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WHITE PAPER | 2005

Getting it Right:

Turning Customer Value into CompetitiveAdvantage in Retail Banking



3

The only value your company will ever create is the value

that comes from customers–the 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.

That’s why we’re 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 we’ve been helping compa-

nies get the most value from their customers. We hope

this paper helps you in that endeavor.

by

Don Peppers and

Martha Rogers, Ph.D.,

Founding Partners,

Peppers & Rogers Group

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 bank’s 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 resources–both dollars

and people–toward 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 continuous-

ly 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.

byDr. 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.

Foreword: Fueling the Customer Growth Engine



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

©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved.Peppers & Rogers Group is a division of Carlson Marketing Group.4

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 pack-

aged-goods industries. Before joiningSAS in 2002, Gilleland drove the development of

legacy Wachovia’s 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 [email protected]

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

Featured ExpertsMichael Lengel, Principal ,Peppers & Rogers Group

Michael Lengel has over 15 years of

experience consulting to some of the

world’s finest management teams. He

has advised clients in a diverse

set of vertical markets, including

financial services, consumer, retail,

hospitality, transportation, and indus-trial 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 world’s largest Internet

venture, incubating and operating company.

For more information contact Michael Lengel at [email protected]

ContributorsRandy 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

Christopher Helm, Executive Editor, Marketing and Client Deliverables,




5

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 customers’potential 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


WHITE PAPER 2005



©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.6

At first glance, retail banks appear to have solved the complex

processes of measuring and acting on customer value.By under-

standing which customers are most valuable to the enterprise

(and which are not), banks can enhance a range of marketing,

sales and service activities.The anticipated

results are loyal customer relationships that

increase profit,growth and differentiation.

“The logic remains sound,and it makes

even more sense as M&A activity slows

down,” says Jeff Gilleland, Financial

Services Industry Strategist, SAS.“When a

bank uses customer value insight to

market, support and sell products to the

right customers, it fuels organic growth

and gains a competitive edge.” Research

shows that retail banking executives agree. Nearly half of

all respondents to the SAS and Peppers & Rogers Group

study believe that customer value knowledge drives success at

their organization.

But there’s a catch. “Many retail banks have yet to see these

benefits,” says Gilleland. Consider these facts: Retail banking

customers are typically the least loyal among the financial

services industry. Forrester reports that just 7% of consumers

own three or more types of products with

their checking account provider; and only

30% of the average bank’s customers will

consider it for future deposit or credit

product purchases.2

The result is that

competitive advantage from profitable

customer relationships has not materialized

for many banks. According to the SAS and

Peppers & Rogers Group study,only 34% of

respondents believe customer value insight

currently provides a competitive advantage.

This state of under-performance will not improve until retail

banks adjust how they strategize around, measure and act on

customer value knowledge. Competitive advantage–and all of

the higher profit that comes with it–will stay out of reach.

Leadership in Question

“The logic remains sound...When

a bank uses customer value

insight to market, support and

sell products to the right cus-

tomers, it fuels organic growthand gains a competitive edge.”

—Jeff Gilleland,Financial Services

Industry Strategist, SAS

Low Degree12%

Yes34%

No33%

Uncertain33%

High Degree44%

Moderate Degree44%

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.

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

Most Banks Believe Customer

Value Drives Success

Banks Split on Whether Customer Value

Offers Competitive Advantage



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.

1 REFOCUS YOUR STRATEGY

Current StateOrganic 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,

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-of-

business–mortgages, 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 they’re subjected to poor

experiences,”says Gilleland.“It’s very difficult to acquire,grow or

retain profitable customers in that kind of environment.”

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.

A common assumption among retail

banks is that cross-selling leads to greater

share-of-wallet, loyalty and profit; but the

numbers say otherwise. In fact, early work

by First Manhattan Consulting Group

revealed that 75% of cross-sold accounts in

retail banking are not profitable–or 3 out

of every 4 cross-sells.4

Here’s why: Customers are not equal.

