Companies know they must use customer data to make smarter decisions and manage their businesses profitably. However, there are two major links in the chain that have yet to be forged, and these missing links could be costing your company money. The first: Customer data needs to be turned into customer insight. For example, the data from a telecom company's contact center that shows a drop in average revenue per customer needs to translate into an understanding about why that is happening. Customer insight is where customer value and customer needs intersect. It is where data is transformed into understanding.

The second link connects customer insight to action. The telecom company in the example above takes the knowledge about decreased customer revenue and crafts a new contact center strategy to reach out to customers whose usage patterns show they may be ready to use fewer of the company's services. Thus, a crisis in business decision making is averted.

Using customer insight to build the value of your current customers and to acquire customers with high growth potential can make the profitability difference. But customer insight is only useful when it is acted upon.

Insight-based action is vital to increasing profits in today's business world, and there are two keys to realizing these profits. The first key is the current business climate. Every important strategic decision is based on knowledge, and most of those decisions center on the customer. While instinct still plays a part in the boardroom, all available customer data must be deployed fully, because you can bet that the competition will deploy it.

This era has placed even more pressure on industries of "intermediating change," according to Anita M. McGahan, writing in the October 2004 Harvard Business Review. She says intermediating change occurs when a business is not threatened at its core, but when relationships have become fragile due to heightened competition and new technologies. Auto dealerships, investment brokerages and entertainment businesses are at the top of this list. In these kinds of businesses, "executives tend to underestimate the threat to their core activities by assuming that longtime customers are still satisfied and that old supplier relationships are still relevant. In reality, these relationships have probably become fragile."

The second profit key is using customer insight to craft strategies and tactics to strengthen these "fragile" customer relationships. An October 2003 Harvard Business Review survey of 157 companies showed that 23 percent used a "causal" analytic model that showed verifiable relationships between business drivers, strategic success and financial outcomes. Simply put, this 23 percent used customer data to verify that what they were already doing was successful. More importantly, they averaged a 2.9 percent higher return on assets and a 5.1 percent higher return on equity.

Finally, customer insight can drive profit by using developing technologies. For example, proactive and predictive modeling in the contact center and marketing optimization applications are adding new levels of accuracy to customer insight. The best customer insights are produced when the customer picture is fused from two sources: The first source is the data from transactions, demographics and attitudes. The second source, which many companies ignore, is data about customer needs and values. It is this fusion, however, that results in the insights that lead to smarter decisions and higher profit.

Say, for example, an automotive company is preparing to introduce a new high-end SUV. It can gather transactional data to identify the customers who are most likely to purchase an expensive vehicle. Demographic data shows the population centers where these types of customers live. Attitudes about competitive models and brands also can be researched. But to complete the picture, the automotive company must determine what customers need in a new SUV. Some need four-wheel drive. Some need interior space for their jobs or for carpools. And what do they value? If it's gasoline efficiency, the automotive company probably would not want to pitch an SUV to them.

Financial Services See Real Payoffs
A 2003 McKinsey report put the cost of acquiring customers at 10 times the cost of keeping them; rescuing defected customers costs 100 times more than keeping existing ones.

Not surprisingly, retaining current customers has been the focus of many customer initiatives, and these efforts are proliferating at a particularly rapid rate in the financial services sector. "Even a small increase in customer retention can lead to a big rise in profitability," says Morgan Stanley Executive Director Tony LoFrumento. "Our processes allow us to find out what customers are most likely to do and when they're going to do it."

LoFrumento has implemented customer data processes that give the bank a single view of customers, even though most customers use more than one of the company's products. In a business where 18 to 20 percent of customers defect within a year, customer insight has led to many forward-thinking decisions at Morgan Stanley, including the creation of new IRA products for various customer groups and a profitability model that replaces the company's former reliance on total assets as the ultimate gauge of customer value. The high cost of customer acquisition has increased the company's interest in the concept of organic growth.

A May 2004 story in FORTUNE magazine highlighted the work of Ed Hess, director of the Center for Entrepreneurship and Corporate Growth at Emory University's Goizueta Business School. Hess identified 23 companies as champions of organic growth, which is defined as the growth that comes from the company's core businesses. Organic growth can also be defined as the growth that comes from your current customer base. According to the article, the stock values of the organic growth index of these 23 companies outperformed the S&P by 22 percent.

One of the 23 companies singled out by FORTUNE and the Hess survey is Automatic Data Processing (ADP). With more than $2 billion in revenue, it is the global leader in payroll and benefits administration. Donna Collins, vice president of business engineering solutions, says that as companies pared employees and payrolls over the past few years, ADP found its customer base shrinking in value. One of its key metrics – checks per client – declined, and the average client payroll shrunk from 80 to 74 employees. The threat of higher interest rates also loomed.

To offset this trend, ADP took a closer look at its customer base. It embarked on a measurement and benchmarking push. It also began categorizing lost customers as either controllable (ADP could have done more to keep them) or non-controllable (the customer left due to reasons outside ADP's control, such as a bankruptcy). This breakdown has allowed ADP to reduce the number of controllable losses by deploying its service and support resources more effectively. Over the past five years, ADP's client-retention rate has jumped from 85 percent to 91 percent, increasing the revenue from its existing customer base.

