Notes

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>> So now it's time to ask the
question.
What metric the firms use to gauge and
guide their development activities?
There's actually a lot of different
metrics that they use.
Again, the basic idea is, how
well-developed is
this customer for the firm, or, look at it
the other way around, how well developed
is this
firm in the customer's mind, or the
customer's wallet?
So a very common metric that's used here
is, share of wallet.
Of all of a customer's needs for a
particular product or service, for the
category as a whole, how many of those
needs are met by this firm.
So as I said, there's a number of other
metrics.
What some firms look at is the number of
different products and services.
That the customer has with them.
As a very specific example, Wells Fargo, a
big retail bank here in the U.S., they're
obsessed
over number of services per customer.
Okay, the CEO, you could ask him at any
given moment what's the average number of
services per customer.
How does that vary over time?
How does it vary across customer groups?
He understands that customer development
is really critical there.
So Bordon looked at Share of Wallet,
again they're very closely related to each
other.
So, so question is what does Share of
Wallet tell us.
It's a decent metric, I think it's a good
metric to look at
but, but I want to understand how it, how
it really fits in.
See I want to understand the, the, the
interrelationship.
Between share of wallet, how well
developed
we are with the customer and over
all size of wallet or overall CLV,
how much overall value does this customer
have.
So, there has been a lot of research
that's looked at
the inter play of size of wallet and share
of wallet.
You can see
a screen shot here, about some work done
by some colleagues
at Duke University, who looked very
carefully at this very issue.
What's the inter-relationship between size
and share of customer wallet?
And, and the results they got are, are
very interesting.
It's a, it's a very well done study and,
and I absolutely believe the results.
So let's jump in and look at the results.
As we can see this chart over here, and
it shows you the relationship between
share and size of wallet.
So, so going along the bottom of the
picture, you could
see Share of Wallet broke up, broken up
into five groups.
People to the left with a really small
Share of Wallet.
People to the right with a high Share of
Wallet.
And up and down in the picture is the
total wallet size.
Again, the thing about that is a proxy for
CLV, the overall worth of this customer,
the overall capability to spend in this
entire product category.
And if you look at this picture, and if I
ask you what's
interesting about it, you'll see a lot of
big circles to the left.
and, and what else is there?
Well there is that big circle to the lower
right and if
you think about that for a moment, its not
really very interesting.
What that's telling us is for customers
who have a very
small wallet size, in other words for
customer
who don't have a lot of money to spend,
they don't sorry have a lot of CLV, they
tend to put all their eggs in one basket.
Think about it this way.
If you only have a dollar to spend, you're
going to spend it all in one place.
And so it's not surprising that the
customers with very
small value are going to have very very
high share of wallet.
They're going to be very well developed,
but they're not necessarily
very good customers, in terms of CLV.
So you know what, let's eliminate that
bottom row not to say that,
that we don't care about those customers,
but I do want to make
a point over here, if we get rid of those
really low value
customers, the ones with the really small
wallets, what else do we see?
Now, if I ask you to describe this picture
over here, in terms of
the relationship between share of wallet
and size of wallet, what do we see?
Good answer, pretty much nothing.
There seems to be no systematic
relationship
between share of wallet and size of
wallet.
So as my colleague said in this paper over
here,
share of wallet is largely independent of
size of wallet.
In other words, a very well-developed
customer isn't
necessarily more valuable than a less
developed customer.
This is a really important point.
It suggests
that, while we want to develop our
customers, at the margin
we always want our customers to be more
valuable to us.
it, it doesn't necessarily have the, this,
this
real strong causal of relationship with
overall CLV.
So let look at another quote from this
paper that I think does a very nice job
of summarizing the good news and the bad
news about cross selling or other customer
development activities.
So here is the good news, if customers
have,
we have a really high share with them,
they
buy a lot of stuff from us in one
category, they're likely to buy from us in
other categories.
If we can sell them a checking account
then there's a pretty good chance
we can get them to get a, a savings
account from us as well.
That's the good news.
The bad news is, it suggests that some
customers
just inherently love us, this is the
celebration of heterogeneity.
And they're going to buy pretty much
everything we have
to offer.
And there's some customers who eh, take it
or leave it.
They might have a particular service from
us.
We're lucky that we have any of
their business, but they're not
necessarily going
to become better customers all of a
sudden, if we push another service on
them.
This is the big issue with customer
development,
we want to do it all the time.
We're always going to be saying, do you
want
fries with that, do you want to super-size
that?
We're always going to be looking for
opportunities to
create and exctract a little more value
from our customers.
But too many companies believe that these
development activities will
systematically, fundamentally change the
overall value of our customers.
That tends to be untrue.
Not saying it's always untrue, but for the
most part development activities are good.
They're important
to do, but they're not necessarily going
to fundamentally change the nature of the
customers.
So we want to do development activities,
but the way I like
to think about them is that they're more
like icing on the cake.
It's going to let us create and extract a
little bit more value than we would have
had otherwise.
But it, but it doesn't necessarily change
the customer.
Now a lot of companies would disagree with
me on that.
A lot of companies would say, you know
what, we put this offer in front of the
customer and not only did he take it but
he bought lots of other things as well.
Here's my point.
The celebration of heterogeneity suggests
that this customer was actually
pretty valuable all along or had high
potential value all along.
We, as a company, were just unable to see
it and to unlock it.
And so, we're going to do
these development activities not so much
to fundamentally change the customer.
