#64: Customer Based Corporate Valuation - Daniel McCarthy of Emory University

Today Let’s Talk Loyalty looks at how loyalty as it’s evolving academically as I interview Assistant Professor of Marketing at Emory University, Dan McCarthy, who researches key marketing topics that loyalty marketers love, such as customer lifetime value.

McCarthy now writes and lectures extensively on customer lifetime value as well as a new concept “customer based corporate valuation” and his work appears in major academic and business media outlets including the Harvard Business Review, Wall Street Journal, FT and CFO Magazine. In addition to his academic career, he has extensive commercial experience supporting companies like Nike with their customer insights and strategies. His latest company Theta Equity Partners is also successfully commercialising his knowledge of customer loyalty. In this interview, he also shares his latest insights on the Pareto Principle as well as the consumer behaviour changes he sees emerging in early statistical data as a result of Covid 19.

Listen to this latest episode of “Let’s Talk Loyalty” to hear the latest insights from the academic world of loyalty marketing.

Show Notes:

1) Daniel McCarthy of Emory University – Assistant Professor of Marketing at Emory University

2) Twitter: @d_mccar

3) Harvard Business Review January 2020 Report – The Loyalty Economy

4) Theta Equity Partners

5) Professor Byron Sharp.

Audio Transcript

Paula: Welcome to Let’s Talk Loyalty, an industry podcast for Loyalty Marketing Professionals.

Paula: I’m your host, Paula Thomas.

Paula: And if you work in Loyalty Marketing, join me every week to learn the latest ideas from Loyalty Specialists around the world.

Paula: This show is sponsored by Comark, a global provider of innovative software products and business services.

Paula: Comark’s platform is used by leading brands across all industries to drive their customer loyalty.

Paula: Powered by AI and machine learning, Comark technologies allow you to build, run and manage personalized loyalty programs and product offers with ease.

Paula: For more information, please visit comark.com.

Paula: So welcome to the latest episode of Let’s Talk Loyalty.

Paula: And today I am delighted to be talking to one of the co-authors for what I believe is perhaps this year’s top publication on loyalty, which is the Spotlight Series from Harvard Business Review.

Paula: So Professor Dan McCarthy is the Assistant Professor of Marketing of Emory University.

Paula: And he joins me today as the third in the trio of authors from those particular articles.

Paula: So regular listeners will know we already had Professor Pete Feder in episode 40, talking about lots of both the academic and commercial aspects of loyalty.

Paula: And in episode 42, we also had Rob Markey from Beining Company.

Paula: So Professor Dan McCarthy, first and foremost, welcome to Let’s Talk Loyalty.

Daniel: It’s great to make it the full trio.

Paula: Absolutely, I’m so happy.

Paula: I feel fully connected to the academic world now, Dan.

Daniel: Now that and yeah, we just had this big webinar with Bain with reuniting the team.

Daniel: So yeah, it’s a small world.

Paula: It sure is, absolutely.

Paula: And I’m certainly following it very closely.

Paula: And I know plenty of my listeners are as well.

Paula: So in terms of your own background, Dan, it’s amazing to see the kind of work you do.

Paula: And I suppose it really gives me a lot of reassurance that we’re in safe hands.

Paula: So I think as we get into talking about loyalty statistics, it’s really useful to know that you have done, I think years and years now research specifically on applying leading edge methodology to what you’ve described as empirical marketing problems.

Paula: And I know when we were chatting before coming on air, you told me that you’ve actually, in fact today, you’ll be finishing delivering your first full semester talking about customer lifetime value over 24 individual lectures, which I think is just extraordinary.

Daniel: Yep, that’s exactly right.

Daniel: Yeah, it’s a full course.

Daniel: The course is literally called Customer Lifetime Valuation.

Daniel: And I certainly, I even had colleagues before I was teaching it who were saying, Dan, are you, like, I know I like customer lifetime value as much as the next guy, but you can teach a whole course on that.

Paula: Yeah, incredible.

Daniel: Feel back the onion on acquisition, retention, ordering, spend, how you do the modeling, how you think about the strategy, how you tie it to valuation, doing the customer efficiency simulations, actually getting to experience it.

Daniel: I need two semesters.

Paula: Well, that’s brilliant.

Paula: And I’m sure you’ll be very happy to come to the end of the very first course.

Paula: So before we get into all of the work that you’re doing, Dan, as you know, we always start the show talking about your favorite loyalty statistic.

Paula: And given that you are a statistician, I know you have two, so I’m super fascinated.

Paula: So please tell us, what are your favorite loyalty statistics?

Daniel: Yeah, one is if you use the traditional customer lifetime value formula, the one that we’ve been taught, kind of in your introductory marketing course when you’re taking your MBA, that formula will often severely discount the value of your customers up to a factor of three, relative to what you would get if you actually used the right formula.

Daniel: And so, one of the things I’ve often heard from some marketers is I know this formula is not correct, but hopefully it’ll be directionally accurate.

Daniel: It’s gonna sort the customers properly and it can’t be that bad, right?

Daniel: Maybe by 30%, right?

Daniel: No, yeah, it’s actually a really, really bad formula.

Daniel: Wow, severely flawed, yeah.

Daniel: And it’s not one of those errors that kind of cancels itself out across the customers.

Daniel: Some customer bases, the factor will be smaller than three.

Daniel: For others, it might even be a little bit larger than three.

Daniel: So it may average to three, but you really would not be served well by that formula.

Paula: And have updates to that formula been published, Dan, or is this what you’re seeking to educate on?

Daniel: Even a very, very basic extension of that formula would work remarkably well.

