Episode 84 Peter Fader, The Wharton School & Theta Equity

Peter Fader is the Frances and Pei-Yuan Chia Professor of Marketing at The Wharton School of the University of Pennsylvania, as well as co-founder of Theta Equity, a next-generation data analytics firm.  Much discussion about Customer Lifetime Value (CLV), the concept that has animated Pete’s academic career and business endeavors.  Pete’s fascination with numbers and data leads to an array of other subjects – baseball player performance, the sales trajectory of hit records, and even the serial numbers on dollar bills.  The hosts and Pete trade notes on what their “walk-on” music would be, a topic that exposes stadium rock as a rare gap in Andy’s range of expertise.  If you think Charlie responds to this discovery with grace and restraint, you must be new around here.

Transcript

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Pay me, you owe me. Hello and welcome, ladies and gents, the Middle Market Musings, a podcast dedicated to the people and ideas of the middle market. We're delighted that you have chosen to join us today. My name is Charlie Gifford of New Heritage Capital and I'm Andy Greenberg of Greenberg Radiations Capital. Today we're speaking with Peter Feder, the Francis and Peiwon Cha professor of Marketing at the University of Pennsylvania's Wharton School and co founder of Theta, a leading customer lifetime value data analytics firm. Before we begin, we'd like to thank Greenberg Radiations Capital and New Heritage Capital. We hope you enjoy today's episode. Pete Fader, welcome to the big stage of Middle Market Musings. I am so pleased to be with the two of you. Your LinkedIn profile aptly says Wharton Marketing professor co founder of Theta Quantner. You've been on some big stages, but this has to count as one of the biggest. This is gonna be a moment I treasure forever. I just hope you're not too nervous. We're very intimidating people. Pete. Godspeed. So I'm gonna set the table because there's so much for us to talk about. I've been excited to get to know you over the past couple of years. And like a lot of our listeners, my career has been steeped in what I would call top down valuation metrics, multiples of ebitda, multiples of revenue as benchmarks in valuing a business. But you've made your mark academically and in your business ventures with something called customer life lifetime value, which I've come to see as more granular and maybe representative of where the future is going. So before we go back to the Pete Fader origin story, why don't you tell us a little bit about that? Like everyone listening to this, I believe, I pray at the shrine of discounted cash flow. I just say that it starts at the customer level, that if we can say, how long are you going to stay, how often are you going to buy, how much are you going to spend? If we can project that into the future and we can, we can come up with a DCF for each customer and if we add that up, that's the value of the firm. So it's kind of a sensible way to go. It just wasn't possible until relatively recently. And the mindset associated with it is something we're still working on. So if the way that, that I explain the difference to people is take a dental practice back in the day, there's a rule of thumb. Dental practice is worth $3,000 a customer, 5,000 patients in the practice, it's worth $15 million. Where you come in, as I understand it, is saying, well, that's actually 5,000 lines of data. 5,000 different customers, different ages, different utilization. So how is it that the, the insight to value business in that way has developed relatively recently? Because back in the day organizations didn't have that data. They didn't have the capability to tag and track, they didn't have the capability to store that data, and they certainly didn't have the capability to do any meaningful analysis with it or insights from it. And today, all that stuff, table stakes. If somebody is building yachts and they make four a year, you're not going to learn more about their business by exposing them to your algorithm. Broadly, what are the characteristics of a business that benefits from your analysis? It's less about how much stuff you produce and more about the differences among those that you sell it to. So I don't really care that much about B2B versus B2C. To me, the biggest distinction is are there a lot of customers and are they kind of different from each other or are they kind of few and homogeneous? Most customer bases are fairly heterogeneous. There's that long tail as well as those one and dones. And if there's a desire to better understand that, better leverage it, and to make not just nice to know marketing insights, but mission critical financial insights from those differences. Step into my office. So Pete, maybe we could talk. Rewind the clock. Where did young Pete Fader grow up? What was he into? What was he like? Yeah, I hate to talk about that because I grew up in a place I'm embarrassed to admit, Long Island. I grew up obsessed with two things, one of which I'm still proud of, the other, which I'm embarrassed to admit, the New York Yankees. So I was just a kind of a. Which one the Yankees was proud or embarrassed? That's important. Thank you. Deeply embarrassed. You seem to be a man of great judgment. That's a good time. I was, and I didn't know better, so I'd kind of. I was really into baseball statistics long before there was Bill James, long before there was the kind of, you know, moneyball stuff that we have now. I don't want to say I was inventing that, but I was thinking along those lines. So I was just always obsessed with kind of data and