W H I T E PA P E R | 2 0 0 5

Getting it Right:
Turning Customer Value into Competitive Advantage in Retail Banking

Foreword: Fueling the Customer Growth Engine

The only value your company will ever create is the value that comes from customersthe ones you have now and the ones you have in the future. To remain competitive, you must figure out how to keep your customers longer, grow them into bigger customers, make them more profitable and serve them more efficiently. This is the new mantra of modern-day business, and it has profound implications for how retail banks compete and win.Traditionally, customer strategy in retail banking has been product-out rather than customer-in. Most banks are more interested in the value they can get from customers rather than the benefits they can create for customers. They focus on cross-selling more and more products and services, rather than meeting customer needs more effectively and comprehensively. Thats why were excited about this white paper by SAS and Peppers & Rogers Group. It meets these challenges head on, detailing the next evolution of customer-based business strategies within retail banking.These strategies are backed up by practical advice for acquiring, growing and retaining the most profitable customers now and in the future. For more than a decade weve been helping companies get the most value from their customers. We hope this paper helps you in that endeavor. Generating growth in retail banking is challenging. Profitable growth through mergers is inhibited by a decreasing number of opportunities and increasing price premiums. Establishing a competitive advantage through improved service quality is becoming more difficult, as service and customer satisfaction steadily improve across the industry. Product innovations are short-lived,and most are considered commodities. Faced with these trends, banking executives are searching for a sustainable competitive advantage that will fuel organic customer growth. I believe that now, more than ever, customer knowledge provides the path to profitable organic growth in retail banking. I believe the key to creating a sustainable competitive advantage lies in a banks ability to harness critical customer insights, which only that bank has about the customer, and then to act on that knowledge in ways that create intimacy with the customers that matter most. This research paper offers fresh insight into how retail banks can use customer knowledge as the rudder to guide the investment of limited resourcesboth dollars and peopletoward actions that add profitability. In this paper, experts from SAS and the Peppers & Rogers Group illuminate the importance of measuring the results of these investments at the customer level. Following their precepts will create a learning organism that continuously improves outcomes, which will create a more loyal and profitable customer franchise for your bank. For nearly 30 years, SAS has been giving retail banks around the world The Power to Know.

by Don Peppers and Martha Rogers, Ph.D., Founding Partners, Peppers & Rogers Group

by Dr. Jim Goodnight, CEO, SAS

2005 SAS Institute Inc. and Carlson Marketing Group. All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.

Getting it Right:
Turning Customer Value into Competitive Advantage in Retail Banking

CONTENTS
Introduction: Business as Unusual ....5 Leadership in Question..........................6 Getting it Right ........................................7 Refocus Your Strategy ............................7 Retool Your Mechanics ........................10 Realign Your Organization ................14 Where Do You Stand? ..........................18 Conclusion: Now is the Time ............20

Featured Experts
Jeff Gilleland, Financial Services Industry Strategist, SAS
Jeff Gilleland has over 25 years of experience in building profitable customer franchises for Fortune 500 companies. He has held senior marketing positions within the financial services and consumer packaged-goods industries. Before joining SAS in 2002, Gilleland drove the development of legacy Wachovias CRM strategy, which is regarded as a best practice in the financial services industry. Applying his experience in 1to1 and classical marketing, he offers an informed view on how to build organizational capabilities that enable knowledge-based strategies to increase customer affinity and profitability.
For more information contact Jeff Gilleland at Jeff.Gilleland@sas.com

Michael Lengel, Principal, Peppers & Rogers Group

Michael Lengel has over 15 years of experience consulting to some of the worlds finest management teams. He has advised clients in a diverse set of vertical markets, including financial services, consumer, retail, hospitality, transportation, and industrial sectors. Before joining Peppers & Rogers Group, Lengel was an officer-level consultant with Monitor Group, a premier strategy firm, and head of strategy for CMGI Solutions, the professional services division of the worlds largest Internet venture, incubating and operating company.
For more information contact Michael Lengel at mlengel@1to1.com

Christopher Helm, Executive Editor, Marketing and Client Deliverables, Peppers & Rogers Group

Contributors
Randy Betancourt, Director, Financial Services Solution Center, SAS Gary Cokins, Strategist, World Wide Marketing, SAS Philippe Meyer, Director, Financial Services, SAS Europe, Middle East & Africa Geert Massa, Director, Financial Services, SAS International Pavan Shidhaye, Product Manager, Business Intelligence Solutions, SAS Scott Lochridge, Managing Partner, Peppers & Rogers Group Jaci Allen, Senior Consultant, Peppers & Rogers Group Deborah Brault, Consultant, Carlson Marketing Group Taylor Duersch, Director, Decision Science Services, Carlson Marketing Group

