Database Marketing to Improve Service and Profits
Many companies, today, including banks, are investing heavily in database marketing. In most cases, several million dollars are required for design, software, and database construction. Some banks are finding, however, that the early paybacks are not as high as expected. What is the problem?
Marketing databases do not generate revenue by themselves. They must be used in an active program of profitability analysis, customer segmentation, and marketing tactics that build retention, loyalty, and increased sales. There are four key database marketing requirements which any successful project must achieve:
If companies execute successfully all four steps, the payoff can be quite significant. This article discusses how to go about carrying out these four steps. It is based on actual experience of the authors with several companies which have gone about this process.
There are three basic steps to be taken in database marketing. They are:
To understand the process, assume that the above chart is typical of a banks customer profitability segments. This chart shows how the typical banks customers break down into five profitability groups, based on monthly profit contribution. The numbers are based on pretax profits, calculated using methods explained later. The five groups are not of equal size. The top group consist only 5% of the households and contributes 80% of monthly profit. The second group represents 11% of the households and contributes 25% of monthly profit. Together, 16% of customers produce 105% of profit.
Group five, representing 28% of customer households, erodes profit by 22%. This is amazing and insightful information. Many banks suspect that their bottom quintile is costly to them. Few have the information to prove it.
How Profitability is determined
Profitability calculation is the heart of the system. It is complex, but it is computed for every product for every customer every month. To understand it, one must understand a few banking terms. It is worth taking the time, because the profitability determination is the foundation for all of these very profitable and advanced database marketing segmentation and behavior modification processes developed. Here are the concepts vital to understanding profitability:
For comparison, here is the profitability calculation for a checking account:
In this case, the gross monthly profit of $11.74 from the average balance of $1,184 was overwhelmed by the high overhead costs of $15.17. This customer visited the branch several times a month to make deposits or cash checks. At $1.65 expense per visit, his branch visits wiped out the profitability of this particular product.
* Note that the capital allocation for a checking account is significantly less than for a loan. This is reflective of the higher risk of loss from loans vs. deposit accounts.
The same process is repeated each month for every product owned by every customer with the bank. Once completed, a customers household profitability is computed by summing the net product values for all products owned by the household. It looks something like this:
Customer J. Smith Monthly Profitability Measurement
This customers total monthly profit to the bank is $101.51.
Creating Profitability Segments
After computing every customers monthly profitability, it is necessary to create customer profitability segments. The analyst should allow the data to specify the segments based on groups with similar profit characteristics. For example, the data might suggest approximately 5 segments, as illustrated in the following chart:
Every customer in the bank, therefore, can be classified as either a 5, 4, 3, 2, or 1, where 5 represents most profitable customer, and 1 represents the least profitable customers.
Once each customer is segmented by profitability, it is possible to study the behavior of certain segments. In this example, customers are ranked by number of products owned.
Each bar represents 2% of a banks retail customers, ranked by profitability. It is interesting that the most profitable and least profitable share some of the same characteristics: they both use many of the banks products. This behavior is even more pronounced when the visits to the banks branches are compared in Chart 5. The heaviest branch users tend to be the most and least profitable customers. Many of the others rarely visit a branch office.
Once all customers are segmented and their various behavioral characteristics are captured in a database, a personal profile of each bank customer can be made available to all customer contact personnel, through technology, at the very point of sale. The profile can include:
Turning Knowledge into Action
Armed with the database knowledge, skilled statistical analysts are able to build models to predict such things as: the profit propensity of customers; which products a customer is next most likely to need; and which behavior change will improve the customers profitability. This information can be made actionable by using a technology solution to deliver the knowledge to the banks customer contact personnel at the very point of contact (teller line, service desk, or platform). Customer contact personnel can then utilize the knowledge to improve cross-sell and up-sell opportunities, to make better decisions regarding pricing and fee waivers, and to suggest alternative channels for certain types of transactions.
The marketing and sales activity at the branch level can be channeled into customer focused activities by profitability segments. There are separate goals for each of the five profitability segments:
Since the profit segment 5s and 4s represent only 16% of the customer households, but up to 105% of the monthly profit, the bank will want to allocate substantial human and marketing resources toward retaining these customers. And, since human resources are limited, particularly those resources devoted to sales, the bank should attempt to direct the acquisition activities of their calling officers to prospects who have the potential to be profit segment 5s or 4s.
In addition, the bank desires to expand the relationship of all customers by selling additional products and, thereby, improving the household profit.
Finally, as to the lower profit segments, actions should be taken to reprice unprofitable products such as certificates of deposit and loans as they mature or are renewed. Employees should refrain from reducing or waiving service charges and fees, and concerted efforts should be used to migrate these customers routine transactions to less expensive alternative channels of delivery, such as ATMs, and call centers.
Gold Customer Programs
What can a bank do for its best customers to be sure that it retains them? There are a wide variety of solutions available, each based on the customers relative value. They may include such tactics as:
The wealth of information now available to banks which have adopted such a profitability and segmentation system enables them to take broader strategic steps. These may include:
Only a few financial institutions have achieved the level of customer knowledge and resulting behavior modification programs that we have outlined here. The entire process begins with a relatively complex monthly profitability calculation for each product for each customer. This is hard work, with a lot of time, effort and imagination going into the creation of the appropriate algorithms.
Once profitability is calculated, the next step is crucial: grouping the banks customers into a manageable number (such as five) of profitability segments based on these monthly ratings.
The final step is the most important. It includes using the knowledge created to develop appropriate strategies and tactics for improving profitability and customer service. This includes tactics to modify the behavior of employees, customers and prospects. The entire system drives the banks resource allocation, expansion plans, relationship and retention building programs, and even their telephone call answering systems. Those banks that have such systems in place have taken a giant step forward that will take their competitors years of very hard work to equal.
Robert James is Group Manager at the Centura Bank. Bob has twenty four years of service with the bank and its predecessors. He is a graduate of the University of North Carolina at Chapel Hill, and the LSU Graduate School of Banking. He can be reached at (919) 977-8233 Fax (919) 977-6362.