Daniel: So in fact, you know, we’ve been just talking about the customer lifetime value course that I teach.

Daniel: I actually teach them a formula that largely solves the problem.

Daniel: So could we have more sophisticated methods?

Daniel: Definitely.

Daniel: But at least it allows for kind of the fundamental error that that formula implies, which is really that every single customer has the same loyalty.

Daniel: They all share the same retention rate.

Daniel: Oh my goodness, yeah.

Daniel: So even if you’ve got a class of undergrads, MBAs, they’re just in their second year, they haven’t had a whole lot of quantitative background.

Daniel: Move just from one, allowing for just that one single retention rate to just allowing for two.

Daniel: It’s actually not that hard to do.

Daniel: You could still do it very easily in Excel.

Daniel: Really, that gives you the bulk of the benefit of stepping away from that formula.

Daniel: It’s really not hard.

Daniel: That’s why it’s so surprising to me why we haven’t seen this being done more.

Paula: My goodness, and I know you mentioned you have a second favorite loyalty statistic, Dan.

Paula: Tell us exactly what is the second one.

Daniel: The second one, it’s not quite as much of a statistic as it is of an interesting empirical fact.

Daniel: Okay.

Daniel: It’s that the companies can exhibit something called the retention smile.

Daniel: I find those companies that exhibit it to be particularly interesting.

Daniel: What it is is, when you think of a retention curve, basically what a retention curve is supposed to represent is the number of customers who are still with you as a function of the number of months since those customers were acquired.

Daniel: So you acquire 100 customers and then over time, some of them peel away.

Daniel: What the retention smile basically is highlighting is the fact that some of those customers can actually come back.

Daniel: Now, I think there’s kind of meta questions about, do they actually leave then or is it that customers can have kind of a hiatus before their purchasing tends to come back upwards?

Daniel: I think that’s kind of an empirical question.

Daniel: It depends on the data set.

Daniel: But empirically, if you just look at the total amount of activity from a cohort, it is a fact that it kind of can go down, go flat and then come back up again.

Daniel: And basically, if you ignore that lip back upwards, for one, you’re going to even more severely discount the goodness of that cohort.

Daniel: And especially when we start moving into, as you know, customer-based corporate valuation, which is the area of my focus, typically those companies will be severely undervalued because companies that are growing really, really quickly, you’re not really going to see a whole lot of customers in that lip because they’re acquiring so many new customers.

Daniel: So those could be really, really promising businesses because of this loyalty aspect of the customers.

Paula: That’s brilliant.

Paula: And I’ve never heard of a retention smile.

Paula: So that’s definitely something that I will be exploring a huge amount.

Paula: What I really loved actually, Dan, about, I suppose, your career already to date is the fact that it does span both the academic world and the commercial world.

Paula: So I know you take statistical valuations around customer lifetime value.

Paula: You’ve built your own companies because you’re on your second one.

Paula: I’d love to hear a bit about Zodiac first and foremost and the current company that you’re running with Professor Fader.

Daniel: Yeah, Zodiac had gotten started with Professor Fader.

Daniel: He was my advisor in the PhD program.

Daniel: And basically, we were extending some of the statistical models that he had built for customer lifetime value.

Daniel: And basically, at one point, we were like, why don’t we just make a business out of this?

Daniel: Essentially, originally, we were thinking about an application to help asthmatic kids.

Daniel: And that would have been a wonderful application of the models.

Daniel: As it turns out, the models work very well for the incidence of taking out albuterol prescriptions for asthma.

Daniel: But we said, the traditional use case of these models is corporate.

Daniel: So why don’t we just stick to that?

Daniel: So we got the team together.

Daniel: We had a co-founding team of four and made a full business out of it.

Daniel: We went down the traditional VC fast growth route.

Daniel: I learned so much along the way, but we basically sold into marketing departments.

Daniel: So we have these great statistical models, we get people onto the platform, we plug into their transactional CRM systems, they give us the data, we automatically spit out all of these insights that are driven off of well validated predictions what the customers will do.

Daniel: Then the head of marketing analytics can use that to say, well, maybe I should target these people or not those.

Daniel: These are the fallen angels, the customers who used to be inferred to have very high value that have dramatically fallen in value over the past three, six months.

Daniel: So you might have a different promotional campaign for them than for other customers who’ve never really been very good.

Daniel: So it’s a wonderful journey, grew it.

Daniel: One of our customers was Nike.

Daniel: And so they basically were making this big pivot to having a more direct relationship with their customers.

Daniel: We want to go where the puck is going to be to use a Wayne Gretzky for it.

Daniel: And yeah, so basically they wanted it all.

Daniel: So we ended up selling to them.

Daniel: If it wasn’t for that, we would have probably just, we’d probably be talking about Zodiac right now.

Paula: I’m sure, yeah.

Daniel: We had a term sheet on our desk for our A round to kind of kick off the next round of growth.

Daniel: And it was really just because their offer was just too much above the terms that we had received on the A round that we had to, you know, from a fiduciary duty standpoint, we had to go with Nike.

Paula: High quality problems, Dan.

Paula: That’s what I’m hearing.

Daniel: Yeah.

Daniel: But yeah, I’d say the other thing is they’ve been a wonderful partner.

Daniel: And one of the things that they had agreed to, in addition to allowing us to continue to be full-time professors, because obviously that’s kind of job number one.

Daniel: Yeah, we were able to carve out this use case of customer-based corporate valuation, which is really completely unrelated to marketing tactics, you know, sending who to send what mailer to.

Daniel: And it’s really much more about how much is the overall company worth?

