Customer Relationship Management: Act II in Y2K

1. Customer Relationship Management: Act II in Y2K Michael English The synergy of action & knowledge to manage customer acquisition & retention September, 1999

2. Bleeding that hasn’t been stopped 1995 Profile of A Typical Yellow Page Directory Company 85.3% Customers Retained 3.7% Out of Business 11.0% Cancelled

3. Customer churn still haunts • Continues almost unabated n among residential customers for long distance service. Yet 98% are “satisfied” to “very satisfied” • Churn among cellular customers still continues at extremely high levels

4. Vulnerability is apparent 1. More and more offerings look more and more alike as almost “commodities” and there are many competitor alternatives: -long distance communications -Cellular phone service -Local telephone service -Cable TV -credit cards -Retail banking -Insurance and health care -Food and beverages 2. We treat the 0.3% of customer base that accounts for 10% of revenues the same as the 50% who account for 15% of the revenues; we don’t know who our best customers are

5. Have we had our heads in sand? • Recent studies have shown… Customer satisfaction is neither a necessary nor sufficient condition for retention, let alone loyalty • Do we need a paradigm change in thinking?

6. Three key definitions: Satisfaction, Loyalty, Retention Customer Satisfaction An indicator of how happy customers are with their suppliers; usually measured through third party survey methods Customer Loyalty Each customer’s (consumer or business) internal orientation towards sticking with or switching from current suppliers Customer Retention The act or process of keeping current customers from switching to other suppliers - THIS MAY BE INFLUENCED BY THE SUPPLIER THROUGH THE USE OF INCENTIVES

7. In the Consumer Market Customer satisfaction is neither a necessary nor sufficient condition for retention Studies show that many dissatisfied customers stay with their current supplier while satisfied customers switch to others

8. Customer acquisition and retention is a big time issue It is now recognized as one of a handful of major business issues Worldwide If not properly managed customer churn can be like a cancer and ruin a company 5% improvement in customer retention can result in 25 - 28% improvement in profits

9. Customer Population Segmented Customer Satisfaction/Loyalty Measurement Employee Utilization Create and Deploy Delivery Systems Manage Customer Relationships Excellent Satisfaction Results Business Process of Increasing Customer Repurchase Loyalty Top Management Leadership Understand Needs and Expectations Customer Expectation Studies Design Requirements Culture for Customers • Products • Services • Practices • Procedures • Value pricing Feedback to All Employees Does this model really work? Continuous Improvement Customer Loyalty, Preference, Retention and Referral

10. So far: Ineffective approaches Because market segmentation falls short and no calculated lifetime value for customers • -Prescriptions fail when focusing entirely on customer satisfaction • -Confusion of “loyalty” vs. “retention” • -Ignored individuals’ propensity to “stick” to or “switch” • Orientation differs by offering • No segmentation by loyalty • -Wisdom of “complete satisfaction” • -Not enough stimuli-incentives yet

11. Influencing customer behavior External simulation drives desirable behavior e.g. discounts, incentives, relationship building programs Media Influence Experience with Current Provider Experience with Competitors Competitor Advertising Competitor Product Package, Pricing & Promotion Current Provider Advertising Customer Behavior Current Provider Product Package Pricing & Promotion Competitor Relationship Programs Current Provider Relationship Programs Word of Mouth

12. Why customers behave as they do • Customers have individual inherent orientations • They affect propensities to purchase, and switch • Propensities are attribute composites of people: • Demographic profile • Personal choices • Underlying values • Lifestyle conditions Understanding what the composites are for individual customers enables suppliers to stimulate desired behavior

13. Attributes suppliers can’t change Internal orientation influencing consumer behavior Demographics Social-Economics Family Status Psychographics Customer (Consumer) Behavior Traditions Lifestyle Choices Career Status Values But suppliers do need to understand them

14. Attributes suppliers can’t change Attributes influencing business customers’ behavior History Industry Customer (Business) Behavior Location Size Management Structure Values But suppliers do need to understand them

15. Combination of two determines customer behavior Internal Attributes Buy/Do Not Buy Switch/Stay Customer Behavior External Stimulation Pay Fast/Pay Slow …So Understanding How Two Forces Interact Enables Suppliers to Predict Customer Behavior and Take Effective Action

16. Step 1: Segment by needsStep 2: Segment by loyalty X-----------X-----------X------------X-----------X Very Frequent Loyal Switcher Individual propensity for offering to “stick with” or “switch” from what they have

17. Strategic customer retention Customer database(s) & segments Segment customer base by extent of loyalty Fulfillment Ascertain true value of each customer based on loyalty coefficient Customer Interface Database Infrastructure Develop cost models for each scenario of pricing and targeted retention programs Determine “matches” for product mix, channel, pricing and retention programs Determine impact of product mix, pricing, care, retention programs on customer segments Communicate to customers -Telemarketing -Direct mail - -Media ads Develop corresponding revenue impact models