But to find out what kind of value they
have, already had locked in
them, and to help us unlock it, and, and,
and really fully enjoy it.
So that's why we have to do
development activities, but it doesn't
necessarily change customers.
And so you can see where I'm going with
this, and in
fact, if I, If I can now combine together
all three tactics,
acquisition, retention, development and if
I go back and ask my question again,
if we had that one extra dollar to spend,
where would you spend it?
Acquisition, retention or development?
And as I said, most people, most
companies, down
play acquisition and really focus on
retention and development.
We can see where I'm going with it.
Now, no way
do I want to minimize the importance of
retention or development.
But at the margin that we've that extra
dollar to spend.
I think we really want to spend it on
acquisition.
And again, that reflects customer-centric
thinking which is
very, very different than the traditional
product-centric thinking.
So that's why thinking in a
customer-centric manner and
celebrating, understanding heterogeneity
can
lead to dramatically different
conclusions.
Now, I want to be careful about making
that statement.
I don't want to say that its always true.
If you are in a market whether it's,
it's intense competition and, and you've
basically saturated the
marketing, every customer, every potential
customer has already
been acquired and sometimes that worked
with multiple firms.
Then, acquisition might not make more
sense.
Because then, the only customers who are
left out
there, are, are probably customers that
aren't very valuable.
And other companies were willing to let
them go.
So there's lots and lots of exceptions to
the general advice that I'm offering.
Again, if you're in a very saturated
market, hanging on to your
really valuable customers is going to make
more sense than acquiring new ones.
But in general, for most companies, for
most markets, when there's a
lot of, of customers still out there, who
haven't been fully evalued
by, by, by different companies, at the
margin, I think acquisition makes more
sense.
But more importantly, than telling you
exactly how to spend the money,
I just wanted you to be thinking about
some of these marginal decisions.
And this clear understanding of the
trade off between acquisition, retention,
development.
I also want to shed light on the
conventional
wisdom that we associate with some of
these trade offs.
So, for instance, want,
want to show you a piece of conventional
wisdom over here, many of you have read
this, many of you have said this, many
of you, perhaps, have managed your
business around this.
the basic idea that it costs so much more
money to acquire a new customer than to
retain one.
So we have to work really hard to keep the
ones that we have.
Again, I'm sure that many of you have
heard
that advice, and even if you haven't, it
makes
a lot of sense, right?
Well, let's think about it.
I don't want to suggest that, that
conventional wisdom is untrue.
Okay, you know what, it probably is true.
It does cost more to acquire a new
customer, especially a good
new customer, than to retain existing
customers, but what's my take on it?
Let's go back to my coverage of
acquisition.
Let's not
focus on costs.
Let's not worry about costs.
Let's worry about value.
And we're spending too much time, more
importantly we're spending too
much money, retaining customers who aren't
really that valuable to us.
Maybe we'd better off reaching a little
bit
higher, spending a little bit of money to
go
out there and find a customer or a
group of customers who might actually be
more valuable
than some of those, eh, customers, we're
spending
so much time, tying, trying to retain and
develop.
And so again, the conventional wisdom
might be right.
But when you take this forward looking
value oriented perspective.
If we're focusing more on CLV, as opposed
to CPA, then this kind of conventional
wisdom won't really impact you that much.
Don't be so cheap.
Don't be so lazy.
Go out there and figure out where
the valuable customers, valuable potential
customers reside.
And do what it takes to get them on board
and then let nature takes its course.
Yes, you want to spend time retaining
them.
Yes, you want to ask them if they want
fries with that.
Because they're better customers, they're
going to naturally stick around longer,
they're going to naturally buy more
products and services from you.
And you'll
see the gains in the long run.
They'll be worth the investment.
So that's my overall take on some
of the tradeoffs between acquisition,
retention, development.
Let me just summarize it for you and then
we'll step back
and, and, and take a last look at, at all
of customer centricity.
So, I, I keep saying it all along and I
hope that you can appreciate how customer
centricity is a celebration
of heterogeneity.
And by really understanding, by, by
measuring and, and fully appreciating
heterogeneity, it brings new light on to
acquisition, retention, and development.
And, at the margin, earliest in
many situations, the greatest
opportunities to improve
customer profitability, it through what,
through
what I like to call, smart acquisition.
Let's not just go out there and bring in a
bunch of customers as cheaply as possible.
But if we can be smart, if we can look
at our customers, fully utilize all the
data that we have
on them and understand how, when and where
we acquired them,
we can go out there and get some really
good customers.
Now retention and development are
important.
Let me just say one more time that so much
of our
attention spending is going towards
flighty
customers, who are likely to leave anyway.
And it's going to cost a lot of money
to keep them coming.
We're going to have to keep spending over
and over and over again.
And while we're tempted to do that,
because we have these customers in our
hand, and we want to maintain or build on
the relationships that we have with them.
If they're not that great.
It's going to be really hard.
It's going to be really expensive.
It's going to be frustrating to do so.
So, we, we do have to spend appropriately
on retention and indeed on development.
We always want to ask that great question.
Do you want fries with that?
We always want to try different kinds of
development activities.
But recognizing that it's more icing on
the cake
than a way, in most cases, to
fundamentally change customers.
And the final piece of that is, let's not
worry so much about
conventional product-centric wisdom that
we often use
to, to, to run our marketing activities.
Let's think about future looking customer
value, CLV, and that's
going to lead us to some very different
kinds of decisions.
So those are the tradeoffs.
Let's wrap up by thinking about, the
overall customer centricity one more time.
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