2005 SAS Institute Inc. and Carlson Marketing Group. All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.

WHITE PAPER 2005

Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking

Introduction: Business as Unusual

The financial services industry is the recognized leader in customer relationship building. Retail banks in particular are praised as pioneers in deploying best-in-class strategy and technology to develop profitable relationships with customers. Much of this progress is built on gaining insight into customer value. According to a new research study by SAS and Peppers & Rogers Group titled Measuring Customer Value in Retail Banking, on average, retail banks have spent over six years developing and utilizing customer value metrics. Given this experience, most retail banks report a high degree of confidence in the accuracy of their customer value models and the insights they produce.1 But just behind this veneer of success lie persistent challenges. Retail banks have long known that growing customer loyalty, customer profitability and share-of-wallet are keys to competitive advantage. While this has not changed, many banks remain challenged to incorporate customer value strategies into a product-driven business model. As a result, achieving a competitive advantage from customer value has remained elusive for many retail banks. According to SAS and Peppers & Rogers Group, just 34% of banks say that customer value insight currently brings an advantage over their competitors. Where have banks gone wrong? More importantly, how can they get it right? Written for senior executives, Getting It Right: Turning Customer Value into Competitive Advantage in Retail Banking is a white paper designed to infuse new thinking into existing strategies for measuring and acting on customer value in retail banking. Drawn from the combined thought leadership of SAS and Peppers & Rogers Group, the white paper is full of practical, real-world advice on how retail banks can increase profitability from customer value insight without a business model overhaul. Whether it is refocusing strategy, retooling the mechanics of measurement or realigning the organization around customers, this paper is a problem-solving guide on how retail banks can turn customer value insight into competitive advantage.
IN BRIEF
This white paper is a practical guide for senior decision makers in retail banking. It provides straightforward advice on: Unlocking your customerspotential value to drive organic growth Identifying which tactical steps to take first to make your customer strategy pay off Boosting profitability from customer value insight without a business model overhaul

Leadership in Question
At first glance, retail banks appear to have solved the complex But theres a catch. Many retail banks have yet to see these processes of measuring and acting on customer value. By underbenefits, says Gilleland. Consider these facts: Retail banking standing which customers are most valuable to the enterprise customers are typically the least loyal among the financial (and which are not), banks can enhance a range of marketing, services industry. Forrester reports that just 7% of consumers sales and service activities. The anticipated own three or more types of products with results are loyal customer relationships that their checking account provider; and only The logic remains sound...When increase profit, growth and differentiation. 30% of the average banks customers will a bank uses customer value The logic remains sound, and it makes consider it for future deposit or credit insight to market, support and even more sense as M&A activity slows product purchases.2 The result is that sell products to the right cuscompetitive advantage from profitable down, says Jeff Gilleland, Financial tomers, it fuels organic growth customer relationships has not materialized Services Industry Strategist, SAS.When a and gains a competitive edge. for many banks. According to the SAS and bank uses customer value insight to Jeff Gilleland, Financial Services Peppers & Rogers Group study, only 34% of market, support and sell products to the Industry Strategist, SAS respondents believe customer value insight right customers, it fuels organic growth currently provides a competitive advantage. and gains a competitive edge. Research This state of under-performance will not improve until retail shows that retail banking executives agree. Nearly half of banks adjust how they strategize around, measure and act on all respondents to the SAS and Peppers & Rogers Group customer value knowledge. Competitive advantageand all of study believe that customer value knowledge drives success at the higher profit that comes with itwill stay out of reach. their organization.

Making Customer Value Add Up

The confidence of banks in customer value to drive success is well placed. Competitive advantage from customer value, however, has yet to materialize for many banks. Closing that gap will drive rich reward.

Most Banks Believe Customer Value Drives Success

Moderate Degree 44%

Banks Split on Whether Customer Value Offers Competitive Advantage

Yes 34%

Low Degree 12% Uncertain 33% No 33% High Degree 44%

Source: Measuring Customer Value in Retail Banking by SAS and Peppers & Rogers Group

2005 SAS Institute Inc. and Carlson Marketing Group. All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.

WHITE PAPER 2005

Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking

Getting it Right
It is up to the banks to engineer a turnaround. An overhaul of the retail banking business model is not practical or necessary, says Michael Lengel, Principal, Peppers & Rogers Group. But banks must improve in several areas when it comes to strategizing around, measuring and acting on customer value. What follows is a current assessment of where retail banks often go wrong followed by actionable advice on how to get it right.The best practices are designed to help banks achieve the profit and competitive advantage that customer relationships offer. higher acquisition price premiums have increased the need to retain and grow the customer franchises of acquired banks in order to make the mergers pay-off. Banks rely on customer relationship building to achieve these goals, but success has proven hard to come by.What stands in the way? At the strategy level,retail banks are focused on product-out rather than customer-in Rather than asking: What value can . we provide to customers, banks spend a lot more time trying to squeeze more value from customers.This approach reinforces a product-driven business model where separate lines-ofbusinessmortgages, credit cards, etc. work independently to secure revenue. If your strategic focus is to sell as many products as possible, customers get swamped by irrelevant marketing and sales offers and theyre subjected to poor experiences,says Gilleland.Its very difficult to acquire, grow or retain profitable customers in that kind of environment.

1 REFOCUS YOUR STRATEGY

Current State
Organic growth by attracting and retaining loyal customers is the top business concern among bank CEOs, claims Gartner G2.3 As merger activity declines, banks are more focused than ever on organic growth as the key to improving shareholder value, says Gilleland. For the banks engaged in mergers,

How banks destroy profitability The strategy to sell as many products as possible results in tactical moves that can actually destroy profitability. Cross-selling is a case in point. Bank CEOs Business Concerns A common assumption among retail banks is that cross-selling leads to greater Retail bank CEOs rank securing organic growth by attracting and retaining loyal customers as top priority, finds Gartner. share-of-wallet, loyalty and profit; but the numbers say otherwise. In fact, early work Most by First Manhattan Consulting Group important Mean scores revealed that 75% of cross-sold accounts in Attracting and retaining loyal customers 8.95 retail banking are not profitableor 3 out Increasing market share 8.39 of every 4 cross-sells.4 8.02 Balancing short-term goals with long-term strategy Heres why: Customers are not equal. 7.93 Improving productivity Despite their best efforts to understand 7.86 Responding to regulatory changes customer value and potential, banks waste 7.82 Attracting and retaining skilled workers resources by marketing and selling 7.8 Building a responsive, flexible organization products to customers or prospects that 7.67 Using technology for competitive advantage are not likely to become more profitable. 7.66 Managing risk on an enterprise Aggressive cross-selling may boost the 7.62 Focusing on core competencies Moderately number of accounts per household over important a given time period, but customer Source: Gartner