Daniel: So yeah, so that’s kind of what kicked off starting Theta Equity Partners, which is the second company you were referring to.

Paula: Yeah.

Paula: Exciting journey, my goodness.

Daniel: Yeah, it’s, you know, we like to, I’d say we’re in this grateful position that the sort of models that we’ve built, you know, they do have a lot of practical relevance.

Daniel: And so, and also, I’d say, especially here at Theta, because this is also my main area of research study, it just exposes like, these are the problems that people are interested in.

Daniel: I mean, I’ve learned so much about, you know, kind of the open problems and what matters to practitioners.

Daniel: And then also, they’re also much more willing and able to supply datasets to be able to answer those questions.

Daniel: So, yeah, so it’s really, in some sense, it’s been an accelerant to my research, not a distraction.

Daniel: Drawing that fine line, you know, I think it’s, you have to be diligent about it.

Paula: Sure, yeah, I can hear how busy you must be.

Paula: But what I loved actually, Dan, was just the whole idea that your research is helping, I suppose, the worlds of marketing and finance really start to translate things for each other.

Paula: And I loved your insight, actually, when we talked before that.

Paula: It seems that the accounting profession hasn’t really caught up with the underlying reality that if you’re going to run marketing activity, the costs will be incurred in the short term, the benefits may take longer and be delivered over time, which is blindingly obvious to most of us.

Paula: But it is super hard to quantify and to have that conversation with people in a different department who maybe have different short term KPIs.

Paula: So it sounds like you’re seeing this throughout all of the work you’re doing.

Daniel: Yeah, that’s exactly right.

Daniel: Companies, they acquire customers today.

Daniel: They have to expense that immediately.

Daniel: They get this ongoing stream of revenue from the customers after they’re acquired.

Daniel: And the big problem is, people say, oh, we need to get the customers onto the balance sheet then because they’re an asset.

Daniel: And philosophically, I agree, customers are an asset of the firm.

Daniel: Practically speaking, it’s going to be impossible to get the accounting standards boards to do that.

Paula: Totally.

Daniel: I think the solution, and in fact, the CFO won’t want to do that because for tax purposes, they’ll probably want to depress current period income because it’s better from a net present value of your tax liability standpoint.

Daniel: Very few people actually want that.

Daniel: I think the main thing that we want is transparency about the value of the customers.

Daniel: And we don’t need to have customers on the balance sheet to do that.

Daniel: What we need is, we need the right set of simple measures that summarize how the customers are doing, how they’re repeating, how many customers we’re bringing in, the economic value that we’re driving from them.

Daniel: And if the company were to disclose those measures, investors are going to have all that they need to be able to bake that into their valuation model.

Daniel: That’s the fundamental claim that we would make.

Paula: And I would definitely reference the Harvard Business Review article that I’ve already mentioned.

Paula: So again, I’ve already linked to that one before, but I’ll make sure it’s there again.

Paula: And funny, when I was rereading it today, Dan, the particular case that you mentioned with Revolve and their IPO, I know that’s an extraordinary company.

Paula: And actually, I wasn’t a customer of the company when I first read the article.

Paula: But I think because I was researching it for the podcast, it’s now come up on my Facebook feed and now I’m buying overpriced dresses.

Paula: So I have to say it is a brilliant business.

Paula: So any ladies listening, definitely go and look at Revolve.

Paula: In all seriousness, the metrics that you mentioned, Dan, in terms of understanding the valuation of a company like Revolve, what are the four key inputs that you’re saying really should be transparently shared by companies like Revolve for investors to get a full sense of their true value?

Daniel: Yeah, nothing that most of these companies aren’t already disclosing at some point.

Daniel: Well, maybe not every company, but a bunch of companies.

Daniel: So the four behaviors that we really want to pin down are acquisition, retention, ordering, spend.

Daniel: How many customers are you bringing in?

Daniel: How long are they staying?

Daniel: How many orders are they placing?

Daniel: And how much are they spending on those orders?

Daniel: So those are the four things that we need to know.

Daniel: And so there’s the question of, all right, so how can we best get that information?

Daniel: And we’re not going to reinvent the wheel.

Daniel: What we found through our work is a lot of the disclosures that some companies are already providing at some points in time are totally enough.

Daniel: So Revolve Clothing is a perfect example.

Daniel: They just directly disclose every quarter this is how many customers we acquired.

Daniel: And they also disclose this thing that we endearingly now call the C3, which is the customer cohort chart.

Daniel: And what it represents is cohort by cohort.

Daniel: So group the customers by when they were first acquired.

Daniel: And then show the total amount of revenues that you got in subsequent periods for those cohorts.

Daniel: So over time, the total height of the bar represents total sales, but we’re kind of chopping it up by acquisition cohort.

Daniel: That’s just telling us so much about actually all those processes, acquisition, retention, ordering and spend.

Daniel: So that is a wonderful disclosure that many, many companies are already disclosing.

Daniel: We just have had this slew of new companies that are stating their intention to IPO, including DoorDash, Airbnb and Firm.

Daniel: And all three in one form or another disclose that chart.

Daniel: So again, we’re not trying to ask for things that companies aren’t already disclosing.

Daniel: What we’re doing is we’re hoping that more companies disclose them and that they disclose them more regularly, so not just in their pre-IPO perspectives.

Daniel: We want to see that being disclosed every single quarter or at the very least once a year in the annual report.

Daniel: And if we could get that, we consider that to be a win.

Daniel: So it’s disclosures like that.

Daniel: Obviously, for orders, if they just disclose total orders over time, which is a very common metric that revolve and wayfair and many other companies disclose already.