numbers and patterns. The other thing that I really did spend a lot of time on and still do now is I collect dollar bills with interesting Serial numbers. I own the domain name coolnumbers.com. it's down right now, but the mobile app coming soon. So I really have this affliction for numbers and patterns and you know, kind of what it all means. And I'm just the luckiest guy on earth because here I am, you know, 60 years later, still doing the same thing. I have a question for the two of you that this may be the most globally important question asked today. Should Andy Pettit be in the hall of Fame? I'd say no, he should be in the hall of. Damn good. But oh boy. How many rings did he win? A few. And lots of playoff wins. Yeah, I mean I'd have to look at the numbers and I don't know what I mean. I know wins was always a key component. Get to 300 wins, you get into the hall and now nobody's sniffing. I think Justin Verlander is the closest and I don't think he's going to get there. So there's got to be different metrics. Just the way the game is played, it's a different game than it used to be. That's kind of the quantitative test take test case because, you know, based on, you know, wins above replacement and those other metrics. He is on the line. Yeah. And believe it or not, as much as I like all the nerdy baseball stuff, I do not like wins above replacement. Why? Because you don't feel like it's accurate? I think it's a principled statistic. It's just kind of a made up metric. It doesn't have good grounding. There's no real science behind it. So like, and this is going to be really relevant for us because the models that I build are generative models. It's not machine learning. It's stuff that has a behavioral story underneath it. We'll get into all that. WAR is unprincipled in that regard. I like what it represents, but I don't like where it comes from. So of the all the new baseball statistics and I don't even. I see them and I have no clue what they mean. What are the ones? So other than rbi, era, batting average, obviously, slugging percentage, on base percentage, ops, what is the one new statistic that me as a baseball fan or our listeners who are listening should pay attention to? So I'm not saying it's necessarily the most important one, but the one that just vibes with me really well is the Pythagorean formula. I don't know if that one's Come across your radar. Another billion. I know it, I'm familiar with it, but Andy doesn't, so maybe you can tell him I'm familiar with the Pythagorean theorem. A squared plus B squared equals C squared. Is that what we're talking about? No, I feel like you're talking about something else, Pete. Yeah. If you look at a team's, the number of runs they've scored and the number of runs they've allowed. But if you take runs scored, same kind of Pythagorean type thing, that would be the expected winning percentage for a team. That's going to be a shockingly good proxy for a team's winning percentage. Really, really good. This is one of the things that Bill James stumbled into in the early 80s, and it turns out there's actually really good math, there's really good science behind it. You could tell a story about team performance that would lead to that formula. It's not just something that just like that was made up like war is. And it turns out it's a really good way to tell if a team is on track. Sometimes a team is, you know, especially hot in the beginning of the year or, you know, they win a bunch of one run games, but losing a bunch of blowouts, they're not as good as their record might seem. The Pythagorean formula works really, really well. What do you think about the people that say the game is being ruined by the bean counters and the whole, you know, Casey Stengel, Don Zimmer, Tony La Russa, you know, approach to managing with or Earl Weaver, managing from your gut. Not what the bean counters upstairs tell you when to pinch it or bring in this reliever because the matchups are overwhelmingly to the positive. Yeah, you might be surprised because I'm so into the math and the numbers, but I am old school. And so all those legendary names you mentioned, they had something right? So I'm somewhere right down the middle that we should be cognizant of out of those metrics. We shouldn't be dismissing them, but we shouldn't be wholly reliant on them either. Balance. Right. Balance. Our world lacks balance. I'm imbalanced in a lot of things, but in this one, I'm right there with you. Including this youthful interest in sports and numbers. What else were you into in high school before heading to mit? Acapella singing? Yeah, I was a big part of the school choir and I love doing the school plays and I love wandering down up in the hall, up and down the Halls of the school with my singing different 50 songs. High tenor, high tenor, one with the soaring, all that. Not anymore. Do you still sing? Not when anyone's listening. Yeah. I was never really that good at it, but I just found great joy and just, you know, getting a group together and doing that sort of thing. So, yeah, I kind of miss it. And, you know, you know, crank up the old. I've sung a little on the podcast. Did you sing when. When we were doing the podcast from Las Vegas and, you know, we had to come up with Walk on music. I sang a little bit of Elvis. Did you sing Please don't do it. Please don't do it? No, I'm not. I'm not. Okay, good. I have my Walk on song, though. I wouldn't try to sing that. What's your walk on? All right. One of my favorite songs. Our answers are going to be very different. If you were a reliever, you were the All Star reliever on the Philadelphia Phillies, and you're coming