Despite their best efforts to understand

customer value and potential, banks wasteresources by marketing and selling

products to customers or prospects that

are not likely to become more profitable.

Aggressive cross-selling may boost the

number of accounts per household over

a given time period, but customer

7

Getting it Right

8.95

Mean scores

Most

important

Moderately

important

8.39

8.02

7.93

7.86

7.82

7.8

7.67

7.66

7.62

Attracting and retaining loyal customers

Increasing market share

Balancing short-term goals with long-term strategy

Improving productivity

Responding to regulatory changes

Attracting and retaining skilled workers

Building a responsive, flexible organization

Using technology for competitive advantage

Managing risk on an enterprise

Focusing on core competencies

Bank CEOs Business Concerns

Retail bank CEOs rank securing organic growth by attracting and

retaining loyal customers as top priority, finds Gartner.

Source: Gartner


WHITE PAPER 2005




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-of-

credit 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 consistent-

ly 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-of-

credit, 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

Customer sm.“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

Profitable Sales25%

UnprofitableSales75%

Random Cross-Sells

Destroy Profit

Banks Lose Money on

Up to 50% of Their Customers

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.

Source: First Manhattan Consulting Group,SAS

-$1000

-$500

0

$500

$1,000

$1,500 1

2

3

4

5

67

8

9

10

HouseholdProfit/Yr.

Average Bank

Retail Customer Profitabiliy by Decile

$1,100

($580)

($230)($130)($70)($50)($10)

$40$100

$300

ProfitDeciles



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

offer the highest value

tomorrow (grow) and the

core attributes to look for in

prospects (acquire). Value

also tells you where to focus

your resources (employees,

marketing spend, etc.)

so banks won’t engage in

profit-eroding cross-sells or

waste precious time and money acquiring,retaining and grow-

ing 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 customer’s 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 deci-

sions are made by a household and not an individual. A bank’s

strategic focus, therefore, must also aggregate down to the

household level. To be sure, information on individual cus-

tomers 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 individualcustomers 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.


WHITE PAPER 2005

9

“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.”

—Don Peppers and Martha Rogers, Ph.D.

Approving a credit card,paying out a loan,re-upping an

insurance policy–all 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 inter-

national 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 bet-

ter decision you’ll 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.”

The “Customer Intelligent”

Response to Risk



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-to-

serve 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-to-

serve in their customer value metric. Among those that do,

many report that it is difficult to develop a complete view of allcustomer 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

customer’s behavior,” says Gilleland.“For example, a customer

may be using the bank’s call center for routine account queries

that can be migrated to less costly automated channels. By

focusing exclusively on the revenue side of a customer’s

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 customer’s

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.).

What’s 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, let’s

examine how banks use LTV in place of potential value

and its negative downstream

impacts on profitability. With

LTV estimates in-hand, banks

start by sorting customers

from high to low LTV and

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 customer’s 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,


As recognized leaders in cus-

tomer relationship building, re

banking executives must once

again redefine the playing field



demographic data can only give insight into a customer’s

capacity to grow. It lacks a customer’s propensity to grow with

your bank and it doesn’t tell the bank what action to take in

order to profitably grow the customer’s relationship.”

Customer needs

Knowing which existing customers are high-value and

high-growth is only half the battle. The

bank must also meet their needs in order

to retain or grow that value.Needs insight

tells the bank why an individual customer

purchases a product. Banks do not do a

good job making timely and relevant

offers based on the needs of their cus-

tomers.According to Forrester, only 5% of

consumers say their banks have “tailored products and

solutions to fit my needs.” This makes profit, loyalty and

competitive advantage hard to come by.8

Getting it RightCosts

To improve cost mechanics, start broad and drill down.“The

goal is to gain an accurate view of costs, not a precise one,”

says Lengel.This may require a bank to make trade offs when

calculating costs,but as long as they are accurate,then better

business decisions can be made based on that accuracy.

Begin by quantifying the overall level of individual channel

usage by various types of customers. Which channels are

customers using now? Next determine the average cost per

customer interaction/transaction by individual channel.