Daniel: Revenue, we get revenue, companies have to disclose that every period.

Daniel: In terms of pinning down the spend process, we get that kind of for free as long as the companies are providing some amount of disclosure about the others.

Daniel: That’s it.

Daniel: There’s really not a whole lot to it.

Daniel: It’s not competitively sensitive because again, these are all disclosures that many companies are already providing.

Daniel: We’re not asking for competitively sensitive information.

Daniel: We feel that this strikes a just right balance where companies, they’ll feel okay with disclosing it because it’s not giving away the farm.

Daniel: On the flip side, investors are getting a tremendous amount of information, so their valuation models will be greatly enhanced.

Daniel: Those are the sort of tradeoffs that we’ll be needing to make when we’re thinking about what disclosures to propose to FASB, the SEC or their international counterparts.

Paula: And then if you think about the audience of this show, Dan, we’re generally running structured points-based loyalty programs, lots of them in retail, whether it’s e-commerce or traditional retail.

Paula: What do you see?

Paula: Would you attribute a huge amount of the work that we do as an industry to driving those customer assets?

Daniel: Very much so.

Daniel: In fact, I think a lot of the work that we’ve been talking about is a way to get much needed respect to the marketers and power to the marketers, but then also accountability to the marketers.

Daniel: I think for quite a while, it’s been harder than it should be to really pin down, this is exactly the value that’s being created by marketing.

Daniel: What everyone will fully agree on is the marketing department that owns those customer relationships.

Daniel: They’re the ones that are in charge of managing the customer portfolio over time.

Daniel: This work is just a way to be able to say, this is how the goodness of the customers has been evolving.

Daniel: We really care about that.

Daniel: We can show that it’s extremely important.

Daniel: We should be giving them more responsibility, but again, it’s giving us a tool to be able to hold them more accountable as well.

Paula: Absolutely.

Paula: And to our comment earlier, Dan, it also gives us the shared language because what I’ve talked about on the show many times already is just the fact that it should be a C-suite conversation.

Paula: And I really believe with people like you and Pete and Rob driving those conversations, it’s no longer just sitting within the marketing department.

Paula: I do believe that’s where it suddenly becomes much more relevant.

Paula: And I suppose actually that brings me on to the current year and the impact of Covid.

Paula: From a statistician’s perspective, would you have any insights in terms of what’s changing behavior-wise?

Daniel: Certainly, one thing that we’re seeing, well actually maybe if I could just kind of close with one point about the loyalty programs, because I know that it seems to be a particular interest on the show.

Paula: Sure.

Daniel: And this was something that we’ve been spending a lot more time thinking about recently.

Daniel: We have this valuation hat that we have been wearing almost, not perfectly exclusively, but very, very heavily, because that’s been the focus of Theta.

Daniel: But we think that this work has tremendous implications for the management of the customers as well.

Daniel: The way that we’ll go about framing the value of some sort of a marketing tactic is we have our model for kind of the baseline.

Daniel: If the company was not to pursue this measure, this is our best guess of how the customer base will evolve, how many purchases they’ll make, etc.

Daniel: You’ve kind of broken down along those four dimensions.

Daniel: Then the question is, what impact did a particular program have?

Daniel: what this can do is it can give us kind of the baseline off of which to measure the value of that program.

Daniel: Do we expect acquisitions to be higher or lower?

Daniel: Do we expect retention to be higher or lower?

Daniel: Is it a program?

Daniel: Is it some sort of a fee that’s going to be charged?

Daniel: So then if there’s a fee, then we have a very good sense for the amount of revenue that we’ll get from the fee.

Daniel: This is a way to be able to quantify the value of that initiative.

Daniel: I think to your point about creating a common language, now we can suddenly think about a marketing tactic in the same way that a finance professional would think about a capital project.

Daniel: I think by speaking that language, whether it’s a loyalty program that we’re initiating or we want to change some of the features of the loyalty program, the idea would be you can run some sort of experiment, use that to get some sense for how those four drivers are changing and then use that to create a project finance based argument that you can present to the CFO and say, well, if we did this, this will be the initial investment, this will be the payback period, this will be the net present value, this is going to be the internal rate of return.

Daniel: And I think that’s going to be much more likely to get to basically pass the CFOs to get through.

Paula: Totally, yeah, to get the scrutiny.

Paula: No, I love that.

Paula: And again, from my own MBA, which as you know is 10 years ago now, you know, we were taught exactly those kinds of concepts.

Paula: I do believe, you know, it’s very sophisticated, but increasingly important.

Paula: So I know everybody in my industry shares a love of customers and customer centricity.

Paula: And sometimes we just need maybe more training and more education, in fact, which is exactly what you guys are doing.

Paula: So you know, when we do talk at the end, I’d love to get any guidance that you have in terms of people following your work to keep up to date with these kinds of conversations.

Daniel: Yeah, I think in addition to the training, it’s also, I think it’s mostly just if you understand that philosophy, which is hopefully something that everyone kind of intuitively gets, then if you have the right people on the team or the right external partner, that can help kind of translate that.

Daniel: And maybe the first few times you need that outside help, but then over time, it kind of becomes part of the muscle memory.

Daniel: And then you can kind of just do it all yourself.

Daniel: I think you don’t have to learn everything before you can get started.

Daniel: I think if you have the right people on the team, you’d be able to kind of generate those quick wins and then get the ball rolling.

Paula: Absolutely.

Paula: Great stuff.

Paula: So the next one, sorry, we didn’t finish on one of the points.

Paula: I got told you about Covid.

Paula: Yeah, Covid, that was it.