in at the bottom of the ninth and seventh game of the World Series, what would they play on the sound system? Oh, geez. I was thinking about Citizens bank park, you know, the Walk up, you know, more as a batter. All right, so I was. I did a lot of work with Major League Baseball, and I'm happy to talk all about that. And I was hanging out with Tom Garfinkel back when he was president of the Padres, and we were just kind of sitting up there in the owner's box, and that's what we were talking about is what's your walk up song? I had no idea. But there was one particular awful rap song that was just sort of, you know, ear worming at the time. Thrift Shop by Macklemore. That's a great song. I like the song. That's my walk up song. That's good. By the way. I would have not. I did not have that on my bingo card. So, you know, keeping us on our seats. Mine would be sabotaged by the Beastie books. Okay, wow. So there you go. From a Long island guy. You know, I'm trying to. I'm doing my best here. What do you got? Andy's is either something from what do we got? Captain Antonio or Air Supply. Air Supply. You're all that I love. Is that that song? No. You're all that I Need. Out of Chance. Yeah, that one. That or Christopher Cross or something like that. Really edgy. No, I can't even. So we had this discussion in Las Vegas. It was different because it was Walk on song for a professional event. My choice was A Little Less Conversation by Elvis, which was appropriate. That was a good. That was a solid, solid choice here. Particularly in the 60s. The. I am stumped now. I was not expecting. Well, it's a different thing. Walk Up Walk on song as a reliever, I will make it easier for you, but how about your Walk up song as a hitter, Is that going to make it easier for you? I'm gonna go with no. I mean, how about just a song? Andy, I. I know I need time to. I need time to. I wish I had time. I didn't have time. Garfinkel said, what do you want? But Pete. Pete killed it. Pete killed it with Thrift Shop Eddie. We'll just give you American pie by Don McLean. Why don't we move on? So, Pete, childhood in Long island and then you found your way up to the great city of Boston or the great city of Cambridge, it sounds like. Right. Ymit. And what was your time there like? Well. Ymit. Cause it's a great place to crunch numbers and hang around with other people who do. It wasn't an active choice. I applied right here to Penn to our management technology program. But I didn't want to get boxed into any one major. I know I like to crunch numbers, but it's not like I wanted to do any one thing. And MIT just gives you that freedom and flexibility just to kind of pop all around and explore and not be committed to a major. I mean, here you're in Wharton from day one. I just didn't want that. And it turned out to be just an awesome place. Both, you know, as a physical location, wonderful city, wonderful region to kind of grow up in, as well as great people, as well as exactly what I bargained for. A chance to kind of explore broadly, find out, learn a lot of good math and find some interesting areas to apply it to. So as a senior, I'm just, you know, I'm thinking I end up with Goldman Sachs or McKinsey. But this one professor came up to me and she said, you ought to get a PhD in marketing. And I said, you ought to get your head checked. What's wrong with you? I'm a math guy. I'm a math guy. I'm not a marketer. I'm not kidding. She would confirm that. And then, Pete, what do you think she saw in you that caused her to see. I took this course on marketing models. I was actually at the time modeling, believe it or not, song movement through the Billboard charts. So the songs, do they rise quickly and fall slowly or rise slowly and fall quickly? And how does that vary based on the genre and the artist? So I did this very thorough analysis of song movement and she saw some potential there. I thought she was a nut and, and I made the mistake of listening to her and you know, here I am, 40 something years later. Pete, did your, did your analysis ever lead you to say, and taking two songs that haven't been released yet, was there a correlation between something that made you say that's going to do well on quote unquote, the charts and this one's not? Or was it just like taking looking backwards and saying did well and what didn't do well and what was their movement on the top 40 charts? I love that question, Charlie. It was more the latter. Just, you know, what are the patterns? Full stop patterns, the data. Yeah, but at the same time we did look for the characteristics. What genre music is it? How well established is the artist? Is it a solo or a band? Is the lead, you know, male or female? I can't remember all those characteristics. So we did start to uncover the characteristics. I can't even remember what the results were. But to be able to make those very, very early forecasts based on those characteristics of how high the song will go, how long will it last and then, you know, fast forward. I ended up doing a lot of work in the music industry as well, demonstrating, you know, I was the expert witness for Napster. Were you really? I was, I was, I was the guy saying Napster is the greatest thing for the music industry. They didn't believe me. The judge didn't believe me. She completely dismissed my research. But I always had a passion for music as well. I think some of our best conversations are you can't predict where they go, but in this idea falls in that category. Somebody two weeks ago sent me a song from Spotify and I'm a voracious consumer of Spotify. And he sent me the song and I was like, my goodness, that is a fantastic, fantastic