Marketing Optimization

Modeling

Alpha Banking CorporationJune 2007 Update

2

• The following is a real case study from a regional bank

located in Louisiana and Texas in the US.

• This was one of the largest banks in the South and recently

experienced some of the chaos and devastation of

Hurricane Katrina.

• Alpha Bank commissioned Bottom-Line Analytics to do a

marketing optimization modeling exercise in order to

continue past efforts a keep growth on a steady upward

path. As part of this, we also had to model the impact of

Hurricane Katrina.

• This was an exercise across 9 city markets. Some of these

were markets which the bank just entered, while others

were long established.

Forward

3

Key Insights

Model Data Architecture

Direct Mailings Consumers

Direct Mailings Direct Deposits

Direct Mailings Business & Grand Openings

Media TV, Radio, Print & OOH

Media Digital Banner Ads & Search

Branch Grand Openings

Federal Funds Interest Rate

Customer Satisfaction Rating

Hurricane Katrina Event

Monthly

Revenue

Balances

By 9 Regional

Branch

Markets

Seasonality

Our models used

5 years of monthly

data

4

• Across 9 regions where this bank operated, the overall contribution of marketing was quite low at 8.4 percent of total revenue. What is remarkable here is this 8.4 percent applied to very large bank balances of $21.5B. Thus,

marketing expenditures of about $39.5 million was responsible for generating $1.8B in revenue. With margins of about 5%, this means that the bank’s marketing spending was very profitable. This very high level of ROI

suggested that the bank was under-investing in marketing and could drive substantially higher growth and returns with much higher marketing budgets.

• Other key insights found from this modeling exercise included:

– One of the bank’s markets was significantly impacted by Hurricane Katrina. Surprisingly, this impact was positive rather than negative due to the inflow of FEMA and insurance claims following this event. Overall,

this event had about a 1 percent net positive impact on total bank balances.

– The bank regularly measured customer satisfaction at the branch level. We included customer satisfaction metrics in our model and found it to be a very important driver of the bank’s overall

performance.

– During the year in question, this bank expanded into 4 new local markets via acquisition. Our model findings revealed that marketing spending was very effective in these markets and was a key catalyst to

the bank’s +13% revenue growth for this year.

– This bank had a wide portfolio of products, from insurance, investments to loans, checking and savings products. Some of these products were name-branded and were highly advertised. Our model findings

revealed that these “branded” products were significantly more marketing driven and these products likewise represented a key catalyst to the bank’s overall 13 percent growth for the year.

– The bank could increase revenues 2.9% through more efficient spending without incremental total investment. Our model optimization found that the bank could further increase revenues by an additional

+9 percent through a significant +50 percent increase in total marketing spending and through more efficient spending across more efficient regions, products and marketing mix elements, as determined

through the model. Because the bank was found to be significantly under-invested in marketing, such an increase not only was found to generate significant growth, but also would be a profitable move,

financially.

Key Insights

Executive Summary

Impact and Productivity of Alpha Banks Marketing

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Jan

.20

04

Mar

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04

May

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Jul.2

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Sep

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v.2

00

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Jan

.20

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Mar

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05

May

.20

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Jul.2

00

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Sep

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No

v.2

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Jan

.20

06

Mar

.20

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May

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Jul.2

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Sep

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No

v.2

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Rev

. Bal

ance

s $

MM

Actual

Model

6

R2 = 98.4 Holdout R2 = 98.7

Model Validation

7

87.9%

1.0%1.0%

1.8%

1.2%

1.3%

1.0%

1.5%

8.4%

MARKETING LEVERAGE: Below represents total Alpha Bank revenue balances of $21.5B for YE Sep 06.

• During this period, Alpha Bank spent $39.5M on marketing, representing 0.2% of revenue balances.

• Direct Marketing Campaigns contributed 3.2% of total balances, while media contributed 5.1 percent.

• This $39.5M in spending generated 8.4% of total revenue balances or $1.8B, which in turn produced

$94.9M in total net returns.

What proportion do marketing programs/channels contribute to total revenue balances for Alpha Bank overall and

what leverage does marketing play in penetrating this?

Decomposing total marketing impact

Direct.Consumer

Direct.Deposits

Direct.Grand Openings (0.1%)Direct.Business

(0.3%)

Media Print

Media: Radio

Media: TV

Media OOH

Media OL (.1%)Grand Opening Events (0.2%)

}

}

Base

Marketing Programs/Channels12 Month Revenue Balances

YE Sep ‘06

Katrina

Marketing Contribution: % Impact on Total Revenue

($183)($36)($36)($23)

($7)$14 $21 $44 $45

$129 $135

$333 $572

$886 $1,003

($400)($200) $0 $200 $400 $600 $800$1,000$1,200

TV.MEDIA

DIRECT.DEPOSITS.CAMPAIGN

DIRECT.CONSUMER.CAMPAIGN

INTEREST.RATES

PRINT.MEDIA

ONLINE.MEDIA

DIRECT.BUSINESS.CAMPAIGN

DIRECT.GRAND.OPENINGS

RADIO.MEDIA

BRANCH.PENETRATION

GRAND.OPENINGS.EVENTS

OOH.MEDIA

BASE(INTRINSIC GROWTH)

CUSTOMER.SATISFACTION

KATRINA RECOVERY

Annual Revenue Growth Drivers

Rev Variance $MM

8

Marketing Variance: Drivers of Growth

9

Markets: Explaining Revenue Balances in “Established” v. “Expansion” markets

70%

75%

80%

85%

90%

95%

100%

Market.1 Market.2 Market.3 Market.4 Market.5 Market.6 Market.7 Market.8 Market.9

ONLINE.MEDIA

OOH.MEDIA

TV.MEDIA

RADIO.MEDIA

PRINT.MEDIA

DIRECT.BUSINESS.CAMPAIGN

DIRECT.GRAND.OPENINGS

DIRECT.DEPOSITS.CAMPAIGN

DIRECT.CONSUMER.CAMPAIGN

GRAND.OPENINGS.EVENTS

BASE

• Markets 3 and 4 (expansion markets) are most impacted by marketing efforts

• Expansion markets are 2x more affected by marketing than established markets

Marketing Contribution: By Branch Regions

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Products: Explaining Revenue Balances by Product