household profitability goes down because many of the newly sold products are not used profitably. For example, a customer may purchase a new line-of-credit in order to eliminate fees on other accounts. If the customer never uses the line-of-credit, overall profitability is decreased when the cost of selling and maintaining the unused line-ofcredit is factored in. In other cases, cross-sells only manage to entice current customers to shift their dollars away from one banking product to another, a profit killer known as disintermediation. For example, a customer may revolve a high balance on her credit card and her bank may proactively sell her a secured home-equity line-of-credit, thereby shifting the same dollars from a higher margin credit card to a lower margin home-equity line. Disintermediation also can occur in deposit and investment products. A customer that consistently maintains a high balance in her non-interest checking account, for example, may be sold a certificate-of-deposit or money-market account. Under a product-driven strategy, these cross-sells would be

considered effective: a line-of-credit, home-equity line-ofcredit, CD or money-market account was opened; but profitability (the true gauge of success) did not increase.5 These facts help to explain why banks actually lose money on up to 50% of their customers.4

Getting it Right
To get profitability on track, retail banks must refocus their strategy from the customer-in rather than product-out. Customers are the scarcest resource in business, even scarcer than capital.The only value your company will ever create is the value that comes from customers-the ones you have now and the ones you will have in the future, state Don Peppers and Martha Rogers, Ph.D. in their most recent book, Return On Customersm.To remain competitive, you must figure out how to keep your customers longer, grow them into bigger customers, make them more profitable and serve them more efficiently. Over time, enterprise value goes up because the company is maximizing its Return on Customersm. 6

Is Your Strategy Destroying Profit?

Cross-selling to build share of wallet revenue remains a strategic priority in retail banking. But unless a bank is cross-selling to the right customers, it could be destroying profit.

Random Cross-Sells Destroy Profit

Household Profit/Yr.

Banks Lose Money on Up to 50% of Their Customers

Retail Customer Profitabiliy by Decile
Profit Deciles
1 $1,100 2 3 4 $300 $100 $40 ($10) ($50) ($70) ($130) ($230) ($580) 5 6 7 8 9 10

Profitable Sales 25%

$1,500 $1,000 $500

Unprofitable Sales 75%

0
-$500

Average Bank

-$1000

Source: First Manhattan Consulting Group, SAS

2005 SAS Institute Inc. and Carlson Marketing Group. All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.

WHITE PAPER 2005

Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking

Value and needs point the way Refocusing your strategy depends on two factors. The first is a better understanding of customer value.Value tells you where to focus, explains Lengel. It tells you which customers bring the highest value today (retain), which customers The only value your company offer the highest value will ever create is the value tomorrow (grow) and the that comes from customers core attributes to look for in the ones you have now and prospects (acquire). Value the ones you will have in also tells you where to focus the future. your resources (employees, Don Peppers and Martha Rogers, Ph.D. marketing spend, etc.) so banks wont engage in profit-eroding cross-sells or waste precious time and money acquiring,retaining and growing the wrong customers. The second factor is customer needs. If value tells you where to focus, needs tells you how to win,says Lengel. Needs insight is all about relevancy. It tackles the question: What will motivate customers to strengthen their relationships with me to drive profit? The answer may be to scale back cross-sell offers to specific types of customers or to limit marketing communications to a high-value customers preferred channel. Get to the household level Whether taking out a home loan for a new addition or setting up a college savings plan, most of the critical financial decisions are made by a household and not an individual. A banks strategic focus, therefore, must also aggregate down to the household level. To be sure, information on individual customers will always be the building blocks (a credit score, for example, will always be an individually assigned attribute). Likewise, any insight into the value and needs of individual customers relies on these building blocks. But the blocks must combine to create accurate views of individual households as the unit to target and regulate marketing, sales and service treatment strategies. This will drive a much more balanced strategy focused on selling as many products as profitable, not as many as possible. Both customer and company win.

The Customer Intelligent Response to Risk

Approving a credit card,paying out a loan,re-upping an insurance policyall of them come with risk.Risk is an unavoidable component of retail banking, says Geert Massa,Director,Financial Services,SAS International.To eliminate risk entirely, a bank would have to close its doors, but it can improve upon how it manages and minimizes that risk. Every bank spends handsome sums to stay current with regulation and offset risk. What Massa wants to know is, why not force all that spending into double duty? If you are going to spend money to be compliant on regulation and risk, then why not turn it around and also use it for being more intelligent about the customer? asks Massa. Reducing risk and complying with regulation are nothing more than getting smart about customers, and a lot of banks miss out on the opportunity to kill both birds with one stone. Take for example the Basel II Capital Accord, an international risk regulation compelling internationally active banks to identify, to measure and to report operational risk more effectively. Banks make more money when they distribute their capital to customers that have a higher probability of paying back a loan, staying current with an insurance policy,and so on.The more you know about an individual customer, the better decision youll make about whether or not that customer is worth the risk in the first place,says Massa. Better customer intelligence up front gives the bank much more control over all the risk parameters involved. And if you have all of the risk parameters under control, then you also are compliant under Basel II.The bank is working smarter, not harder.