song. And then my friend followed up and he's a musician and he goes, that's AI and it was an artist named Nick Hussles on Spotify. And it was kind of like a groovy jammy R B up tempo with a lot of funk, which is the type of music I love. And I was like, this is, this is fascinating and terrifying at the same time. And his point was like, yeah, but I know you like music, but as a musician I listen to that and say, there's no soul there. There's no grit, there's no. It's just too perfect. As opposed to, you know, listening to Aretha Franklin from 1960 and so. But to me it's just like, it's just such a. Like, is that where we're going now? Is AI going to put all the artists out of work as well? It won't put them all out of work, but it's going to have a big impact. And by the way, if anyone's interested in both the CLV work that I'm doing and music, my partner in crime, Dan McCarthy, if you Google his name, Dan McCarthy, CLV songs. He has a whole Spotify playlist of AI generated songs about different aspects of customer lifetime value. Every class session that he teaches at the University of Maryland, he begins with. With an AI generated song about that aspect that he's gonna cover. So on one hand, fascinating. It lacks soul and grit and everything that you said, Charlie. On the other hand, it just gives people capabilities to introduce content, to create engagements, to, you know, entertain and amuse in ways that were just unthinkable. So Net Net, we're better off. And I was entertained and amused. But it was introduced to me by a musician who says, do I want my kids growing up to be musicians right now? And I'm not sure you would. That's a great point. Yeah, probably not. You want to do the computer programming. You could say that about any application. I mean, this is the vast subject of our time, right? But let me say the music industry has created its own demise because it's so badly run, it's so dysfunctional, they're so customer unfriendly that they've just opened the door to this devastating technology and they don't know what to do. As opposed to other areas of entertainment, like look at the streaming services and so on. They're gonna be fine. But music has written its own death certificate. And that goes back to the whole Napster thing. It was their fault back then, Pete, when I brought up Spotify, you held up a picture which of course our listeners can't see. You were trying to make a point about something to do with Spotify. I invented Spotify. You and Daniel AK well, that's the thing. Daniel doesn't know that. So he and I are buddies and I make a pilgrimage to visit him every year in Stockholm. But yeah, back when I was doing all this Napster stuff, I was saying the world needs what I called back then the Celestial Jukebox. A service where you'd pay say, $15 a month. And not only would you have access to, but you would be encouraged to consume as much as possible. And this was years before Daniel made Spotify. So it's kind of the obvious thing that that's what the industry needed to overcome its ills. And even today, the industry hates Spotify, which is nutty. So that's a whole separate rant. Did you ever deal with Barry McCarthy by any chance? I sure did. Wharton alum, CFO of Netflix. CFO of Spotify, CEO of Peloton. Sure thing. I invited him to give a talk here years ago about kind of lifetime value for Netflix. Oh, yeah, yeah. Impressive guy. This conversation is reinforcing my impression that while your interests are, you know, very varied and small c catholic, the underpinning has been a pretty straight line, starting with the marketing, building blocks of value. You know, what. What do people buy? How often do they buy it? How often do they come back and, you know, what is their half life as a customer? I mean, is that fair? Did you come to this at the beginning of your academic career? No, no, no, no, no, no, no, no. At the beginning, I was doing other stuff. It was more kind of game theory and other sorts of things, but I was infatuated by the emerging data source. The same nutty professor who talk. Keep in mind, this is 1982 or 3. She says, we are building the electron microscope of the customer. Pretty soon we're going to be able to tag and track and predict and understand and leverage customer behavior in a way that's just unthinkable now. And she was completely right. I mean, she said all this when Zuckerberg was in diapers. And she was so right. And I just listened and, you know, right place, right time. Here we go. So a lot of the kind of obvious things you just mentioned, Andy, no one was really thinking about it back then because it was impossible. And so I was kind of early on asking those questions, coming up with simple statistical methods, and then thinking very broadly about how to apply them to sports and music and packaged goods and anything else. MIT has this somewhat famous tradition of inventive, complicated practical jokes called hacks. I'm curious whether, during your time at mit, Pete, you got into the hacks at all? Not directly, but I took great pride in watching them happen. Many of them were done by people I knew well, Harvard, Yale, football game thing. I lived in a dorm that throws a piano off the roof every year. It was just part of the culture. We didn't, like, think that we were, like, weird and special. It's just what we did. So you, were you, were you part of any notable acts? No, no, no, no, no. But you know, but I'm certainly micro level stuff that wouldn't be like interesting to normal people, but just day to day life. Like, you know, we're thinking about going out to dinner. We're not sure which restaurant to go to. There's five