[MUSIC] Well, it is good to see everybody once again. Let me remind you of where we have been and then talk about where we are going for the remainder of my portion of the course. So, here's where we've been. We've been talking about customer centricity. We've been motivating it by the fact that the traditional product centric model, while it's still common, still the way that most businesses operate, there are some cracks in product centricity. Issues like monetization, well informed customers, globalization that just takes some of the edge off of product centricity and so customer centricity is emerging. It seems to be a promising alternative but it's not well understood. So people, companies, are using a lot of different words for it. Whether it's customer intimacy, whether it's customer centricity, customer focus. People using a lot of different words and people are implying a lot of different concepts. For me, I've offered a very clear definition of what customer centricity means and why companies would want to consider it. And for me the key to customer centricity is the celebration of customer heterogeneity. An acknowledgment that customers are different from each other. And instead of viewing that a nuisance, we have to treat them differently. It's an opportunity. It's a terrific opportunity to say, hey some customers are more valuable than others. Let's really focus on them to create and extract some of that value let's find more customers like them. And let's find ways to continue to have relationships with the other customers but not necessarily on the same terms as those really focal customers. And at the heart of that argument was the concept of customer lifetime value. The idea that we're going to judge the goodness of a customer not so much on the amount of money or value that we've already extracted from that customer but for the amount of money or value that we think we can extract and will extract in the future. So it's this future looking idea, we're going to judge customers based on what we think they will be worth to us and that's just a really critical and we're going to continue to really focus on how that forward looking, seal the orientation is going to affect, and in some cases radically change the kinds of decisions we make about how we run our business. And I mentioned very briefly some of the tactics that we tend to focus on are things like customer acquisition, customer retention, customer development but I haven't given a lot of specifics yet about how we manage those tactics. How we gauge our success at those tactics and how we balance them off against each other in order to really understand our customers, and again, create and extract all that value. That's what we're going to be doing now. So this module is all about show me the money. This module is all about on how to really really understand Acquisition, retention and development. In a very new way, this is it's said before. Those tactics, by themselves are new, companies have been acquiring customers. They've been retaining and increasing the value of customers for long, long time. But we want to elevate the importance of those ideas, we want to develop matrix and manage your guideline to, to really understand those tactics better and drive the business using them, not as using them, kind of at the margin to, to squeeze a, a few more dollars, so we really going to dive deep into acquisition retention and development that what this matter is all about. Ideally a company aspires to be world class on all three of those dimensions, acquisition, retention and development. But that's tricky. In fact, it's tough enough to master any one of them, much less two or even three of them. So, what we're going to do, is we're going to examine them one at a time. But we do want to understand the interplay among the. We do want to understand some of the trade offs that companies face. In fact, I want to begin by asking you about one of those trade offs. So, let's imagine that you are running a company. Many of you are, or you are involved with a business. And you are out there You have your marketing budget and you're spending it appropriately on acquisition, retention, and development. But then your CEO comes down and says you know what? I'm going to give you an extra dollar or 100,000 you get the idea let me give you a little extra money. Which one of those three tactics are you going to spend it on. Those all three are important. But at the margin, which do you think, is most deserving of that incremental dollar that you might have? And in fact, I really want you think about this. I want to make this a little quiz question. So I will pause for a section and I want you to vote. Okay? So I am counting So I want you to raise your hand. So which one is the most important tactic at the margin? So how many of you would say it's customer acquisition? Okay. How many say customer retention? Raise them high so I can see. Okay. And how many say customer development? Okay got it. So I've tallied up your votes here and it looks like approximately 5% of you voted for customer acquisition and of the rest of you, the remaining 95%, it looks like it's a pretty even split. So 47 and 1/2 percent for customer retention 47 1/2 percent for development. At least when I ask this question to students, to managers, to senior executives. Different companies all around the world, that's the basic split that I get. Most of the attention seems to be on retention and development and just a few odd balls who are saying, we should spend that extra dollar on acquisition. So I'm going to come up with a crisp answer to that question. Okay. I don't like it depends. I want to say at the margin, which one of those would be most important for our ongoing activities so, here's what I want to do, let's dive into each one of these three tactics and understand it really carefully, but understand it in a new way, because again the basic words acquisition retention development aren't new. But how do we see them differently when we look at them through the lens of