2 RETOOL YOUR MECHANICS

Current State
The second step is retooling your mechanics. It comes down to three areas: costs, potential customer value and customer needs. When banks miss the mark on these three areas, they end up placing customers into the wrong value buckets. This ripples out to sub-optimal managerial decisions, the misallocation of marketing and sales resources and the familiar outcomes of lower profits, slower growth and no competitive advantage. Costs Simply stated, customer profitability is the difference between revenue earned and costs incurred during a specified time period. Any measurement of customer value, therefore, depends on an accurate view of both revenue and costs. Virtually all banks track and assign sources of revenue (interest, margin spread, fees, balance size, etc.) to individual customers. Enough transparency exists between a customer and the products she uses to come up with a reliable revenue figure. Unfortunately the same transparency does not apply to costs, and many banks struggle to get a clear picture of the cost-to-serve for different customers. Most banks have an idea of which channels are being used by customers on an aggregate basis; and they may calculate the average cost-per-transaction by channel and then apply it to all customers when measuring value. However, many banks do not incorporate the actual cost-toserve individual customers in their customer value metric.In the SAS and Peppers & Rogers Group study, only 50% of banks reported that they account for individual, non-product, cost-toserve in their customer value metric. Among those that do, many report that it is difficult to develop a complete view of all customer costs because the data is not available. Without an accurate view of customer-level costs, a distorted understanding of customer value results. A customer thought to be high-value, for instance, may actually be much less valuable because his cost-to-serve far exceeds the average. A lack of understanding of costs-drivers at the customer level prohibits the bank from taking action that might improve individual household profitability.Sometimes the easiest way

to improve the profitability of a customer is not to sell him another product, but rather to encourage a change in the customers behavior, says Gilleland. For example, a customer may be using the banks call center for routine account queries that can be migrated to less costly automated channels. By focusing exclusively on the revenue side of a customers relationship, banks often miss opportunities to improve customer value by reducing the costs-to-serve a customer. Potential value There are three layers of customer value: Current Value (what a customer is worth today based on historical data); Lifetime Value or LTV (which is an extrapolation of the customers current state); and Potential Value (which is a projection of what a customer could be worth if the bank grows the relationship).7 Most banks go as far as measuring LTV. At a high level, the process may involve time series projections, RFM-type models and plugging in the value of the variables for a customer (balance history, product ownership history, propensity to attrite at a product or household level, propensity to pre-pay or default on a loan, etc.). Whats missing here (aside from a robust cost-to-serve view) is any understanding of potential value, which is where the real opportunity for higher profitability lies.To understand why, lets examine how banks use LTV in place of potential value and its negative downstream impacts on profitability. With As recognized leaders in cusLTV estimates in-hand, banks tomer relationship building, retail start by sorting customers banking executives must once from high to low LTV and again redefine the playing field. placing them into deciles. They then ask the question: What if I could move a customer currently in the second decile up into the first? The uplift is easy to calculate, but how to make it happen (or even if it can happen) is not clear at all, says Lengel.You have no idea if that customers value can be grown in the first place, where that growth is going to come from,or the steps you need to take to get there. Only a potential value analysis supported by customer needs insight can tell you that. Adds Gilleland, While some banks use demographic data (e.g. household income,investable assets,etc.) as a surrogate for potential value,

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2005 SAS Institute Inc. and Carlson Marketing Group. All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.

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Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking

demographic data can only give insight into a customers capacity to grow. It lacks a customers propensity to grow with your bank and it doesnt tell the bank what action to take in order to profitably grow the customers relationship.

growth, the CMO carefully tracks how marketing initiatives that elicit the desired customer behavior and drive profit. When a customer value score is balanced accurately between the revenue and cost-to-serve factors, it will reflect the customers behavior and not the banks behavior. Customer needs Why is this important? Lets say a relationship manager Knowing which existing customers are high-value and calls a high-value customer due to a recent transaction trighigh-growth is only half the battle. The ger (e.g., a large deposit). During the call, bank must also meet their needs in order the customer also purchases an Equity Retail banks that do not have an to retain or grow that value. Needs insight Bank Line that may not generate revenue understanding of the potential tells the bank why an individual customer for 6 months. The call costs $50. If the value of their customers leave purchases a product. Banks do not do a bank decides to factor in the cost of the substantial profit on the table. good job making timely and relevant call to the customer value score, then the offers based on the needs of their cusscore will automatically drop, despite the tomers. According to Forrester, only 5% of fact that the customer just purchased consumers say their banks have tailored products and more from the bank. But if an accurately balanced customer solutions to fit my needs. This makes profit, loyalty and value score is embedded in the business model, then a competitive advantage hard to come by.8 marketer can make more profitable decisions and deliver customer treatmentscall center queuing, campaigns, fee Getting it Right waivers, etc. that reward positive customer behavior. Costs To improve cost mechanics, start broad and drill down. The Potential value goal is to gain an accurate view of costs, not a precise one, Retail banks that do not have an understanding of the says Lengel.This may require a bank to make trade offs when potential value of their customers leave substantial profit on calculating costs, but as long as they are accurate, then better the table. Potential value goes beyond LTV by answering the business decisions can be made based on that accuracy. question: How much more of a customers business could the Begin by quantifying the overall level of individual channel bank capture if the bank could change the customers usage by various types of customers. Which channels are behavior in the future? Potential value insight identifies which customers using now? Next determine the average cost per customers have the capacity to deliver more profit as well as customer interaction/transaction by individual channel. the size of that latent profitability, says Gilleland. The bank can Finally, measure resource and work activity costs by channel: project profitability based on the current set of products the How much does it actually cost the bank for high-value customer has now and those he is likely to buy in the future, as Customer A to conduct an interaction over the Web? At the well as the volume of those transactions. Existing resources, or branch? The best way to get an accurate view of cost-tointelligently adjusted resource capacity levels can now be serve is Activity Based Costing (ABC), says Pavan Shidhaye, focused on those customers able to deliver the highest possible Product Manager, Business Intelligence Solutions, SAS. ABC profit.This is the first, all-important step to sparking the desired accounts for the volume of the banks activities per customer customer behavior that drives Return on Customer and and the consumed resource costs that result. enterprise value. A customer value score based on an accurate balance of The mechanics of potential value are not as mysterious as customer revenue (cash generated by the customer) minus they appear, says Shidhaye. Its based on several data points, the cost to serve (the customer-generated costs) is extremeincluding current balances and spreads, fees and risk factors ly valuable to the CMO. Charged with increasing organic such as the probability to attrite or default. Based on the