of us. So we needed to invent a five way Rock Paper Scissors, which is much harder than you think. And we end up spending the whole night sitting in the lounge trying to figure out what would be a five way version of Rock Paper Sitter. So, so that kind of just unbounded point, I got asked because I, I actually have thought about how you would add even a fourth implement. Yeah, Rock Paper Scissors. So, so it was just went through the culture of just thinking outside the box and, and all that. And I kind of missed that. And I tried to bring some of that both, you know, out of the box thinking, that kind of creativity to my, my, you know, Wharton students here, they need it. They desperately need it. So it's a nice combination here of being kind of the Pied Piper to let them let their freak flags fly and not to be so straight laced and button up and careerist. You're listening to Middle Market musings brought to you by New Heritage Capital and Greenberg Variations Capital. Before we get to Zodiac and then, you know, your prior company and then Theta and your partner in crime, Dan McCarthy, going back, I guess circa 2000, what was Pete Fader thinking about and working on? Great. So in the late 1990s, I had kind of stumbled into a lot of the questions that you asked Andy. How long is this customer going to stay? How long, how often are they going to buy? I was focusing in more on products. So, you know, can we better forecast new product or new album sales? A lot of music stuff. But it was right around 2000 is when we made the pivot to customer lifetime value. So let's take this, these questions we're asking and kind of turn them 90 degrees. So instead of how much of the product will we sell? How often will this person buy it? And again, right place, right time, people were just starting to ask those questions. The data sources were just starting to come together, E commerce and so on, and did a lot of just, let's call it pure academic work. And then the commercial just sort of followed naturally from there. The first company that I ever heard talk about its customers in this way was qvc. The, you know, the Online marketing retailer based near us in suburban Philadelphia and now going away, but, you know, probably was circa 2000, you know, having a discussion with the people there. And they, you know, our customers, they are universally women. These are their demographics. They have a half life. You know, they are active buying from us for a certain period of time. And it was a level of granularity on the customer that, you know, seems rough now. Yeah. But at the time it was like, cool. And you're absolutely right. I am standing on the shoulders of giants like, you know, Joe Siegel and the other people who kind of got qvc. Founder of qvc. Exactly. Yeah. They thought about this stuff, these ideas of customer lifetime value. They were talking about it, not doing it that well, but talking about it decades before I was number one. The kind of product development and organizational design that would be surrounding the customer inside of the product. Give them all the credit for that. So I was just kind of taking some of those ideas and then bringing a bit more rigorous math and better data to do that stuff better. And finally to bring it to other domains outside of selling, you know, schlocky stuff on late night tv. Let's bring it to pharmaceuticals and sports and music and. And hospitality and other industries. Same mindset, but just. It was just unheard of in those other sectors. Before we leave, QVC, the news this week. They're in chapter 11. So you can be at the head of the pack, but you got to stay correct. And they didn't. They got a little arrogant, they got a little lazy. And I've spent much time out there, you know, offering a lifeline. Clients saying, let's do the lifetime value thing. And they've said, nah, we're good, no loss. Are you a math professor or a marketing professor? I am a marketing professor, which is kind of interesting because I'm teaching this crazy, nasty math course that would be, on one hand, ridiculously complicated compared to most marketing courses, but on the other hand, ridiculously simple compared to most math courses. I'm threading that needle and again, finding a sweet spot with it. But isn't it interesting? It sounds like you got your degree at MIT in math, Right. But you're a marketing guy. Undergrad degree was undergrad in marketing, but then PhD was in marketing at the time. Fascinating. Yeah. So let's get into the concept, the idea of customer lifetime value. And, you know, I think you and I both have a deep understanding of it, but maybe for Andy and our listeners, you can really break it down and just apply it to the investing world. For people that in that are in venture capital, private equity, why does it matter? Maybe you can give us a quick example of how you can apply it. So I gave you the kind of very quick bottom up explanation already that it's just for me, fun to project. How long will this customer stay? How often will they buy? How much will they spend? But now let's get from the top down. If you think about revenue, which is something that you guys and your listeners spend a lot of time thinking about, revenue isn't a thing, okay? Revenue is a composite of lots of different behaviors. Every dollar a company makes is either from a new customer you just acquired or an existing one who stayed a little bit longer or bought a little bit more, or spent a little bit more. And so let's take revenue and decompose it, or cash flow or ebitda. Let's decompose it into those four fundamental atomic behaviors that I just mentioned. Customer