CMO Confidential Episode Summary: Peter Fader Discusses Warby Parker's IPO Through CLTV Lens

Podcast Information:

• Title: CMO Confidential
• Host: Mike Linton
• Guest: Dr. Peter Fader, Professor at the Wharton School
• Episode Title: Peter Fader | Wharton School | The Warby Parker Case - I Can See Clearly Now With My CLTV Glasses On
• Release Date: January 6, 2025

Introduction to Customer Lifetime Value (CLTV) and Company Valuation

The episode opens with Mike Linton introducing Dr. Peter Fader, a seasoned marketing professor and expert in predictive analytics. Dr. Fader provides foundational insights into how customer data, particularly Customer Lifetime Value (CLTV), is instrumental in valuing companies.

Key Concepts Discussed:

• Predictive Modeling: Dr. Fader explains his extensive work in building models to forecast customer behavior, including acquisition rates, retention, purchasing frequency, and spending patterns.
• Integration with Finance: He highlights the collaboration between marketing and finance teams to decompose revenue into customer behavior metrics, thereby bridging the gap between these departments.

Notable Quote:

"It's all about acquiring, retaining and developing customers, period."
— Dr. Peter Fader [04:38]

Warby Parker's IPO: Expectations vs. Reality

The core of the discussion revolves around Warby Parker's Initial Public Offering (IPO) and its subsequent stock performance. Dr. Fader and Mike delve into the expectations set during Warby Parker's IPO and how these aligned—or misaligned—with actual performance based on CLTV analysis.

Highlights:

• Pre-IPO Analysis: Dr. Fader mentions their early analysis predicting Warby Parker's stock should be valued around $22 per share based on their unit economics.

  Quote:

  "We say they're worth about two, two and a half billion dollars overall."
  — Dr. Peter Fader [07:14]

• Market Reaction: Contrary to their predictions, Warby Parker's stock surged to $54 a share post-IPO, reflecting a significant overvaluation from their perspective.

  Quote:

  "They're worth $6 billion for a very fleeting moment or a couple of weeks."
  — Dr. Peter Fader [07:52]

• Model Reassessment: Despite the initial overvaluation, Dr. Fader emphasizes confidence in their models, asserting that even with optimistic scenarios, the valuation wouldn't justify the inflated stock prices.

  Quote:

  "Suppose you give yourself the most optimistic but potentially conceivable assumptions... you could get up to maybe, maybe $35 a share."
  — Dr. Peter Fader [10:40]

Critical Analysis of Warby Parker's Metrics

A significant portion of the episode discusses discrepancies in Warby Parker's reported metrics, particularly Customer Acquisition Cost (CAC).

Key Points:

• CAC Misreporting: Warby Parker calculated CAC by dividing acquisition costs by the total active customer base in a period, inadvertently lowering the CAC figure.

  Quote:

  "They divided by the total size of the active customer base in a given period. So it had a much larger denominator. So CAC makes it lower."
  — Dr. Peter Fader [16:09]

• Implications: This miscalculation led to an understatement of CAC, skewing the perceived health of their unit economics.

• Simulator Tool: Dr. Fader and his colleague developed a simulator to assess under what conditions Warby Parker's stock price could be justified, consistently finding that the high valuations were unsupported by their models.

  Quote:

  "There was no scenario where you could justify the kind of stock price that they were momentarily enjoying."
  — Dr. Peter Fader [10:40]

Warby Parker vs. Peloton: The Tortoise and the Hare

Drawing a parallel with another case study, Peloton, Dr. Fader contrasts the two companies' approaches to growth and valuation.

Comparative Insights:

• Peloton (The Hare): Aggressive expansion and high growth expectations led to eventual stock price correction.
• Warby Parker (The Tortoise): Steady adherence to their core business model and robust unit economics despite initial overvaluation.

Quote:

"The tortoise and hare metaphor is so shockingly appropriate."
— Dr. Peter Fader [20:28]

Lessons for Marketers and Financial Teams

The discussion culminates with actionable insights for marketing professionals, emphasizing the importance of data-driven decision-making and collaboration with financial teams.

Practical Advice:

1. Understand Underlying Metrics: Break down company performance into acquisition, retention, purchase frequency, and spending metrics.
2. Cohort Analysis: Analyze customer behavior on a cohort-by-cohort basis rather than relying on averages to uncover deeper insights.
3. Collaborative Forecasting: Work closely with finance to align marketing strategies with achievable financial outcomes.

Notable Quote:

"Your company's not different. Okay. Your company is going to obey the very same laws of gravity."
— Dr. Peter Fader [30:05]

Conclusion and Final Thoughts

Dr. Fader concludes by reiterating the significance of adhering to robust analytical frameworks and resisting the temptation to chase transient market trends. His final thoughts underscore the value of patience and consistency in maintaining a sustainable business model.

Final Quote:

"It's going to manifest. People are going to see it and eventually the stock price will rise."
— Dr. Peter Fader [28:30]

Mike wraps up the episode by encouraging listeners to apply these insights to their own marketing strategies, reinforcing the episode's key takeaway: solid, data-driven marketing grounded in customer behavior metrics is essential for long-term success.

Episode Takeaways:

• CLTV as a Valuation Tool: Understanding and applying CLTV provides a more accurate picture of a company's financial health than market sentiment alone.
• Data Accuracy Matters: Precise measurement and reporting of key metrics like CAC are critical for informed decision-making.
• Consistency Over Hype: Adhering to a proven business model and maintaining steady growth can withstand market volatility better than aggressive, hype-driven strategies.
• Interdepartmental Collaboration: Effective communication and collaboration between marketing and finance teams lead to more aligned and sustainable business strategies.

For further insights and detailed analysis, listen to the full episode of CMO Confidential on Spotify, Apple Podcasts, or YouTube.