18. Managing the Value Chain Areas that must be addressed while working on churn Monitor Fulfillment of the Value Choose the Value Communicate the Value Deliver the Value STRATEGY REVIEW COMMUNICATIONS, BUY-IN, TEAMWORK ORGANIZATIONAL EFFECTIVENESS CONTINUOUS IMPROVEMENT • Communicate to • right people, clearly, • consistently, frequently, • effectively • Ensure message is • heard, understood, • and liked • Measure right things • Measuring them right • Use and deploy the information effectively • Achieve and • continuously improve the value delivered • Target market(s) • Have strategy or value proposition • Make relevant and meaningful to the • target audience • Make it uniquely opportunistic • Align, equip and motivate the organi- zation to deliver the • intended value • Processes • Structure • Management • System • Culture

19. Example of Phasing into Market Leadership: A Window Manufacturer • Identify existing customers • Understand how to listen to them • Segment by needs and expectations • Use information to design products • Manage access and complaints • Measure satisfaction • Strategy to acquire & retain customers • Focus shifted to customer loyalty • Use of 360-degree view of relationship • Use customer data- base for marketing products • Communicate vision and strategy • Measure customer perceived value • Batch of one or mass customization • Ownership taken for customers’ total experience & time • Experiences are “branded” • Personalized service for every transaction • Expectations exceeded • Product bundles for relationship Customer Sensitivity Relationship Focus Customer Retention

20. A big step forward: relationship marketing Where individual customers (and even small groups) are treated differently with the objective of building a lasting relationship - breaking paradigm of focusing on current sale Making ownership of the customer relationship the most critical business success factor

21. Relationship marketing displayed Pricing with incentives & promotions Product mix and levels Distribution channels Individual Customers or Groups of Like Customers MATCHES Communications Customer Care mix and levels Retention programs

22. Lifetime value of a customer methodology Customer Value The discounted value of revenues expected Acquisition Costs Discounted value of incentives required to acquire new customer Retention Costs Discounted value of incentives required, based on loyalty orientation, to prevent customer from switching suppliers Minus Minus Equals True lifetime value of customer

23. Cost of retaining customers The lower the inherent loyalty orientation of a customer... COST Customer’s inherent loyalty orientation …the higher the cost of retaining that customer

24. Strategic customer retention Customer database(s) & segments Segment customer base by extent of loyalty Fulfillment Ascertain true value of each customer based on loyalty coefficient Customer Interface Database Infrastructure Develop cost models for each scenario of pricing and targeted retention programs Determine “matches” for product mix, channel, pricing and retention programs Determine impact of product mix, pricing, care, retention programs on customer segments Communicate to customers -Telemarketing -Direct mail - -Media ads Develop corresponding revenue impact models

25. KeyCorp Case Study The 1994 Situation • $66 billion in assets • 7 million customers • 18% of customers produce 82% revenues • They didn’t know who the 18% were/are • Promotions & profitability disappointed

26. KeyCorp Case Study The Answer: Data Warehouse Marketing • Age, check/saving balance, ATM usage, children, etc. • Identified most profitable & expensive customers • Data mined to focus on four market segments • Response rates tripled • Direct mail, phone calls & e-mail now more effective

27. T. Rowe PricePersonal Services Group • By personal invitation • $250K in mutual fund assets • Dedicated 800 number • Assigned client manager • build personal relationship • familiar with all products • expertise in estate planning, tax strategies, minimum required distributions

28. T. Rowe PricePersonal Services Group • Higher level of service • One on one consultation • New fund previews • Special publications • Audio tapes from portfolio managers • Fee waivers

29. T. Rowe Price • Products/services to deepen relationships • Rollover Investment Service • Investment Check-up • Oct ‘99 - watch for new retirement product!

30. The business imperative: Strategic Customer Value Management • Tailored Solutions • Product Bundles • Customer Care • Billing and Terms • Customer Care • Warranties • Programs (custom) Targeted at:: Individual Customers based on their economic, demographic and psychological characteristics Use detailed customer data and statistical modeling • Increase acquisition & retention of customers based on their lifetime worth • Get higher impact by focusing expenditures, discounts and incentives

31. Mutual Fund Example -Competitors force one another to compete T. Rowe Price Charles Schwab Vanguard Group

32. Example

33. Promising practices for success 1. Gather detailed data from surveys and secondary sources to identify (a) internal attributes and (b) external stimulation that drive customer churn behavior 2. Perform statistical analysis to determine the relationship between internal attributes and propensity to churn 3. Identify statistically significant proxies for attributes observed in customer surveys that are found in existing customer databases 4. Assign a lifetime value to each customer and classify customers 5. Determine importance of “owning” customer relationship(s) for industry at hand as strategic input to step 6 below. 6. Offer tailored incentive to acquire a new customer or prevent switching of an existing customer with a positive lifetime value 7. Test market, gather data, and refine

34. Ten database marketinglessons learned by KeyCorp 1. Must be a champion at the top to build and use database. 2. Broad based buy-in and evangelists are needed 3. Collect lots of data but not more than you will use 4. Understand the technology will change the business model 5. Start with core (names, contact info, etc.) data 6. Deliver value quickly (e.g. accurate, timely mailings) 7. Measure behavior (sales reps on customer retention) 8. Establish frameworks for sharing 9. Be accurate 10. Keep the big picture in mind

35. Closing thoughts and comments -The outlook and prospects for breakthroughs in customer acquisition, retention, database and relationship marketing -Questions and answers