acquisition, retention, repeat, purchase, spend. So even if you don't care about the marketing origins or use cases, even if all you want to do is to project revenue, by understanding this more granular story associated with it, we can do a better job of forecasting revenue over longer horizons more accurately and with a better diagnostic understanding of why it's leveling off. Is it because we're not acquiring as many, not staying as long? It's just revenue forecasting done right again in a principled, scientific way. In the same way I rag on war for sports, a rag on revenue forecasting, the way Wall street analysts do it, exactly the same philosophy, break it down. I happen to agree with you on that. I think that DCF analysis, it's a convention, it can be done better or less well, but it's fundamentally based on a series of high level assumptions about how a business is going to perform. And you know, if you do what I do or what Charlie has done for some period of time, you see many more instances where DCF or similar analysis resulted in overvaluation, rather an undervaluation. Right? So I think that that creates the appetite and if you know in the past 20 years the ability has developed for more granular, granular analysis, why not do it? So trying to apply CLV to a middle aged man who can't see very well as he used to readers, Warby Parker and thinking about how they think about customer lifetime value in their business, is that a good example? Well, in that regard, no. In other words, they don't do as much with it tactically as other firms do. So we can apply it to Warby Parker, but they themselves, if you think about what Warby Parker sells, glasses. That's basically it. If they were really thinking about lifetime value as broadly and regularly as they'd like, they'd be selling clothing and accessories and all kinds of other things to try to deepen the relationships with their customers. Now more power to them. It's a tortoise and hare race, and the tortoise things work very well for them. But other companies like Nike, that kind of bought my company, you know, went from athletic shoes to apparel to, you know, just a much broader lifestyle company. They want to be, you know, they want to create and earn greater lifetime value by being just an overall bigger part of your life. So, Pete, let's, let's backtrack. The company that you're talking about, the Nike bought was Zodiac. Yes. And that, you know, and let's have your colleague, Dan McCarthy enter the story. Former student of yours got involved with you when. So I'm developing these models and they're good, but I'm just, you know, doing it in the classroom. And it's saying, hey, students, go use this stuff. It's good for you. And people would kind of not believe me. So a whole long story. But in 2015, along with Dan and a couple of other former students, we said, you know what, let's bring these models to life at full commercial scale. Let's not just talk about it, let's do it. And so we set this company up called Zodiac, and we played the regular VC game. We got just initial funding from First Round Capital right here in Philadelphia and just a bunch of other top VCs, and we went to town bringing lifetime value to, well, you name it, gaming, hospitality, retail, financial services, telcos, pharmaceuticals, all kinds of other companies. And it was awesome. Now let's get outside of the academic ivory tower. Let's use the same models, but let's help companies not only understand the value of the customers, but make better decisions, make more money in a defendable, accountable, ethical manner. And then Nike swooped in, swooshed in, and bought the thing in 2018. From what you were saying before, I mean, this is true of many innovations as you all set to expand your model, then with Zodiac, now with Theta, the response was mixed. All of these prospective clients did not part and applaud the and say, yes, thank you. We, we immediately understand how, you know, this can make us operate more intelligently. When you get pushback, what's the pushback? Yeah, so lots of different sorts of pushback. One is that's just, you know, nonsense. It's marketing silliness. It's all about product, product, product. Which takes us back to Apple, by the way. It's just all about, you know, what's going to version 2.0 going to look like, you know, who we sell it to. That's secondary. So one is just kind of a product obsession. Two is, to the extent you're leaning into this, we can do this ourselves. It's just a make believe formula anyway. There's no real science behind it. Or three is even if we had that tool, we wouldn't really know what to do with it. We either don't have the infrastructure, the organizational skills, the capability, the willingness to treat different customers differently. So all kinds of different pushback that bit by bit we're overcoming. But I got to tell you, and this gets, you know where I start, to enter your world. One company, one of our clients that loved it and has never, ever questioned it, a little growth equity firm named Provenance out of Southern California. They were one of our clients at Zodiac. Not using it for tactical marketing purposes, but using it for customer base, corporate valuation. Every company they look at investing in, they're looking at through this lens. We've done hundreds and hundreds of diligences with and for this company. And as you keep saying, Andy, this should be rule instead of exception. They're still fairly exceptional. Why don't we talk about the private equity world? Provenance is one example of an early adapter. But private equity firm buying a company worth $200 million, consumer facing products, enough