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The Dollars and Sense of Activity Based Costing

Expense accounting at a retail bank is typically reported by a general ledger accounting system. Financial statements are generated with chart-of-account expense lines representing the departmental expense of labor, supplies, facilities and infrastructure, among others. The problem with this approach is it only displays what was spent but not for who and why that money was spent. That is, it displays expenses for resources but not the costs of the business processes and ultimately the products, service lines, channels and customers that each uniquely consumes. In short, the expense data in the general ledger expense account format is structurally deficient to causally trace and assign (not broadlyaverage allocate) the resources expenses into the calculated costs of work activities belonging to the processes and ultimately into customers costs. And without an accurate cost-to-serve view at the customer level with visibility into all cost elements, a bank will always have a sub-optimal understanding of customer value. The solution is to adopt an Activity Based Costing (ABC) measurement strategy in which customers are viewed as consuming work activities that in turn draw on the organizational resources, advises Gary Cokins, Strategist, World Wide Marketing, SAS. Like its namesake, ABC is a practical approach that begins by focusing on the work activities required to serve the customer-opening a new account, completing a funds transfer, updating a statement, and so forth. ABC next traces the costs of these work activities, including through channels if appropriate, into customers based on the quantity or volume of their demands. In basic terms, for each work activity, ABC computes a unit cost rate by distributing direct expenses (e.g., salaries) in proportion to the amount of employee time spent on that activity, adding associated indirect expenses (e.g., charge back for square footage occupied by employees), and dividing the total by the activity cost driverthe number of activity transaction events (e.g., number of funds transfers) performed during the period under consideration. By multiplying the activity unit cost rate by the quantity for each activity initiated by a customer and next summing all the activity costs for each customer, a retail bank arrives at a much more accurate calculation of the cost-to-serve that customer. Unlike traditional financial accounting in which the focus is external regulatory reporting, ABC stresses internal decision making, says Cokins.It provides greater accuracy of customer costs and transparency of the business process elements of those costs. The results are a much stronger grasp of customer value, how customer behavior impacts profitability and what potential actions can improve profitability.

Unlike traditional financial accounting in which the focus is external regulatory reporting, ABC stresses internal decision making.

results, a look-alike model is created to uncover which customers offer the greatest opportunity and how to capture it. For instance, a set of moderate-value customers may share many behavioral and attitudinal characteristics of your highvalue customers. The question is why these moderate-value

customers have not made the jump to high-value status? The answer lies in how the bank is treating that customer, says Lengel.It is not providing the right message or offer at the right time to trigger improvement in the right business drivers.This is why an understanding of customer needs is so important.

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Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking

Customer needs Getting needs right means uncovering customers preferences (e.g. Please send me new offers only via email), goals (e.g.I want to retire at 55), or desires (e.g.But can I retire even sooner?).These clues point to what motivates a customer to buy at different points along the customer lifecycle. They help sales and marketing teams make the right offer to the right customer at the right time, and across the right channels. According to the First Manhattan Consulting Group, by better matching the why behind consumer purchases with the what,retail banks can improve effectiveness by more than five times over traditional purchase propensity models alone.9 The granular level of insight (not to mention the stronger results) makes needs insight superior to product propensity models or standard marketing research tactics such as focus groups.To illustrate the point:Two high-growth customers may be in the market for an identical insurance policy. Their needs, however, are very different: One wants the policy to minimize

estate taxes, the other to ensure that a home mortgage is paid no matter what. This is a customer-level distinction a marketer or sales team must know to be effective. But it cannot be found by relying on broad behavioral or demographic trends of a product propensity model. The same is true for a focus group. Knowing that a certain percentage of the customer base has a need is quite different from being able to specifically identify which customers actually have that need. Rolling it up The process of retooling your mechanics results in a prioritized set of customer groups backed by a fully-scored database and value model. These are the customer-level tools the bank needs to begin assembling the household views that drive customer-facing activities across marketing, sales and service. A bank is ready to increase customer value, profitability and competitive edge by managing households as financial assets.

Value => Needs => Profit

A combination of customer value insight and customer needs insight is required to develop the treatment strategies that drive more profitable customer behavior.

INSIGHT

Value
Actual and future potential contribution

Needs
Insight into customer needs, attitudes, behaviors and perceptions

Where to Allocate Resources

How to Win

ACTION

Conceptual Framework

Customer Portfolio Management

Treatment strategies and organization

RESULT

Changed Behavior

Impact

Coordinated enterprise-wide integrated marketing and customer experience management