Daniel: So I just did, because a lot of people, they’ll show these, and everyone’s probably read those popular media articles.

Daniel: You have the effect of Covid and they see some chart of sales for restaurant meal delivery companies.

Daniel: The sales are going up or restaurant sales.

Daniel: Those are moving down.

Daniel: And certainly that’s all well and good, but what I’m wondering as a customer person is, what’s going on with the customer behavior?

Daniel: And so I took a look, actually.

Daniel: There was this credit card panel data company called Second Measure.

Daniel: And I just said, they’re friends of mine.

Daniel: They gave me this data on Wayfair and on Blue Apron.

Daniel: Wayfair is this online e-commerce only furniture company.

Daniel: And Blue Apron is a meal kit company.

Daniel: So every period you pay your regular fee, you get the box of ingredients, and you use that to prepare your meal more quickly than you otherwise would.

Daniel: I said, just give me a lot of the granular data for these firms.

Daniel: And I’d love to just take a look and I’ll write something and obviously sing your praises in the post.

Daniel: So yeah, it culminated in this little article that I wrote maybe a couple weeks ago, just comparing and contrasting, like what happened with these firms?

Daniel: And it was really interesting.

Daniel: What we saw was for both of them, there were a lot of people who were stepping their toe in the water for the first time.

Daniel: So there were a lot of new acquisitions.

Daniel: They were kind of acquisitions were going along one trajectory, the Covid hits and boom, you just see this bump upwards.

Daniel: So that was definitely noticeable across both of them.

Daniel: At Wayfair, we also saw this big boost to repeat business from all of their existing customers.

Daniel: Again, it was really interesting to see, as you’d expect, there wasn’t really much of a retention smile.

Daniel: Kind of go back to the original idea we were mentioning, two facts of the day.

Daniel: So it was just kind of going down and down and down.

Daniel: Again, as you expect, you acquire customers, you get the most orders when they were first acquired and then kind of falls.

Daniel: But then we hit Covid time and it’s as if the trajectory completely changed and you saw this camel like hump.

Daniel: Yeah, we’re just kind of bumped up again across all of them.

Daniel: And so we were seeing basically 100%, 150% growth in the amount of business that they were getting relative to what they would have gotten.

Daniel: So very, very significant increases in activity at Wayfair.

Daniel: Now at Blue Apron, we didn’t really see that.

Daniel: So like people who had been using Blue Apron, they were just kind of continuing to use them in the usual way.

Daniel: There was no bump there.

Daniel: So again, what it’s doing is it’s saying, all right, we’re seeing the sales boost, but where is it coming from?

Daniel: And what this is telling us is I think a lot of consumers right now, because they’re cooped up at home, they know they can’t go to the stores.

Daniel: They usually go.

Daniel: They’re kind of playing the field more.

Paula: Yeah.

Daniel: And they’re trying a lot of different brands that they wouldn’t have tried if we weren’t in Covid times.

Daniel: And then at some businesses, especially industries like furniture, where literally 86% of all furniture purchasing used to happen in stores.

Daniel: Now they don’t have that option anymore.

Daniel: Well, you become kind of the only game in town.

Daniel: There you’ll see existing customers placing a lot more orders.

Daniel: But in general, for those existing customers, I think the trends can be a little bit more nuanced.

Daniel: That’s on the category.

Paula: Absolutely.

Paula: Yeah, they’re great insights.

Paula: And I’ve certainly been trying more myself online.

Paula: I don’t know about you, Dan, but things like juices.

Paula: So I think we’re all becoming more health conscious.

Paula: And yet I don’t want to go to the store and risk making contact in order to get those.

Paula: So I’ve been subscribing, for example, to particular products like that.

Paula: So I definitely think there is a willingness.

Paula: I do also think, though, there’s in some ways a regression to just trusted brands.

Paula: So I think you really do see people.

Paula: I’m hearing anyway, lots of people going, OK, we trust these guys.

Paula: They’ve always taken care of us.

Paula: So I think that the level of trust required, and maybe it’s an opportunity for those newly acquired customers as well.

Paula: I do think they expect much, much more than they have in the past.

Paula: So I think there’s lots of insights coming through.

Paula: So really interesting to hear that you’re doing a lot of work in that space.

Daniel: Yeah, if you’re direct to consumer brand, this is a very crucial time for you.

Daniel: I think if you leave a very good first impression, there’s a lot of people who will be willing to give you a try.

Daniel: And then the question is, was it a good experience?

Daniel: And so this is kind of their moment of opportunity that would not have come around or would have come around at significant expense and lots of Facebook ads.

Paula: Yeah.

Daniel: So yes, I got to admit for me, certainly I’ve been ordering a lot more off of restaurant delivery companies.

Daniel: So I’m probably now a customer of all of those restaurant meal deliveries from like DoorDash and Grubhub and Postmates.

Daniel: But certainly my trusted brand Amazon, I’m doubling down on, I’m probably tripling down on them.

Daniel: And the other big one, I just moved into a new house this past Thursday.

Paula: Congratulations.

Daniel: I got to say, the purchase of the home, this was in part, I think there was a Covid part of it.

Daniel: I have a three year old child at home and to have the big backyard.

Daniel: And in general, there’s just a lot of appeal to having a little bit more space than I had before.

Daniel: Yeah.

Daniel: So yeah, just there’s so many ways that consumer behavior is changing.

Daniel: I think that the million dollar question right now is, there’s really, I think there’s two main million dollar questions.

Daniel: One is, what happens after Covid is gone?

Daniel: We have the vaccine now, let’s roll forward the clock to summer or fall of next year.

Daniel: We know that people will be changing their behavior in some ways.