depth in the data set that they could be doing this analysis. What's your sense of the world? They're not doing it, they're doing it themselves. So a couple things. They're often not doing it. They just think it's not relevant here or we have this under control. We're confident enough of the valuation that we don't need to complicate things further. That's excuse number one. Excuse number two is we have this army of Russian PhD physicists in house. They could just do that. That's not always true. So very often the PE firms will just either ignore. Oh, and thing number three, we're looking to buy this middle market B2B firm. It's one thing if you're using this for the digitally native glasses company, but we're looking at a company that makes screen windows here. No, it doesn't apply. It's what they think. Boy, oh boy, are they wrong. It applies just as well in B2B and to the middle market as it does to your traditional direct to consumer e commerce firm. Do you think that this hypothetical private equity firm that we're talking about, where the deal is large enough that they want to commission one of the, you know, the big consulting firms to do vendor due diligence. Right. You know, they're going to be spending a hundred thousand dollars a week for somebody to do a market study. Do you think that the future of your analysis is in addition to that work or will be impounded in that work by the consulting firms? Yeah. I am not saying that the traditional top down, multiple driven way is going out the window, but let's do the bottom up, customer base way as a complement to that. Let's try both and let's see if they triangulate and we come up with roughly the same number. Super. And we often do. But if they're different, let's understand why. What is it that one analysis is accounting for or missing? So it really should be complementary and it should be routine. And it can be extremely insightful, not only for the diligence for the valuation purpose, but for the subsequent value creation as well. It's going to give us direct advice about what we should be doing once we buy this company. It fits beautifully there. That's what takes us back to the marketing stuff. How much of the demand for this sort of analytic work is tied to the fact that it seems like our consumer preferences are more fickle and changing? Warren Buffett, all the years that he invested in Coca Cola, he would say, go into a trance. You're going to wake up in five years. What's one thing you know about the world? More people will be drinking Coca Cola in five years than are today. Not true. Right? It's like QVC is also not true in 2025. So our tastes as consumers change more quickly. Our, you know, fidelity to brands is more fickle. How much of that makes the case for this kind of more granular, granular analysis rather than just running out the future cash flows? Love it. So before we even talk about kind of the marketing taste loyalty thing, get into that. I'm a marketing professor. But the real, real, real heart of that question is something that a lot of PE firms are starting to wake up to, I'm happy to say, whether they're, you know, working with us or not. And that's the idea of doing cohort analysis. The idea of let's, let's look at the tranches of customers that we acquire based on the time we acquire them. So let's look at the, you know, the Q4 2019 cohort and the Q1 2020 and the Q2. Let's look at each of them. Say how are they varying in quantity and quality? So this is a really, really big part of the analysis. And the reason why some companies die isn't because they're old. You know, loyal customers are going away, is that they can't continue to acquire the quantity and quality that they used to either. Their marketing is worse, there's better competition. A lot of the taste things you're referring to, Andy, will manifest in cross cohort differences, not necessarily old customers changing and going away. So we obsess over these cross cohort connect the dots patterns again. Some BEs are starting to do that on their own without maybe not as rigorous as we'd like to, but that tends to be the, to the extent that we see differences in our bottom up analysis and the traditional top down one, that's where we see it. Finished up a project with a women's kind of a cosmetic appliance company and very profitable. Great unit economics. But if you look at the recently acquired cohorts, it's like they're falling off a cliff. They've either overfished the waters or competition is stealing them away. We don't know what, but those recently acquired cohorts, those canaries in the coal mine, are terrible. So we're going to the PE firm saying stay away from this one. They go, no, no, no, it's really profitable. Saying stay away because it's dying and they can't see it. Pete, before we get off of Theta, if people are interested in learning more, they can find you on the website, but. But just the product that you offer to customers. Sure, I appreciate the chance to do that. It's really kind of two products. One would be aimed more at investors, this idea of customer based corporate valuation. So even if we don't worry about the value of any one customer, let's roll it all up, let's do the revenue forecasting and say what is the company worth in this kind of bottom up way? And then secondly would be the more tactical working with corporations that really want to know which emails we should be sending to which customer at which time to elevate and extract all that lifetime value. It's the same exact models, but just a very different use case. A very different part of the organization, a very different language that we use to talk about it. But