custom eccentricity or more specifically how do we see them differently in a world where were celebrating [INAUDIBLE] okay. So that's the theme that's been running through my portion of the course so far and will continue because now we're going to see the big payoff from that celebration of heterogeneity. Here's what I'm going to do. For each one of those tactics, I'm going to lead by asking the same question and then we're going to dive deeper from there. So here's the question. Let's start with customer acquisition. What metric do firms use to gauge and guide their acquisition activities? because there's a lot of different metrics out there that firms use to evaluate how well they're doing different parts of their operations. But when we look at customer acquisition, in particular what's the metric that tells us how well we're doing and give us a say forward looking indication of how well we think what we're doing. Now, for some of you you might not have a readily available metric for it but for many of you especially those of you with firms that work in the digital world It is very often. I ask this question and will come up with the answer to it right away. And it comes in the form of three letters. CPA. CPA. And I am sure many of you know what I am talking about there. Cost per acquisition. Many firms gage and guide their acquisition activities based on CPA. Cost per acquisition. One of the reasons why they do it is because it's just so visible especially in this day and age where it's much easier to track not only the behavior of customers after we acquire them but the cost of acquiring them in the first place. So so many companies out there are constantly looking at their CPA And trying to think about ways to [INAUDIBLE] how can we get that CPA down, how can we bring in more customers for the same number of dollars? And again, many of you who are out there working especially focusing on marketing or customer acquisition activities in particular, know what I'm talking about. But, here's the important point that I want to make focusing your business using CPA to gauge and guide your acquisition activities is a big big mistake! I'm not just saying that its an imperfect measure. I'm saying that its actually a grossly misleading measure. If you're using that to guide your acquisition activities. So that's a very radical statement and I want to explain myself, how I come up with that logic, and what you should do about it. So let me step back for a second and focus on issues that I've raised previously, which is the idea of thinking about our customers as assets. Right? Our customers are assets. In many cases, that's the most important asset that we have. Now I'm not necessarily saying that we're going to put customers formally on the balance sheets, although, there's a lot of discussion about doing just that, taking customer equity and really using it as a formal measure. I do not necessarily care about the accounting, but we all agree that customers are assets. So to the extent that customers are assets, what do you think about using a CPA type metric when it comes to acquiring assets? Think about other assets that we acquire. How about employees? About technology. How about lawyers? Think about those kind of assets that firms depend on. You'll never hear a firm say something, well she was a lousy lawyers but she was cheap. Then when it comes to lawyers, when it comes to employees, what a firm is looking for they're looking for the best not necessarily the cheapest. So why is it that we use this cost oriented mentality when it comes to our customers? So my question is instead of focusing on CPA, what is it that firms should be focusing on instead? Think about that for a second. Instead of CPA, what should it be? Say it all together with me. Exactly. VPA, value per acquisition. We should be focusing on the upside that they customers can provide to us. And by the way, if you just think about the notion of value per acquisition, what does that sound a lot like? An idea that we've already discussed. Of course that's CLV, customer lifetime value so let's think about the upside potential that customers have and then use that number to drive the CPA, okay so we're going to kind of flip the equations around. One way of thinking about customer lifetime value and certainly this is the way a lot of text books present it and the way a lot of companies think about it Is that CLV represents the upper ballot, I'm willing to spend up to that amount to acquire a customer. Makes sense right, I certainly don't want to spend more than that because then I'm losing money on the customer but the CLV is basically a ceiling. I'm willing to spend up to that amount and that's what I want managers and companies to think about, here's the ceiling. This is what I think the customer will be worth. How much of that money am I willing to spend to acquire that customer and then how much do that money do I want to keep and give to my shareholders as current and future profits. So when it comes to thinking about customer acquisition I don't want to focus on floors. I want to focus on how low can we bring it I'm going to focus on ceilings instead. Okay I want to understand how high we can go and I'm not saying that we should necessarily spend every penny up to CLV. We're not aspiring to spend more money, that's ridiculous. But the point is that if we focus on the ceiling instead of the floor, we'll be willing to spend a little bit more money at the margin and more importantly, get better customers in the process. So I want to give you a very specific example. As I said in the digital marketing world the the CPA is to tangible, so observable to us. Any company that is working with Google, for instance, is thinking very carefully about what they are spending for every key word on Google sponsored search. And they are wondering, should we be spending $4.50 to get someone through this key word, or should we be spending $4.49? We have all of these arguments about pennies, about CPA, and so, there's a couple of companies getting