Daniel: How much will they be going to the restaurant meal delivery companies?

Daniel: I think that’s a big empirical question.

Daniel: I think the other big one that’s also really underappreciated is how things look on the supply side.

Daniel: So I think everyone tends to obsess about where is consumer demand going to be?

Daniel: How is that going to change?

Daniel: That’s very much the demand side of the equation, but I think we’re seeing tremendous changes on the supply side, both in terms of existing incumbents building out their e-commerce business.

Daniel: So now they’re able to supply that market a lot more than before.

Daniel: And what effect is that going to have on all the DTC single brand companies that sell in just one category?

Daniel: I think there’ll be a lot more competition there.

Daniel: I think the other one is there’s a lot of stores that are getting shut down permanently right now.

Daniel: Sure.

Paula: Yeah.

Daniel: Restaurants, even some furniture company stores, a lot of bankruptcies and liquidations.

Daniel: And so there’s kind of this other argument where it’s more along the lines of, well, you know, we know that spending will continue to be in this category.

Daniel: Where’s that share of wallet going to go now, now that the supply side is so different from before?

Daniel: And that could also, even if you didn’t really change, you could get a ton more business just because you don’t have as many competitors around.

Paula: Well, it’s funny, actually, Dan, because I was listening back to the episode with Rob, just speaking at a conference recently, and we were talking about Net Promoter Score, and we had noticed, or I had certainly been asking him, that Walgreens, for example, their NPS was at minus four, and I was super confused, and that was the best in the industry.

Paula: So I’m like going, OK, what does that mean about Walgreens in terms of its loyalty?

Paula: And Rob was very much going, it’s ripe for disruption.

Paula: This industry is ripe for disruption.

Paula: And to your point exactly now, Amazon Pharmacy has just been launched last week, and I’m pretty sure that you, for example, would be a prime customer to literally go now and maybe not go to your Walgreens store anymore and just go with Amazon Pharmacy.

Paula: It’s incredible.

Daniel: Yeah, I fully agree.

Daniel: I think that’s finding industries where the NPS tends to be low across the entire category and finding some way to disrupt that.

Daniel: I think that is the markings of a good business.

Daniel: Along those lines, I’d say too, I think there’s a lot of debate about the grocery delivery businesses.

Daniel: And I certainly I see both sides of the argument.

Daniel: Some people are saying they’re waking up to the convenience of being able to just click a few buttons and getting your list together and then just having the groceries delivered to your door and how some of that won’t go away.

Daniel: I personally, I’ve tried and during the heat, during the worst of Covid, we were using them a number of times.

Daniel: So we kind of forced kicking and screaming.

Daniel: And we had a number of very bad service experiences.

Paula: Sure, I did too.

Daniel: And so, you know, I’m kind of saying if you force me to, you know, if you put me in the middle of a pandemic, sure, I’ll use it.

Daniel: But if I’m not, I’m going to go back to the grocery store.

Daniel: So, yeah, so that’s one where I don’t know.

Daniel: I think maybe the truth might be a little bit in the middle.

Paula: Absolutely.

Paula: And for me, I think, Dan, what will come through is an increasing focus on the power of the brand because, you know, my poor grocery experiences have tended to be in non-branded categories, you know, like the fruit and veg or whatever.

Paula: And so, you know, I’ve certainly seen brands like Coca-Cola now, admittedly, pre-COVID, but again, focusing on building loyalty programs.

Paula: Clearly, they have one of the strongest brands in the world anyway.

Paula: But for me, you know, grocery online really only works when I know 100% what I’m getting.

Paula: And so the trust factor is totally taken care of.

Paula: So, yeah, then it’s down to the logistics.

Paula: And, you know, you mentioned furniture shops earlier, Dan.

Paula: So I think it’s totally, you know, what’s happening here in Dubai.

Paula: And you cannot get a villa, for example, at the moment.

Paula: The demand has gone through the roof because everybody wants to be outdoors.

Paula: But actually, my experience trying to buy furniture online has been a little ropey, let’s say.

Paula: Well, maybe that’s, you know, only initially in Covid.

Paula: So hopefully now it’s all kind of settling down.

Daniel: No, it hasn’t.

Paula: Oh, no.

Daniel: I’m now the prime consumer because I just bought this big house.

Daniel: And so I need to get all this new furniture.

Daniel: And now I think the thing that they’re blaming on is supply chain disruption.

Daniel: And I do think there is an element to that.

Paula: Of course.

Daniel: But you make a purchase, you don’t hear about it.

Daniel: You have to literally call them up multiple times to figure out where’s my furniture?

Daniel: Oh, you know, it’s going to be coming in March.

Paula: Yeah.

Paula: And you’re like, I have a three year old who needs a bed.

Paula: What are we going to do about that?

Daniel: You told me it was going to come earlier than that.

Daniel: So, yes, that’s a category where again, to be able to get the look and the feel of it, to sit on the mattress and then to know you have the certainty that the product is in the store.

Daniel: You know, you have the ability to ship it from the store.

Paula: My goodness.

Paula: Yeah.

Paula: So many factors driving loyalty, huh?

Daniel: Yeah, I think that’s it.

Daniel: It keeps us gainfully employed for quite a while, hopefully.

Paula: Definitely does, Dan.

Paula: The other one I wanted to ask you about was very recent news.

Paula: And I suppose because you work with so many in the VC community and just kind of the equity side, there was a particular company I think I mentioned to you that was recently launched that is basically giving its customers equity as rewards.

Paula: So I’d love to just hear any thoughts you have on this as a new model for loyalty programs.