Finally, measure resource and work activity costs by channel:

How much does it actually cost the bank for high-value

“Customer A”to conduct an interaction over the Web? At the

branch? “The best way to get an accurate view of cost-to-serve is Activity Based Costing (ABC),” says Pavan Shidhaye,

Product Manager, Business Intelligence Solutions, SAS. ABC

accounts for the volume of the bank’s activities per customer

and the consumed resource costs that result.

A customer value score based on an accurate balance of

customer revenue (cash generated by the customer) minus

the cost to serve (the customer-generated costs) is extreme-

ly valuable to the CMO. Charged with increasing organic

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

customer’s behavior and not the bank’s behavior.

Why is this important? Let’s say a relationship manager

calls a high-value customer due to a recent “transaction trig-

ger” (e.g., a large deposit).During the call,

the customer also purchases an Equity

Bank Line that may not generate revenue

for 6 months. The call costs $50. If the

bank decides to factor in the cost of the

call to the customer value score, then the

score will automatically drop, despite the

fact that the customer just purchased

more from the bank. But if an accurately balanced customer

value score is embedded in the business model, then a

marketer can make more profitable decisions and deliver

customer treatments–call center queuing, campaigns, fee

waivers, etc. –that reward positive customer behavior.

Potential value

Retail banks that do not have an understanding of the

potential value of their customers leave substantial profit on

the table. Potential value goes beyond LTV by answering the

question: How much more of a customer’s business could the

bank capture if the bank could change the customer’s

behavior in the future? “Potential value insight identifies which

customers have the capacity to deliver more profit as well as

the size of that latent profitability,” says Gilleland.The bank can

project profitability based on the current set of products the

customer has now and those he is likely to buy in the future,as

well as the volume of those transactions. Existing resources, or

intelligently adjusted resource capacity levels can now befocused on those customers able to deliver the highest possible

profit.This is the first, all-important step to sparking the desired

customer behavior that drives Return on Customer and

enterprise value.

“The mechanics of potential value are not as mysterious as

they appear,” says Shidhaye. It’s based on several data points,

including current balances and spreads, fees and risk factors

such as the probability to attrite or default.” Based on the


WHITE PAPER 2005

11

Retail banks that do not have an

understanding of the potential

value of their customers leave

substantial profit on the table.



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 high-

value 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.”


Expense accounting at a retail bank is typically reported

by a “general ledger accounting system.” Financial state-

ments 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 forresources but not the costs of the

business processes and ultimate-

ly 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 broadly-

average allocate) the resources expenses into the

calculated costs of work activities belonging to theprocesses and ultimately into customers costs.And with-

out 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 theamount 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 driver–the

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 customerand 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 accu-

racy 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.”

The Dollars and Sense of Activity Based Costing

Unlike traditional financial

accounting in which the

focus is external regulatory

reporting, ABC stresses

internal decision making.



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.


WHITE PAPER 2005

13

I N S I G H T

Actual and future potent ial cont ribut ion Insight into cus tomer needs, att itudes ,

behaviors and perceptions

Value

Conceptual

Framework

Needs

Where to Allocate Resources How to Win

R E S U L T

Coordinated enterprise-wide integrated marketing and customer experience management

Changed Behavior Impact

A C T I O N

Treatment strategies and organization

Customer Portfolio Management

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.

Source: Peppers & Rogers Group



3 REALIGN YOUR ORGANIZATION

Current StateEven when armed with fresh customer insight, banks will fall

short if this knowledge does not become a central part of the

bank’s everyday work activities and priorities. Where are

banks dropping the organizational ball?

It starts with managing the customer experience.From rela-

tionship 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 cus-

tomers. In doing so, the entire organization works together to

increase customer value, loyalty and profit. However, most

banks are not ready to take this step. According to the SAS and

Peppers & Rogers Group study, over 80% of participating

banks organize around product groups or lines-of-business.

