Create Sustainable Growth for Your DTC Brand with Professor Peter Fader

Many DTC companies take a “growth at all costs” approach to their business. They focus on acquiring as many new customers—any customers—as possible. 

That strategy overlooks the fact that customer acquisition will inevitably level off, and even decline. Once that happens, if a business isn’t built on a foundation of profitable customers, it won’t be around for long. 

There’s a smarter way to grow. Peter Fader, professor of marketing at the University of Pennsylvania’s Wharton School, pioneered this customer-centric framework. 

“Most of your customers are not that great,” Fader said on a recent Nerd Marketing podcast. “In fact, a lot of your customers don't even think of themselves as your customers.” 

On the other end of the scale are your die-hards. The kind of people who “get your logo tattooed on their body parts,” Fader said. 

Those customers are gold. 

Prioritize profitability by identifying your most valuable shoppers (A.K.A. your whales) and building your business around them. 

In this post, we’re sharing Fader’s key takeaways. 

• Conduct a customer audit
• Let data drive your marketing decisions
• Obsess over LTV, not CAC
• Build your business around your whales
• Get away from old-school thinking
• Apply this framework to all kinds of business

Conduct a customer audit 

A customer audit isn’t new or sexy, but it is smart. 

It doesn't require intricate models, forecasts, or complex analytical methods. Fader and his co-authors call the process "unashamedly descriptive." 

The goal of this analysis is to identify your whale customers, their key buying patterns, and the opportunities for value. 

When PostPilot CEOs Drew Sanocki and Michael Epstein are turning a company around, they use this framework. 

They start with RFM: recency (when a customer last purchased), frequency (how often they purchase), and monetary value (how much they spend).

That gives you the data you need to estimate your customer lifetime value (LTV or CLV).  

Divide customers into quintiles based on their LTV. Look at what customers in the top quintile have in common (your whales) and what the ones in the bottom quintile have in common (your minnows). 

Fader explains that it’s all about looking for opportunities and gaps in your data set. For instance, is there a product your whales typically buy first? The answer might surprise you. 

Let data drive your marketing 

The audit will tell you which customers to lean into, because they’re the most valuable. Focus on marketing to these best customers—and marketing the products that attract them, because that will help you attract more of them. 

One common trap Fader sees brands fall into is marketing the products that are most popular—and trying to offer more of those kinds of items. It might well be that only your least valuable customers are buying them. The reverse might also be true. 

Take the example of La Perla, a renowned Italian lingerie brand. This brand was at risk of being cut from a retailer's inventory, but a deeper analysis of data through a customer audit revealed it was instrumental in acquiring customers for a slew of other brands. 

“In the old days when the only thing we could measure was product level sales, that seemed like a good proxy for value,” Fader said. “Now that we can tag and track individual customers and calculate lifetime value, we need to be asking ourselves what's the value of the people who buy that product? “ 

Build your business around your whales 

All of this data and customer segmentation means you can now build your business around your best customers. 

That’s what video game company Electronic Arts did a number of years ago. 

“They were kind of plateaued,” Fader said. “But instead of just trying to develop blockbuster products, they were like, let's also come up with products that are going to be uniquely appealing to high-value customers, to help elevate their value, to signal to them that we really care.”

Customer-centric brands should: 

• Design products for their best customers. 
• Arrange collaborations with them in mind. 
• Be everywhere their best customers are. 

A few years back, Nike acquired Zodiac, an analytics firm Fader built to operationalize lifetime value models on a commercial scale. Nike didn’t want to be dependent on distributors like Foot Locker or Walmart, but to own its customer relationships. By calculating the LTV of each customer, Nike could identify who the whale customers were, what they bought, and where they bought it. 

This gave Nike more leverage with their channel partners and distributors. And it means a more personalized experience for shoppers.  

Get away from old-school thinking 

Too many brands are still attached to the four Ps framework for marketing (product, price, promotion, and place) which disproportionately focus on the product, Fader said. 

That made sense in the early days when Lester Wunderman, the father of direct marketing, pioneered the use of behavioral data for customer segmentation. With limited data and tools, segmenting customers by age, income, gender, or race was a breakthrough. 

Relying on those demographic markers doesn’t make sense any more, Fader said. Instead of asking, "Who should we aim our product at?" we need to shift the perspective to "Who are our best customers, and what products should we develop for them?" 

Apply this to all kinds of businesses 

Customer-centric thinking can apply to all kinds of businesses, not just DTC brands, Fader said. It works for SAAS companies as well as consumer product brands. 

You may do the analysis and audit process differently, but the principles are the same. 

And if you’re in retail but not doing DTC yet, set up a Shopify storefront in order to start collecting that valuable first-party data. Third-party data providers can also be helpful. So can loyalty programs and mobile apps, Fader said. 

“Find a way to build such a strong relationship with your customers that they want to self-identify,” he said. “‘Hey, I made this purchase over at Whole Foods, but I wanna make sure that you have it on the record so that you can treat me better.”

Build a sustainable business

Acquiring tons of new customers can give you a contact high. But it’s likely not a path to building a profitable, sustainable business. Customer-centric marketing means using data to identify your best customers, figuring out what they have in common, and letting that guide your marketing efforts. It’s a path to happy, loyal customers and a healthy ecommerce business. 

Want more smart insights around marketing, ecommerce, and entrepreneurship?  Subscribe to the Nerd Marketing Podcast today. 

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