it's nice to be able to connect them all together. Okay, call back to the first five minutes. Walk on music. I am gonna go with Mr. Brightside by the Killers. All right. You and you and every 18 year old at a 18th birthday party. I. I actually am not familiar with the song. Of course you are. Good God. All right. You're doing my job for me. I mean, usually I make fun of you. You're just making fun of yourself. All right, all right, all right. The Seven Nation army by the White Stripes. White Stripes? Yeah. Do you know that song? Let's say I do. Let's. Good God. I don't need to make fun of you. Just do it yourself. That's great. Pete, you mentioned earlier in our conversation this side hustle, you got cool numbers. Where you've always been interested in collecting dollar bills with interesting serial numbers. For the uninitiated, every dollar bill has eight or nine. How many? Eight digits. Eight digits. Every bill has eight unique digits. How'd you get into that? And what the hell is cool numbers anyway? I'm a nerd. And every time mom would come back from the grocery store, I'd look at each dollar bill and I'd say, this one, that's a nice number. I'd give that one an 80 out of 100. This one nad give that one a 30. So I had in mind the universal Coolness Index. Just a totally arbitrary. Is that a registered trademark? The coolness? Not yet. But I do own cool numbers. Yeah. And so I have this silly website and it's been fun. And I just found a nerdy kid, a sophomore at Carnegie Mellon University, and we're working together and we're building the Cool numbers mobile app. Cool. So you can hold your phone over dollar bill. It knows where to find the numbers. You don't have to type anything in. It picks it off, looks it up and tells you how interesting it is on the 0 to 100 scale. Uploads it to Instagram and tells everyone you've ever met about it. No kidding. And this is the stupidest thing you've ever heard. But I already have thousands of people around the world who are typing the numbers in one digit at a time. Once we get that mobile app up, and it will be up very soon, it's going to be revolutionary. How do you acquire new bills, Pete? Well, these days, not as much as before, because who uses cash? But that's why we want to expand beyond dollar bills, beyond eight digit numbers. So you could look at any number out there, whether it's a zip code, a Social Security number, an address. Just hold your phone up. Pick that number off, look it up and tell you how cool it is relative to other numbers of that length. That's like phase two. But yeah, we want people holding up their phones and thinking about numbers. And then phase three. Maybe you guys could help me with this would be a marketplace where we could start, you know, buying and selling, let's say dollar bills or, you know, or driver's license. Are these like trading cards? Does the quality, the physical quality of the bill matter is a crinkle. A crinkled bill worth less than a million to me, all that. If it's a beautiful number, it could be as crinkled and ripped up. But if it, all that matters is the number. But there's no doubt. Have you calculated the CLV of a Cool numbers customer yet or not? Well, that's the thing. Once we have the mobile app, we'll have the ability to tag and track them. So we'll know how many times. We'll have a whole leaderboard based on how many bills you've uploaded and others and how many times you've engaged with the site. We're thinking about it, Charlie. It's not out of the question. Coolest bill you've got in your possession or that you've seen in the past that you've had. The coolest one that's in the hall of fame on cool numbers, I think it's a bill that has eight fours in it. Four, four, four, four, four, four, four, four, four. Which would be kind of devastatingly awful in Chinese. But, but, but that's, that's. What's a bill like that worth in decent condition? You know, again, there are people who buy and sell these bills. I don't, I just collect the good ones. But yeah, bill like that, probably get, you know, 20, $25 for it. That's a pretty nice ROI. Is that a, is that a hundred dollar bill or a $1 bill? Actually, it turns out. Well, it actually turns out the one I refer to is a hundred dollar bill, so hopefully it's worth more than 25. It better be. Yeah, I don't collect $100 bills because that starts getting expensive. Other than tipping for valets and parking, what is something that you use cash for in 2026? That's the end of my list. That's pretty much. I do, I don't carry cash. I don't have cash on me. And I feel bad. It's always, it always has to do with tipping a doorman or a bellhop or that's about it. They do take Venmo. I know, but that seems so impersonal. I just could have said Inner Sandman and you guys would have given me. Yeah, we would have done. I would have been done. No, we'd still give you. Pete, just a delight to have you here. Thanks for taking the time. I really appreciate it. Great talking to you guys. Pete, you're a great sport. Thanks for sharing what you've had and we'll look forward to staying in touch. All the best. Amen. Thanks for joining us for this episode of Middle Market Musings. We'd like to once again extend our sincere thanks to Pete Fader for joining us today, as well as New Heritage Capital and Greenberg Variations Capital. Thanks as well to our editor, Jason Zappolo. If you enjoyed today's podcast, we'd encourage you to like and follow Middle Market Musings on Spotify, Apple, or whichever provider you use to access podcasts. And of course, feel free to share with your friends. Thanks again and look forward to catching you on the next one. Pay me my money down.