But why should a call center rep care about the customer

experience if he is judged only on call

volume? Why should a segment manag-

er in credit cards care about increasing

total customer value across multiple

products if she’s rewarded on the

number of credit cards sold and portfolio

balances per quarter?

Such organizational misalignments

create poor customer experiences with

real financial impacts. According to a

2003 McKinsey survey, these “moments

of truth” directly affect customers’ bal-

ance levels, and with them the banks’ pockets. For example,

mass-market customers who had a negative experience–

such as an unexpected fee or unresolved service call–kept

4% less with the bank than mass-market customers who had

a positive experience, such as a smooth transfer of funds.Even more telling, mass-affluent customers (those with more

than $100,000 in assets) were twice as punitive–a vital point

because mass-affluent customers generate 13 times more

profit than their mass-market counterparts.10

Talking technology

At most banks, technology does not stand in the way of

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 break-

down does occur, it is because technology is not tied to a

focused strategy of acquiring,retaining and growing the right

customers.“Technology can’t do its job if the lines-of-business

are working independently with their own solutions and busi-

ness rules,”says Betancourt.

Getting it Right“Realignment around customers has to be a practical

exercise,” says Lengel. “It’s about balancing a product-driven

environment with manageable steps to make better use of

customer insight.”

As stated before, it starts with the customer experience. A

retail bank cannot provide a best-in-class

experience to every customer, nor should

it. But it can take time to “stand in the

shoes” of its high-value and high-growth

customers. By mapping the experiences

of customers across channels and at each

stage of the customer lifecycle, the bank

gets a clearer picture of where the gaps in

execution are taking place. It can then

identify which organizational capabilities

it must improve upon to close the gaps,

including people, processes, infrastruc-

ture and culture. The final step is to prioritize the needed

capabilities and draw action plans for achieving results in a

manageable time frame.

Metrics are used to track progress. Focus is again vital.

Improving performance is not about what you can measurebut rather what you should measure. A practical approach is

to rely on two metrics: a “profitability” metric that tracks

changes in customer value and an “attitudinal” metric that

tracks customers’ needs and satisfaction. When taken

together, they act as leading indicators of how well the bank

is delivering superior customer experiences to the right

customers and whether it’s moving the profitability needle in


“Technology should take a

customer value score out of

a closed-door room full of

experts and serve it up tocustomer-facing employees

in a way that makes sense.”

—Randy Betancourt,Director, Financial Services

Solution Center, SAS



the right direction. Based on their results, banks can direct

their future actions toward the highest profit.

Here’s 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 A’s

value has gone up 10% whereas customer B’s has stayed flat.

It’s easy to assume that Customer A is responding to a better

customer experience whereas Customer B isn’t.But when the

profitability metric is supported by an attitudinal, needs-

based 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 needs–an important fact the bank gains through its

attitudinal metric. In other words, though Customer B’s prof-

itability 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.

Don’t 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, managers–most often from

marketing–set the strategy, processes and policies for


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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.

• Profit & Potential Scores• Product Purchase & Attrition Scores• Attitudinal “Needs”• Demographics & Risk Scores

1. Customer Information

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

3. Develop Segment Strategies

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

4. Engage High-Potential Customers

• Refine Segmentation Schemas• Refine Product Algorithms• Update Value Scores

6. Feedback Learning

• Multi-Channel Results Analysis• Customer Value Tracking

5. Analyze Contact Results

• Schema Based OnProfit, Potential & “Needs”

• Create Customer Portfolios

2. Segment Customers

PROCESS VIEW

Retain

Profit

Potential

Retain &

Grow

Reduce

Cost

Invest &

Grow

0 1 2 3 4 5

Source: SAS



increasing that value and managing the customer experience,”

says Gilleland. “It’s then up to customer-facing teams to

coordinate to implement management’s 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 execu-

tives are well aware of.“Technology’s 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


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

1. Customer Information

• Campaign Management• Marketing Optimization• Multi-Channel Synchronization

3. Develop Segment Strategies

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

4. Engage High-Potential Customers

• Rapid Model Deployment• Reporting & Web Distribution

6. Feedback Learning

• Multi-Channel Results Tracking• Customer Value Tracking• Measurement & Reporting

5. Analyze Contact Results

• Portfolio Management:Creation, Migration & Tracking

2. Segment Customers

TECHNOLOGY VIEW

Retain

Profit

Potential

Retain &

Grow

Reduce

Cost

Invest &

Grow

0 1 2 3 4 5

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.

