High-Impact Entrepreneurship

Wharton professor’s advice: “Fatten up” your customers

Reprinted from under30ceo.com. See the original post here.

by Peter Fader

I often use the metaphor of fishing as a way to explain new customer acquisition. From the firm’s perspective, there is a great big ocean out there full of prospective customers of all different shapes and sizes. First we have to decide how we want to catch them: do we want to cast our nets far and wide (a broad acquisition strategy), or throw spears at individual fish that we believe to be particularly juicy and plump (a targeted acquisition strategy)? That’s a tough decision and worthy of two full lectures in my MBA elective course, “Managing the Value of Customer Relationships”

But let’s focus on what happens after we catch the fish: once we have acquired our newest batch of customers, how do we fatten them up as much as possible, i.e., enhance their long-term value to the firm?

Customer development – along with acquisition and retention — is one of the primary firm activities that drive customer value. It describes the tactics that a firm employs to create the maximum value for its existing customers over the lifetime of their relationship. My students can now recite by heart what I casually label the Great American Question: “Would you like fries with that?” It’s a classic example of cross-selling, one of a range of activities at the heart of customer development.

For companies considering adopting a customer-centric strategy, customer development is often one of the most visible and alluring selling points: if a firm knows its individual customers better, it can better tailor its product/service offerings to their needs — and thus capture a greater share of their total dollars. Indeed, a recent study from Forrester Research suggests that nearly 90% of managers in large North American financial services firms identified increased cross-selling as “very important” or “critical.”

So how does it work? In my book Customer Centricity: What It Is, What It Isn’t, and Why It Matters, I outline four ways in which companies typically “develop” their customers:

– Cross-selling: getting customers to purchase additional products or services
– Increasing the frequency/volume of purchases of current products
– Up-selling: moving customers up to higher level products/services
– Premium pricing: increasing the mark-up for existing customers

The metric that companies typically use to measure the success of their customer development efforts is “share of wallet,” also known as “share of requirements” in some settings. This is essentially the firm’s market share amongst its existing customers.

But how important is customer development, really? It’s a question with huge implications for firm resource allocation decisions. Given an additional dollar to spend on growing your firm’s overall customer equity, where are you going to get the biggest bang for your buck: from new customer acquisition, customer retention, or customer development?

It turns out that there is a range of inconclusive (and sometimes contradictory) evidence about the relative importance of customer development. Some of it suggests that there is real value in these activities: for example, reduced churn or greater value per transaction among customers who purchase more of a firm’s products or services. Wells Fargo is a great example of a company whose relatively robust success through the recession seems due, at least in part, to its customer development efforts. The average Wells Fargo household has over five different bank products, roughly twice the industry average, while about 20% have an impressive eight or more products from the bank. And Wells Fargo credits cross-selling with lowering its selling and advertising costs, given that it’s cheaper to target existing customers than new customers.

But this pattern is far from universal. In fact, in most cases customer acquisition seems to roundly trump customer development as a strategy for driving firm growth. In industries from financial services to consumer packaged goods, researchers have observed that increases in penetration (i.e., acquisition) are often associated with much larger increases in profitability and market share growth than increases in the size or complexity of customers’ baskets.

So what’s the bottom line on customer development? While development is perhaps one of the most appealing applications of customer centricity — we can make more informed product recommendations! We can offer services targeted to specific customers! — it helps to maintain a balanced perspective. When all is said and done, acquiring and retaining great customers are probably the two most important things a firm can do to increase the long-term value of its customer base.

That being said, companies can absolutely see some incremental value by “fattening up” their existing customers — especially if they do it in a truly customer-centric way. Asking if they’d like fries would certainly be a start.

Peter Fader, author of Wharton Executive Education Customer Centricity Essentials: What It Is, What It Isn’t, and Why It Matters,is the Frances and Pei-Yuan Chia Professor of Marketing at the Wharton School of the University of Pennsylvania. He is also the co-director of the Wharton Customer Analytics Initiative, an academic research center focused on fostering productive collaborations between data-driven firms and top academic researchers around the world. Fader has been quoted or featured in The New York Times, Wall Street Journal, The Economist, The Washington Post, and on NPR, among other media. He has also won many awards for his teaching and research accomplishments. In 2009, Fader was named a “Professor to Watch” by the Financial Times, which discussed his interest in “the swathes of hard data consumers generate through their spending habits.”

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