Daniel: Yeah, I think it sounds very interesting.

Daniel: Certainly, I can understand how if you gave even a really token small amount of equity to somebody that they’ll feel a compulsion to buy from that brand that they would not otherwise have under any other scheme.

Daniel: So certainly I could see there being this tremendous return on investment to that piece of equity.

Daniel: I think at that point the devil’s in the details.

Daniel: So figuring out, I saw that they had to register as a broker-dealer, so you need to have a way of first pricing the companies.

Daniel: When the stock goes into the account, what are the rules around how long they need to hold it before they’re able to sell it?

Daniel: Presumably you’d want them to hold it for a while because if you hold it immediately, then it will remove that incentive.

Daniel: So a lot of question marks.

Daniel: I can see it being logistically complicated because opening up a brokerage account is not the easiest process in the world.

Daniel: So they’ll need to really think about that.

Daniel: But if they’re able to, hopefully those would be surmountable issues.

Daniel: I think especially if there was a way to offer something like this to the whale customers.

Daniel: The big ones where for them, I could see the dollars really being there.

Paula: Totally.

Daniel: For the little winnows, certainly if you have to, they’d come along for the ride.

Daniel: And maybe some of the little winnows will become the whales in the future.

Daniel: But I think there the ROI might be a little harder to justify relative to the cost of the program.

Daniel: But certainly it gives you a lot to work with.

Daniel: If you can really buy into the fact that a $5 equity investment will create $100 worth of new spend, that’s a powerful thing to be able to fall back on.

Paula: Absolutely, yeah.

Paula: And for listeners, the name of the company, it’s called Bumped.

Paula: It was literally launched in November 2020.

Paula: And I suppose, again, it’s high publicity and lots of fundraising just closed.

Paula: But literally, I suppose, you know, when you start saying that, you know, customers stop shopping with competitors as a marketeer, that’s obviously a dream outcome.

Paula: As you said, the devil is in the detail, Dan, and I’m sure there’s very much a very specific socio-demographic, I suppose, that will even be excited by a proposition like this.

Paula: But I suppose I love innovation.

Paula: So, yeah, it’s just lovely to see kind of a brand new idea that’s coming out in the middle of an otherwise chaotic year.

Daniel: Yeah, there’s a lot of really interesting innovations.

Daniel: That’s kind of the one side where you’re giving a bit of equity to the customer.

Daniel: Another thing I’ve seen, very innovative, that’s just starting to happen right now, is selling a bit of the equity to investors.

Daniel: And by that I mean, imagine that you’re a customer of a certain company and you buy a whole bunch of business.

Daniel: Imagine it’s something like Blue Apron, where you’ve got this monthly recurring revenue.

Daniel: If you had a way of being able to sell ownership of part of that contract, that customer contract to a third party, how useful that could be to that company like Blue Apron.

Daniel: So we’re actually seeing companies do that now.

Daniel: There’s a company called Pipe, where they’re basically doing this for software as a service contracts.

Daniel: So again, it’s the same idea as like a Blue Apron, but just a different industry.

Daniel: And they’re literally selling those customer contracts to investors.

Daniel: They’re doing it in an incentive compatible way so that the companies are, you know, they want to maintain the value of those contracts.

Daniel: But what it allows the companies to do is to grow their business much more quickly because it’s expensive to grow.

Daniel: And so just the act of growth itself can force the company to raise a whole bunch of dilutive equity.

Daniel: What this offers those companies a way, basically offers them a way to be able to grow by selling part of their customer contracts and use that to finance the growth instead of having to give up 30% of their equity.

Daniel: It’s a whole bunch of the outside VC investors each time.

Paula: Yeah, creative.

Paula: I like it.

Daniel: Yeah, it’s just innovations that all kind of make sense that are all revolving around taking different aspects of that customer relationship and just doing something with them.

Paula: Brilliant stuff, Dan.

Paula: My final question was around the age-old principle of Pareto, which I think we all learned, I don’t know, in high school or something.

Paula: It’s a very simple principle, but I did see you wrote a paper which said instead of the 80-20, perhaps now it’s the 70-20 principle, which even without being particularly strong mathematically, I found more questions than answers.

Paula: So I’d love to hear what that paper was about and what’s happening with the Pareto principle.

Daniel: Yeah, so the inception story on that is there’s a fellow by the name of Byron Sharp who wrote a book called How Brands Grow.

Daniel: I’m sure many of the listeners will have read his book.

Daniel: And he has some wonderful insights.

Daniel: But one of the principles that he really falls back on very heavily is that you really don’t need to do surgical customer acquisition.

Daniel: It’s not really going to move the pin very much.

Daniel: What you want is to grow market share.

Daniel: And that’s what creates double jeopardy.

Daniel: You get this double benefit by being kind of big in the category.

Daniel: And so he’ll throw out, I think he had said at some point that it’s more like 50-20, that the best 20% of your customers will bring about 50% of your sales.

Daniel: And the point was, yeah, 50%, you know, reasonably big number, but it’s certainly nowhere close to 80-20.

Daniel: And we found that that was kind of a little bit too, that that wasn’t quite right.

Daniel: And I wanted to kind of dive in, because we’ve done all this work at Zodiac, and we were seeing these companies where they were driving a lot more of their value from a smaller proportion of their customers.

Daniel: And so, again, rounding it out, going back to second measure.

Daniel: I said, hey, second measure, can you give me this data set that can just allow me to prove this out?

Daniel: You know, just look at customer behavior.

Daniel: So they did.

Daniel: And what we found was it’s more like 70-20, that if you take the best 20% of your customers outside the CPG category, so this is more like direct to consumer, which is an important distinction.