Source: SAS



serve it up to customer-facing employees in a way that

makes sense,” adds Randy Betancourt, Director, Financial

Services Solution Center, SAS. A customer’s total holdings

with a bank don’t mean much to a service rep on the front

lines. But if the rep’s screen showed that a high-growth

customer’s current value

score is 26 and the goal

is to raise it to 28

by cross-selling a mort-

gage refinance at a

special rate for that

customer, the rep has a

clear focus and a real-

time treatment strategy

in hand.The rep can take

an important step

toward what Gartner

calls “the next significant

CRM strategy” in banking, “Dynamic Relationship Pricing.”

When backed by customer value knowledge, customer-

facing 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. “It’s 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 customer’s propensity to spend

more money with the bank is high, his capacity to spendmore 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.


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17

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 profitabil-

ity or the Lifetime Value of a customer through

stronger retention.

5. Don’t confuse customer value withcustomer 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.

Top Takeaways

“An overhaul of the retail

banking business model is

not practical or necessary.

But banks must improve in

several areas when it comes to

strategizing around,measuring

and acting on customer value.”

—Michael Lengel,Principal,





Where Do You Stand? Turning customer value into competitive

advantage in retail banking is an evolu-

tionary 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 issuesare addressed: The maturity of the

customer value metric and how/where

is it being applied to the business.

Stage 1: OperateMETRIC – 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.

Stage 2: Consolidate

METRIC – A single department (usually marketing) takes initial steps to consolidatethe 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 3: IntegrateMETRIC – Information across the lines-of-business and multiple produ

is factored into the metric. Calculation reflects revenue minus the tracea

service costs and direct marketing costs (see sidebar,“The Dollars and Sens

Activity Based Costing”).The bank establishes some enterprise standards

how the metric should be applied to different lines-of-business, lend

credibility to the metric throughout the organization.

BUSINESS APPLICATION – Marketing heads up segmentation efforts a

takes the first cut at developing customer treatment strategies.The findi

help bring the customer value metric to sales and service departmen

which take early steps to apply the metric to customer-facing activities (

fee-waiver decisioning). However, the metric still does not play a central

in creating a consistent customer experience across channels and product




WHITE PAPER 2005

19

Stage 5: InnovateMETRIC – The metric (potential value in particular) is consistently

updated to account for changes in customer contact history.

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.

Stage 4: OptimizeMETRIC – 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

“risk”scores.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 manage-

ment 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.

Source: SAS




Conclusion: Now is the TimeRetail 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 measure-

ment 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 cus-

tomers that will drive the greatest amount of profit today and in

the future. Lasting competitive advantage is not far behind.

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 prod-

uct 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.

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.

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.

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.

9 First Manhattan Consulting Group,“Cross-Sell: How to Achieve

a ‘Three-Way Win’,” 2004.

10McKinsey Quarterly,“Better Customer Service in Banks,”2005,Number 1.

11 Gartner,“Dynamic Relationship Pricing to be Banking’s Next

CRM Strategy,”June 2005.

Footnotes




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21

Measuring Customer Value

in Retail Banking

A Joint SAS andPeppers & 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 applicationof customer value metrics in retail banking; the process of measuring customer value;and the orga-

nizational 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.



Peppers & Rogers Group is a management consulting

firm, recognized as the world’s 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 implemen-

tation 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 Peppers & Rogers Group

SAS is the market leader in providing a new genera-

tion 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. Fornearly three decades, SAS has been giving

customers around the world The Power to Know®.

To learn more visit: www.sas.com

About SAS

retail business strategy

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