smart about it and saying, you know what instead of focusing exclusively on what we are paying to get those customers let's look at what we are getting out of those customers after we acquire them. In other words, let's look at the COV of customers who we acquire through different kinds of marketing activities. And so over here you can see a screenshot of just this one article, it's just I think a very nice typical example of an article, and you could see from the title alone, it's what to understand the CLV, the lifetime value of the customers whom we'd acquired through Google sponsored search and once understand how their CLB is different than customers whom we acquire through other channels. And so without giving you all the details of the study, here's the highlight. And it tells us, as we sit back and we look at the data that we've collected on customers acquired through different kinds of marketing activities. Those who were acquired initially through Google sponsored search are worth on average CLV of about $1,000 where as customers acquired through other channels are worth about $200 less. So here we are arguing about pennies or dimes, small amounts of money about how much we should be spending to acquire customers. But we find out that there is this huge dramatic differences. Hundreds of dollars difference, if we use one kind of tactic instead of another. And see how big is the key. COB shows us that there's so much more value lying in our customers. So we don't necessarily appreciate and when we have this cost orientation, not only we don't appreciate it but we'll never realize it. We'll never actually be able to put in our pocket. So I really like example and I wish that this example were more rule than exception, and we said a lot of companies would kind of step back and do this kind of analysis for their existing customers, and it's not only a matter of doing it for. Say, Google sponsored search versus anything else. You can do it any which way. You can say, most of the customers we acquired at one time period versus another. Let us look at customers we acquired for one geographic area versus another. Let us look at customers whose first product purchase from us was one kind of product versus another. Let us look at customers we acquired from one marketing campaign from another. So we constantly want to be tagging our customers, understanding different characteristics of how and when and where we acquired them, and then with a little patience, let's match that information up with what these customers prove to be worth. And so we're going to run some [INAUDIBLE] ] we need to wait a little bit of time. We need to collect some more data on them to understand which customers or which groups of customers are the most valuable ones. But by doing so we can really understand those sources of value and get just some great guidance on where we should be spending our next marketing dollars. So let me summarize this thinking about customer acquisition. First and foremost, you want to avoid having a "CPA mentality." and I mean that, not only kind of in a joking way, because of course I am also referring to CPAs being Certified Public Accountants. We don't want to think about being accounting pennies where it comes to acquiring customers. You want to focus on ceilings instead of floors when it comes to how we're going to spend to acquire customers. And the celebration of heterogeneity is that by understanding the CLV differences across customers, that's going to give us some direct ideas about where we should be spending the money. and when we understand, where the more valuable customers tend to come from, lets invest much more heavily in those search words, in those channels, in those marketing campaigns. There's no guarantee that every customer that we get through those activities are going to be good in fact that's not true at all. We're always going to get a mix of customers. The metaphor that I like to use is that we're always fishing for a customers. And this is going to give us some idea of where we should be throwing the lines. And when we throw the lines, the one we throw out the nets. We going to always pull in, they had a regenius mix of customers. ANd you know what? Most of them we want to be eh, so and so customers. But if we get really smart about where we trow them next, we can tend to pull and just slightly. A better mix of customers and if we do that more often. If we do that in a smarter way those differences can really magnify over time and show us that there's actually tremendous value unlocked by just being a better fisherman when it comes to customer acquisition. So a couple of other points here. Number one companies need to be a little bit more patient. When they're evaluating their customer acquisition activities. Too often companies are looking for an immediate payoff. Okay, so we spent this money, what did we get for it? My point is if you're forward looking, if you're taking the long view as implied by customer centricity then let's wait a little bit of time until we can get a pretty good sense. Of what their CLV what the value is, and what the CLV will be. And that's going to give us not only better guidance, but better idea of where to set that ceiling. The main point about customer acquisition, which I've been implying but let me say it very plainly. Is that firms are under spending on acquisition. By focusing so much of their efforts and asking all the time how little can we spend? They end up spending very little, it becomes a self fulfilling prophecy and by focusing on tactics and methods to just bring in as many customers as possible for the least amount of dollars they also tend to under achieve. And that's a problem. It's about being smart or being careful by tagging and tracking on customers. Focusing on CLV instead of CPA. We can get a lot more money. We might spend more on acquisition but the returns to scale on that are going to be huge. So that's my piece on customer acquisition. Let's take a step back now and talk about customer retention. >> [MUSIC]