Source: Peppers & Rogers Group

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3 REALIGN YOUR ORGANIZATION

Current State

Even when armed with fresh customer insight, banks will fall short if this knowledge does not become a central part of the banks everyday work activities and priorities. Where are banks dropping the organizational ball? It starts with managing the customer experience. From relationship managers and call center representatives to segment managers and ATM machines, the bank must deliver a positive and consistent experience to high-value and high-growth cusGetting it Right tomers. In doing so, the entire organization works together to Realignment around customers has to be a practical increase customer value, loyalty and profit. However, most exercise, says Lengel. Its about balancing a product-driven banks are not ready to take this step.According to the SAS and environment with manageable steps to make better use of Peppers & Rogers Group study, over 80% of participating customer insight. banks organize around product groups or lines-of-business. As stated before, it starts with the customer experience. A But why should a call center rep care about the customer retail bank cannot provide a best-in-class experience if he is judged only on call experience to every customer, nor should volume? Why should a segment managit. But it can take time to stand in the er in credit cards care about increasing Technology should take a shoes of its high-value and high-growth total customer value across multiple customer value score out of customers. By mapping the experiences products if shes rewarded on the a closed-door room full of of customers across channels and at each number of credit cards sold and portfolio experts and serve it up to stage of the customer lifecycle, the bank balances per quarter? customer-facing employees gets a clearer picture of where the gaps in Such organizational misalignments in a way that makes sense. execution are taking place. It can then create poor customer experiences with Randy Betancourt, Director, Financial Services identify which organizational capabilities real financial impacts. According to a Solution Center, SAS it must improve upon to close the gaps, 2003 McKinsey survey, these moments including people, processes, infrastrucof truth directly affect customers balture and culture. The final step is to prioritize the needed ance levels, and with them the banks pockets. For example, capabilities and draw action plans for achieving results in a mass-market customers who had a negative experience manageable time frame. such as an unexpected fee or unresolved service callkept Metrics are used to track progress. Focus is again vital. 4% less with the bank than mass-market customers who had Improving performance is not about what you can measure a positive experience, such as a smooth transfer of funds. but rather what you should measure. A practical approach is Even more telling, mass-affluent customers (those with more to rely on two metrics: a profitability metric that tracks than $100,000 in assets) were twice as punitivea vital point changes in customer value and an attitudinal metric that because mass-affluent customers generate 13 times more tracks customers needs and satisfaction. When taken profit than their mass-market counterparts.10 together, they act as leading indicators of how well the bank Talking technology is delivering superior customer experiences to the right At most banks, technology does not stand in the way of customers and whether its moving the profitability needle in

aligning the organization around customers. Technology has matured to the point where it can collect and distribute the customer intelligence needed to keep employees focused on building customer value, says Randy Betancourt, Director, Financial Services Solution Center, SAS. When breakdown does occur, it is because technology is not tied to a focused strategy of acquiring, retaining and growing the right customers.Technology cant do its job if the lines-of-business are working independently with their own solutions and business rules, says Betancourt.

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the right direction. Based on their results, banks can direct their future actions toward the highest profit. Heres how they work: Assume Customer A and Customer B start at the same value level and are equally profitable. Over time, the profitability metric may show that customer As value has gone up 10% whereas customer Bs has stayed flat. Its easy to assume that Customer A is responding to a better customer experience whereas Customer B isnt. But when the profitability metric is supported by an attitudinal, needsbased metric a different picture results. In actuality, Customer B has improved his deposits because a relationship manager recently moved him to lower margin products better suited to his needsan important fact the bank gains through its

attitudinal metric. In other words, though Customer Bs profitability has not gone up, his satisfaction level has. More importantly, the bank has increased its share-of-wallet with Customer B, all due to a positive customer experience tracked by sharp metrics. The payoffs are more profit and stronger loyalty. Dont forget to own it Ownership is another important piece of the puzzle. It must happen at the management level and the customer-facing level. Once you have accurate customer value scores and tracking mechanisms in hand, managersmost often from marketingset the strategy, processes and policies for

The Customer-Centric Business Model: PROCESS VIEW

Applying customer value to the retail banking business model should be a continuous loop of learning and results. Shown below are the business process steps needed to get it done.

2. Segment Customers 1. Customer Information

Retain Profit Reduce Cost Retain & Grow Invest & Grow

3. Develop Segment Strategies

Potential

Profit & Potential Scores Product Purchase & Attrition Scores Attitudinal Needs Demographics & Risk Scores

Schema Based On Profit, Potential & Needs Create Customer Portfolios

Growth Plans Service Rules for Treatment Pricing & Product Bundling Behavior Migration

PROCESS VIEW
6. Feedback Learning 5. Analyze Contact Results 4. Engage High-Potential Customers

Refine Segmentation Schemas Refine Product Algorithms Update Value Scores

Multi-Channel Results Analysis Customer Value Tracking

Out-Bound Multi-Channel In-Bound Service Rules In-Bound Product Suggestions Contact History

Source: SAS

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increasing that value and managing the customer experience, says Gilleland. Its then up to customer-facing teams to coordinate to implement managements strategic intent and directives.The bank is now in a position to incent, reward and assess performance based on changes in customer value. Rather than traditional, volume-based benchmarks such as how many mortgages did you sell this quarter, banks ask how much has the profitability of the customers changed under your watch? Technology makes insight actionable Organizational realignment around customer value cannot

happen without technology, a fact that retail banking executives are well aware of.Technologys role is to integrate data, processes and people to gain a single view of customers, says Philippe Meyer, Director, Financial Services, SAS Europe, Middle East & Africa.The best approach is to deploy a suite of solutions that deliver banking-specific analytics based on rigorous data management. A single technology platform is the organizational backbone for rolling out business rules on how to identify and treat high-value and high-growth customers. At a practical level, technology should take a customer value score out of a closed-door room full of experts and

The Customer-Centric Business Model: TECHNOLOGY VIEW

Applying customer value to the retail banking business model should be a continuous loop of learning and results. Shown below are technology capabilities needed to get it done.