Branded and advertised products were significantly more impacted by marketing

than non-branded products

60%

65%

70%

75%

80%

85%

90%

95%

100%

Katrina

Media.Online

Media.OOH

Media.TV

Media.Radio

Media.Print

DM.Business

DM.GrOpengs

DM.Deposits

DM.Consumer

Grand.Openings

Base

Marketing Contribution: By Product Line

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ROI: Determining Relative Contributions by Market

Market 1, $1.29

Market 2, $1.12

Market 3, $2.08

Market 4, $1.07

Market 5, $1.90

Market 6, $3.52

Market 7, $2.93

Market 8, $22.28

Market 9, $41.24

TOTAL, $1.94

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45

• For all Alpha Bank regions, an additional dollar spent on marketing returns more than a

dollar in net returns, making marketing a profitable investment with $1.94 in net returns

for every $1 spent.

• Expansion markets deliver a higher ROI at $2.55 per every incremental dollar spent, v.

$1.49 in established markets (1-5).

Incremental Returns Per $

Total Marketing ReturnsPer Investment by Market

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ROI: Determining Relative Contributions by Marketing Program/Channels

• For all Alpha Bank regions, an additional ($1) marketing dollar spent returns

$1.94.

• OOH generates the largest return of $5.10; Deposit DM ($3.17), Business DM

($2.51), Media TV ($2.47) and Consumer DM ($2.32) also drive 1.5x+ returns in

incremental marketing dollars.

CONSUMER.DIRECT.MAIL, $2.32

DEPOSIT.DIRECT.MAIL, $3.17

GRNDOPENING.DIRECT.MAIL, $1.01

BUSINESS.DIRECT.MAIL, $2.51

MEDIA.RADIO, $1.60

MEDIA.PRINT, $1.14

MEDIA.OOH, $5.10

MEDIA.TV, $2.47

MEDIA.ONLINE, $0.46

GRAND.OPENING $1.20

TOTAL, $1.94

$0 $1 $2 $3 $4 $5 $6

Incremental Returns Per $

Total Marketing ReturnsPer Investment by Marketing Channel

1313

Marketing Investment Optimization

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Optimization: Determining Alpha Bank Marketing Spend by Market at Constant Total Spending

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Current Contribution Current Spend Optimal Spend

Expansion.Market 9

Expansion.Market 8

Expansion.Market 7

Expansion.Market 6

Established.Market 5

Established.Market 4

Established.Market 3

Established.Market 2

Established.Market 1

• Optimization by MARKET, at constant $39.5MM spend, predicts an additional +2.9% in revenue balances and

$0.75B in average monthly balance revenues over the course of a year.

• Optimization suggests increasing marketing spend in Expansion markets to $6.20 per thousand revenue

balance (an increase from current spend $4.59 per thousand).

• Spending in Established markets is recommended at a rate of $.92 per thousand in revenue balance.

Optimal Marketing Spend Per Market

Total Marketing SpendingOptimization by Market

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Optimal marketing spend by Marketing Channel

Optimization: Determining Alpha Bank Marketing Spend by Program at Constant Total Spending

• Optimization by PROGRAM results in a 2.9% percent increase in revenue

balances and $.75B in average monthly balance revenues over the course of a

year.

• This solution calls for the greatest increases in business direct marketing, OOH

and Online media.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Current Contribution Current Spend Optimal Spend

ONLINE

PRINT

TV

RADIO

OOH

DIRECT.MARKETING.BUSINESS

DIRECT.MARKETING.OPENDINGS

DIRECT.MARKETING.DEPOSITS

DIRECT.MARKETING.CONSUMER

GRAND OPENINGS

Total Marketing SpendOptimization by Channel

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Optimization: Determining Total Alpha Bank Marketing Spend

• Optimization of Alpha Bank’s current marketing spend delivers a high level of

positive net financial returns.

• The upward boundary of our model predicts profitability at even a +50% increase

in marketing spend.

$900

$950

$1,000

$1,050

$1,100

$1,150

$1,200

$20,500

$21,000

$21,500

$22,000

$22,500

$23,000

$23,500

-50%-40%-30%-20%-10% 0% 10% 20% 30% 40% 50%

Tot. Rev. Balances

Total Bank Returns

Total Alpha Bank

Returns $MM*

Tot. Alpha Bank Monthly Avg Rev

$MM

*NOTE: “Total Alpha Bank Returns” calculated as Market weighted net margins (4.99%) times revenue balances

($22,723MM)=$1,136MM at current. Projections calculated through simulation of marketing spend changes for total Alpha

Bank, assuming equal region and market program changes of -50 through +50%

Revenue Balances

$MM*

Total Bank Marketing ProfitabilityRemains High

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Optimization of Marketing Spend: Putting It All Together

At 50% higher total spend, the solution calls for slightly higher

relative increase for direct marketing. Overall, this 50% increase is

expected to generate +9% increase in revenue balances or $+2.1B

Marketing Spend Optimization

18

Optimization of Marketing Spend: Putting It All Together

On a market-by-market basis, the solution calls for almost a

doubling of spending in expansion markets, whereas spending is

relatively flat in established markets. Overall, this 50% increase is

expected to generate +9% increase in revenue balances or $+2.1B

Marketing Plan Impact