Cycling Your Way to Greater Sales Productivity

By Kahn, William; Ahren, Martin | American Banker, March 5, 1998 | Go to article overview

Cycling Your Way to Greater Sales Productivity


Kahn, William, Ahren, Martin, American Banker


Data base marketing, touted as a sure-fire method of fattening banking's anemic share of its customers' wallets in the early to mid-'90s, is now viewed in some quarters as a failed initiative. A number of banks have spent lavishly to build a data-mining capability without, however, achieving improved cross-sales performance or a much-needed reduction in costs. True, these institutions have learned a good deal about customer characteristics. But they have been unable to translate this knowledge into higher profits. The knowledge is descriptive, not yet prescriptive.

But there is still hope of converting customer information into effective sales and cost-reduction programs. Those banks that would make a success of data base marketing must institutionalize a process that goes far beyond simple data-gathering. The process can be characterized as a continuous learning cycle. It encompasses the following eight steps: (1) capturing relevant data; (2) creating valid measures of customer value; (3) brainstorming value-enhancing strategies; (4) designing, via fractional factorial analysis, appropriate value propositions; (5) fielding or implementing these value propositions; (6) collecting data on the results of this field activity; (7) modeling the changes in expected customer value attributable to each value proposition; and (8) marrying every new customer to his or her optimal value proposition.

Step 1-the data-building phase-is necessary but by no means sufficient. It is the sine qua non of successful marketing, but still just the beginning of a long journey. The availability of good data will ideally provide timely notice of certain customer events-say, the receipt of an annual bonus. However, unless the institution can craft the right value proposition for the right bonus recipient, it will not succeed as an event- driven marketer. Acquiring this capability depends in turn on executing the other seven steps in the continuous learning cycle-and doing so day in and day out as a matter of corporate routine.

Step 2 in the journey is the creation of valid measures of customer lifetime value. A bank is nothing more than a collection of customer cash flows, and the institution must be able to estimate, at any given time, the magnitude and duration of future flows and the resulting worth of each customer relationship to the shareholder.

Substituting customer contribution for lifetime value is convenient but not really adequate. Contribution is an accounting concept, while value is a financial term that serves as the raw material for stock price determination. The contribution of a typical mortgagor to the bank is negative in the first few years of the life of the mortgage (because of the high cost of loan origination), but the expected lifetime value of that same mortgagor, the more important measure, is usually strongly positive.

Many institutions have trouble measuring expected value. One problem, which also bedevils the accurate assessment of contribution, is the inability to assign realistic costs. In part, this is because of the dearth of valid transaction data. In equal part, however, it is traceable to methodological confusions about whether to allocate fully-loaded or marginal costs. Another difficulty, one peculiar to valuation analysis, stems from lack of clarity as to the rate to be used in discounting future cash flows. A surprisingly large number of financial institutions employ multiple discount rates instead of selecting that single rate which reflects what the shareholder can earn on other investments of comparable risk. (It is useful, indeed essential, to regard each customer as a kind of capital project in which the bank is investing its equity.)

Furnished with good data and valuation assessments, a bank can transition to Step 3, the brainstorming phase of the learning cycle. Here the marketer seeks to increase customer value by manipulating, either singly or in combination, the levers of revenue, expense, customer risk, and customer longevity. …

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