2. Segment Customers 1. Customer Information

Retain Profit Reduce Cost Retain & Grow Invest & Grow

3. Develop Segment Strategies

Potential

Data Warehouse Analytics & Data Mining Credit Scoring Activity-Based-Costing

Portfolio Management: Creation, Migration & Tracking

Campaign Management Marketing Optimization Multi-Channel Synchronization

TECHNOLOGY VIEW
6. Feedback Learning 5. Analyze Contact Results 4. Engage High-Potential Customers

Rapid Model Deployment Reporting & Web Distribution

Multi-Channel Results Tracking Customer Value Tracking Measurement & Reporting

Lead Management System Multi-Channel Lead Delivery Behavior Triggers Contact History Management

Source: SAS

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Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking

serve it up to customer-facing employees in a way that makes sense, adds Randy Betancourt, Director, Financial Services Solution Center, SAS. A customers total holdings with a bank dont mean much to a service rep on the front lines. But if the reps screen showed that a high-growth customers current value score is 26 and the goal An overhaul of the retail is to raise it to 28 banking business model is by cross-selling a mortnot practical or necessary. gage refinance at a But banks must improve in special rate for that several areas when it comes to customer, the rep has a strategizing around, measuring clear focus and a realand acting on customer value. time treatment strategy Michael Lengel, Principal, in hand.The rep can take Peppers & Rogers Group an important step toward what Gartner calls the next significant CRM strategy in banking, Dynamic Relationship Pricing. When backed by customer value knowledge, customerfacing employees can use technology to dynamically price offers in real time to deliver the highest profit.11 Close the learning loop Customer data and customer value scores do not stand still. A common practice among banks is to recalculate customer value scores on a regular basis (usually monthly) to track changes. This is an important outcome, but it is not the only outcome. Its just as important to close the learning loop, says Gilleland. If a customer shows all of the attributes of a high-value customer but his value score has not moved up over the course of a couple of quarters, you have to ask why. It could be that although the customers propensity to spend more money with the bank is high, his capacity to spend more is actually much less than the bank thought at first. New insights must always be factored back into the value calculations, algorithms, segmentation schemes, forecast assumptions, outbound and inbound marketing communications, etc., to make sure the bank can act fast on its ongoing knowledge. Otherwise, the bank will fall into the same unprofitable behaviors.

Top Takeaways
1. Invest retention efforts in high-value/
low-potential households
Locking in the loyalty of high-value customers who already use a broad range of products and services is vital. But also recognize that their growth potential is low. Pushing more products to this group damages long-term profitability.

2. Remember that customer value is half

the battle
Customer value insight tells you where to focus, but customer needs insight tells you how to win.

3. Invest sales efforts in households with

the capacity and propensity to grow
Assemble customer knowledge (behavioral and attitudinal) to gain insights on how to better serve and grow relationships, create action plans and align sales, marketing, and services resources around the action plans.

4. Ensure that insight equals profit

Retool cross-sell models to target customers that will buy and use a product profitably. Cross-sells only pay off if they improve household profitability or the Lifetime Value of a customer through stronger retention.

5. Dont confuse customer value with

customer affinity
Understanding the important differences between customer value and customer affinity at a customer level leads a retail bank to the right decisions that improve profitability and competitive advantage.

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Where Do You Stand?

Turning customer value into competitive advantage in retail banking is an evolutionary process. The journey begins by plotting where the organization stands today and where it should be tomorrow. Below is the SAS Information Evolution Model, a tool designed specifically for this purpose. The model has five stages: Operate, Consolidate, Integrate, Optimize and Innovate. For each stage, two issues are addressed: The maturity of the customer value metric and how/where is it being applied to the business.

Stage 3: Integrate
METRIC Information across the lines-of-business and multiple products is factored into the metric. Calculation reflects revenue minus the traceable service costs and direct marketing costs (see sidebar,The Dollars and Sense of Activity Based Costing). The bank establishes some enterprise standards for how the metric should be applied to different lines-of-business, lending credibility to the metric throughout the organization. BUSINESS APPLICATION Marketing heads up segmentation efforts and takes the first cut at developing customer treatment strategies. The findings help bring the customer value metric to sales and service departments, which take early steps to apply the metric to customer-facing activities (e.g. fee-waiver decisioning). However, the metric still does not play a central role in creating a consistent customer experience across channels and products.

Stage 2: Consolidate
METRIC A single department (usually marketing) takes initial steps to consolidate the information of individual customers from some (not all) of the lines-of-business. The consolidated information helps marketing take the metric deeper, from the individual customer level to the household level. It also allows marketing to factor in some (not all) service costs when calculating the metric, thereby going beyond just a revenue view. BUSINESS APPLICATION Marketing begins to draw up department standards for applying and updating the metric based on the success of campaigns, e.g. one set of tools or common rules for managing data. Marketing also begins to track changes in customer value over time. Thus the bank is doing smarter marketing but it has yet to evolve to smarter customer management based on accurate value insight.

Stage 1: Operate
METRIC Individuals control the data, and there are no enterprise standards for consolidating or analyzing information. Insight into customer value is at the customer level, and is not used outside of a single line-of-business.The metric is based solely on revenue. BUSINESS APPLICATION The metric resides in marketing with a few information mavericks that use it to measure the success of outbound campaigns. It does not yet play a role in helping the bank to capitalize on inbound communications with customers, specifically customer service.

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Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking

Stage 5: Innovate
METRIC The metric (potential value in particular) is consistently updated to account for changes in customer contact history.