Daniel: I think a lot of the work that Professor Sharp had done was with CPG.

Daniel: We found it was more like 70-20 than either 50-20 or 80-20.

Daniel: But that there was a lot of interesting variation across companies, and so we spent a lot of time kind of diving into that as well.

Paula: But I’m relieved to know that we’re not turning the model on its head.

Paula: We can still go after our super fans and really look after our top customers and that the principle still applies.

Paula: It just depends what vertical you’re in.

Daniel: Well, I’d say the other silver lining, which I’m surprised that I hadn’t heard of this before, was when you move from sales, sales is not what puts money in your pocket.

Daniel: What puts money in your pocket is profit.

Daniel: Companies, they want to generate profit.

Daniel: They don’t want to generate.

Daniel: They want to generate sales to the extent that it creates profit.

Daniel: And as soon as you move to contribution profit, then all bets are off.

Daniel: Actually, 80-20 gets conservative.

Daniel: It’s probably more like 90, 95-20, maybe even above 120.

Daniel: So all of those other 80% of your customers, you might be losing money on them, actually.

Daniel: So again, when we talk about super fans, this really plays into that argument.

Daniel: Just empirically, I think, even though we didn’t have as much data in the specific data set that Second Measure had supplied to us, in every example that we’ve seen where we had profit data, the ratio was significantly more concentrated for profit than sales.

Paula: My goodness, wow.

Paula: And again, certainly because I’m in B2B, Dan, as you can imagine, we’re laser focused on where’s your profit coming from.

Paula: And sometimes clients are not profitable.

Paula: So plenty of consultants I know would literally have to exit and fire the client, which is controversial.

Paula: But when we do have that laser focus and the opportunity cost, absolutely.

Paula: It’s super important to have the right business.

Paula: So totally agree.

Paula: So thank you for those insights.

Paula: We’ve covered a huge amount today, Dan.

Paula: Is there anything else?

Paula: I know we haven’t maybe given enough to corporate based company valuations.

Paula: Do you want to maybe give us a closing summary on where you’re going with that work?

Daniel: Well, I think we covered a pretty decent amount, but yeah, I think there’s obviously a whole bunch of new dimensions that I’m exploring to the academic work and that we’re exploring to Theta.

Daniel: So through Theta, we have a new software platform that we’re going to be creating.

Daniel: It’s just going to be maybe a month and a half from now before it’s launched.

Daniel: What it’s going to allow us to do is basically to take in transactional data in much the same way that Zodiac had done and be able to spit back out all these CBCV outputs much the same way that Zodiac had spat out the marketing outputs.

Daniel: What we hope is it’s going to allow us to even further democratize access to these sorts of methodologies.

Daniel: I think there’s a lot of brands where imagine you’re that fast growing DTC brand that you don’t have a whole lot of budget, but you really want to know how are my customers doing.

Daniel: To pay a bespoke consulting type fee arrangement might be a bit more than your budget can handle, but I think by reducing our costs, we may be able to reach a price point that would be appealing to them.

Daniel: In terms of the academic work, you mentioned the impact of Covid.

Daniel: I’m actually right now maybe a month away from having a paper that’s specifically focused on what is the causal effect of Covid on customer behavior.

Daniel: We’re taking data from another credit card panel data company called Ernest Research.

Daniel: They’re the biggest credit card panel data firm.

Daniel: We’re using their data in conjunction with a whole bunch of other data sources, geolocation data, employee time tracking data, to be able to say Covid caused this effect in customer behavior.

Daniel: We’re very excited to be able to release that, but again, probably more like a month or so before those results will be out.

Paula: My goodness.

Paula: For people who want to follow your work, Dan, where is the best place for them to link in or connect with you?

Daniel: No pun intended.

Daniel: LinkedIn would be one.

Paula: I entered that one.

Daniel: The other one would be Twitter.

Daniel: LinkedIn is where I’ll tend to put the articles.

Daniel: I’ll also put some of the longer form posts.

Daniel: On Twitter, it gets some of my more speculative posts.

Daniel: I’ll certainly cross post a little bit, but you’ll see a lot more of the small tidbit-y type content that just happens to come to mind one day and I’ll just put it out there.

Daniel: Definitely do follow me on both.

Daniel: D underscore mccar is my Twitter handle.

Paula: We’ll link to that as well in the show notes.

Paula: Is there anything else you wanted to mention, Dan, before we wrap up?

Daniel: Thanks so much for having me.

Daniel: This has been wonderful.

Daniel: As you can tell, I tend to focus traditionally a little bit more on the corporate valuation side, but as you can see, there’s just so much to think through, so many implications for how it ties to the management side.

Daniel: So I really hope that we can continue to build this bridge over the course of the next year or so, just make this common language both for marketers and for finance people.

Paula: Wonderful, wonderful.

Paula: Well, I’ll certainly be keen to check in with you in the future and stay in touch down because I will again say I’m super grateful you guys are doing this work and thinking it through for us as loyalty professionals.

Paula: So from my side, I just want to say Daniel McCarthy, Assistant Professor of Marketing at Emory University, thank you so much from Let’s Talk Loyalty.

Paula: This show is sponsored by The Wise Marketer, the world’s most popular source of loyalty marketing news, insights and research.

Paula: The Wise Marketer also offers loyalty marketing training through its loyalty academy, which has already certified over 170 executives in 20 countries as certified loyalty marketing professionals.

Paula: For more information, check out thewisemarketeer.com and loyaltyacademy.org.

Paula: Thanks so much for listening to this episode of Let’s Talk Loyalty.

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