity and from hedge funds. These are financial people, so it’s not just marketing people just trying to