Stage 4: Optimize
METRIC Accounts for revenue minus traceable costs (ABC) and minus direct marketing costs.The bank has a handle on the current value, LTV and potential value of customers while incorporating the riskscores.This insight is rolled up to provide accurate views at the household level. BUSINESS APPLICATION The enterprise is working together to manage customer relationships. Marketing, sales and service coordinate around customer value scores and contact management based treatment strategies to deliver consistent customer experiences. The profitability metric and the attitudinal/needs metric are used to track progress. Marketing and sales capacity is optimized with modeling techniques to maximize short-term and long-term profit.

BUSINESS APPLICATION The bank engages in dynamic relationship pricing and bundling. Incentives and performance are based on changes in customer value. A closed-loop of learning is created to drive ongoing improvement. The metric becomes a basis for communicating enterprise value to Wall Street.

Source: SAS

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Conclusion: Now is the Time

Retail banking executives are absolutely on target. Their confidence that customer value insight drives success in retail banking is well placed. Measuring and acting on customer value is proven to deliver higher profitability, organic growth and competitive advantage. But the why behind customer value is not the problem. It is the how that gets overlooked. The result is that most banks have not captured the substantial benefits from more loyal and profitable customer relationships. At least not yet. As recognized leaders in customer relationship building,retail banking executives must once again redefine the playing field. Incremental improvements to the existing business model are the key. By refocusing customer strategy, retooling measurement mechanics, and taking steps to realign the organization around customers, banks will unlock the vast profit potential of the customer asset. They will acquire, grow and retain the customers that will drive the greatest amount of profit today and in the future. Lasting competitive advantage is not far behind.

Footnotes
1 The findings of the SAS and Peppers & Rogers Group study, Measuring Customer Value in Retail Banking, are taken from surveys of 48 executives from 18 retail banks conducted in October and November, 2004. 2 Forrester,Earning the Loyalty of Banking Customers, September 2004. It is important to note here that customer loyalty in retail banking is defined as increasing future product purchases from existing customers, and not just keeping accounts open. Just because a customer chooses not to attrite does not mean she is loyal to the bank. 3 GartnerG2,Bank CEOs Rate Business and Technology Concerns, August 2004. 4 First Manhattan Consulting Group. 10 McKinsey Quarterly,Better Customer Service in Banks, 2005, 5 Ibid. In some cases, notes Gilleland, disintermediation is the right thing to do in order to improve customer satisfaction, share-of-wallet, and retention. At times, it does make sense for some customers to shift their dollars from one product to another. But more often than not, the desired payoffs do not result. Number 1. 11 Gartner,Dynamic Relationship Pricing to be Bankings Next CRM Strategy, June 2005. 9 First Manhattan Consulting Group,Cross-Sell: How to Achieve a Three-Way Win, 2004. 7 Terminology around customer value can vary. Current value also is commonly referred to as actual value, for example, and potential value also is referred to as future value. 8 Forrester,Earning the Loyalty of Banking Customers, September 2004. 6 Don Peppers and Martha Rogers, Ph.D., Return on Customer: Creating Maximum Value from Your Scarcest Resource, Currency/DoubleDay, 2005. Return on Customersm and ROCsm are registered service marks of Peppers & Rogers Group, a division of Carlson Marketing Group.

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Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking

Measuring Customer Value in Retail Banking

A Joint SAS and Peppers & Rogers Group Study
Measuring Customer Value in Retail Banking takes an in-depth look at how retail banks are measuring and applying customer value. Published by SAS and Peppers & Rogers Group, the findings from this report were gathered from surveys of 48 executives from 18 retail banks ranging in asset size from $12 billion to $1.3 trillion. The surveys were conducted in October and November, 2004. Participants included Senior Vice Presidents, Vice Presidents, Directors and Managers from Marketing, Finance, Analytics, Customer Service and Product Management. Participants were asked for their feedback on three, core topics: The management and application of customer value metrics in retail banking; the process of measuring customer value; and the organizational impact.

Some Highlights
The survey indicates that customer value metrics are becoming embedded in retail banking business models for decision making: A full 100% of retail banks participating in the study are measuring customer value to some degree Banks reported a high degree of confidence with their customer value metrics the average accuracy rating was 7.6 on a 10 point scale More than three-quarters of respondents (78%) use customer value in strategic planning More than two-thirds of respondents (67%) said that senior managers use customer value in decision making
All answers to survey questions were recorded and codified. Multiple responses from individual banks were aggregated.

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About Peppers & Rogers Group

Peppers & Rogers Group is a management consulting firm, recognized as the worlds leading authority on customer-based business strategy. Founded in 1993 by Don Peppers and Martha Rogers Ph.D., the firm is dedicated to helping companies maximize the value of their business by maximizing the value of their customer base. Our work is focused on driving bottom-line results from the delivery and implementation of customer initiatives. The goal: develop and execute customer strategies that create immediate return on investment and long-term customer value. In this way, we help clients optimize their most valuable asset: their customer base. Led by 1to1 Magazine, Peppers & Rogers Group maintains a significant voice in the marketplace through its 1to1 Media properties. These print, electronic and custom publications explore the best practices, trends and developments in customer strategy, demonstrating how customer-based initiatives are driving bottom-line impact. More information is available at: www.1to1.com

About SAS
SAS is the market leader in providing a new generation of business intelligence software and services that create true enterprise intelligence. SAS solutions are used at 40,000 sites including 96 of the top 100 companies on the FORTUNE Global 500 to develop more profitable relationships with customers and suppliers; to enable better, more accurate and informed decisions; and to drive organizations forward. SAS is the only vendor that completely integrates leading data warehousing, analytics and traditional BI applications to create intelligence from massive amounts of data. For nearly three decades, SAS has been giving customers around the world The Power to Know. To learn more visit: www.sas.com

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2005 SAS Institute Inc. and Carlson Marketing Group. All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.