Experts agree that customer insight should continue to drive decision making. Its importance no longer needs to be sold to the executive suite at most companies. Paul Bierbusse, senior director of customer intelligence at SAS, says, "I see the rise of the intelligent company. This will be a company that uses knowledge about its customers all across the company, and all up and down the demand chain. Customer insight should influence every interaction that a company makes."

Additional Information:
 

Now for the cold reality: History illustrates that it is unlikely that you will generate the returns that shareholders expect – returns that will surpass the acquisition premium required in the just-completed deal. In fact, the analysts are already publishing briefs raising just that specter – and the capital markets have reacted by discounting your share price of late. What is your blueprint for overcoming the hurdles and realizing the promise of the new entity?

The Drive to Acquire – and a Resulting Catch-22
It is well documented that, after a lull in activity, mergers and acquisitions are back in vogue with financial institutions across the globe. The imperative for institutions to demonstrate sustained revenue and earnings growth in principally mature markets has restarted consolidation activity in the U.S. market with gusto. In addition, top European and Asian institutions are looking to solidify their positions as leaders among the global banks via acquisition activity in both home and foreign markets.

However, like Ulysses charting his course between Scylla and Charybdis, an executive must strike the balance between the growth promise of acquisitions and the complexity of extracting value out of each deal. Though the capital markets do penalize banks that don't post revenue/earnings growth with lower relative valuations, the markets are also quick to punish the company seeking acquisitions and with good cause: Nearly 70 percent of banking M&A activity in the last half-century resulted in the acquiring party failing to recoup the purchase premium.

Why the high rate of failure? The financial performance indicators most often cited as available "synergies" in an acquisition scenario include operating cost reductions and revenue growth. Traditional approaches to realizing operating cost reductions – closing branches, eliminating redundant staff and combining back offices – are necessary, but not sufficient, to earn returns in excess of acquisition premiums. Those activities are well understood, and it's fairly straightforward to include their impact in valuation models. The real challenge is realizing those cost synergies in practice to the extent forecasted in the pre-acquisition due diligence process.

An even more difficult proposition is the process of forecasting and then realizing the promise of revenue synergies. Notions of "cross-selling," "up-selling" and "share-of-wallet" growth fuel pre-deal speculation about how much new revenue the institution can generate from the combined customer base. However, even the best revenue growth models are subject to assumption bias, and most will have a high variance in outcomes between various scenarios. Further, poorly executed cost-cutting activities can alienate the very customers that are supposed to fuel revenue growth. In the mid-1990s, one large merger was so poorly executed that the buyer lost 20 percent of the acquired bank's customers. Also, a 2003 study by the Federal Reserve Bank of Chicago concluded that it was the competing institutions, perhaps aware of customer irritation over bungled mergers, that gain greater efficiencies after a merger – not the merged banks.

What can your institution do to keep an acquisition from turning into an opportunity for the competition? To realize the profit enhancement embedded in these potential synergies, you must control business performance drivers better than the acquired company's management. These drivers include:

• Effective customer portfolio management to ensure profitable revenue growth.
   
• Operational distinction across the core resources of financial capital, personnel and information to spur advantaged cost ratios.
   
• Enterprise-level risk management to improve capital ratios and to reduce income volatility due to unexpected losses.

Keeping Your Eyes on the Customer
This discussion will focus on customer portfolio management since, essentially, the new institution must not just be equal in revenue to its two parts, but greater. To create that synergy – and to do so profitably – it must analyze its combined customer portfolio in new ways to discover new revenue growth opportunities. This is rarely as simple as sending a direct mail piece on Bank A's tiered checking accounts to Bank B's customers or creating a marketing piece on Bank B's Internet banking options for Bank A's customers. It requires a more insightful, forward-looking approach.

A business strategy to realize revenue synergies will generally pursue the following objectives:

• Identify, understand and address your best (and worst) customers.
   
• Target and sell existing products and services to both acquired and existing customers.
   
• Develop compelling new offerings, price schemes and marketing programs for the entire customer portfolio.
   
• Retain and increase the share of wallet for the most valuable customers.

A company must possess a number of core capabilities in order to accomplish these objectives. As the diagram below notes, these begin with the ability to build a foundation of customer information that is 360 degrees in nature and flow through to the capacity to reach customers on a one-to-one basis via effective marketing delivery systems. Let's explore these capabilities in more detail.

A Single View of the Customer
Many institutions have difficulty accessing, consolidating and analyzing the necessary customer data that exists across its various banking systems. This issue is exacerbated in a post-acquisition environment as the number of systems and discrete customer databases expands. Becoming customer-centric requires a view of data that involves no walls. Organizational hierarchies that keep the credit card data in one silo, the DDA data in another and the mortgage data in yet another must be eliminated. A "single view" of the customer must be created, one that consolidates relevant and accurate data related to a single customer across different organizations, databases and operational systems.

An Understanding of Customer Profitability Drivers
Effective data coupled with the right analytic processes and software can prove or refute theories about which customers are profitable and which are not. You might have thought the customer with a large stock portfolio was a profitable customer until you discover the account holder not only makes frequent trades in a high-risk hedge fund, but also calls the broker regularly to discuss strategy. A customer with less money, but who banks by direct deposit, makes withdrawals from an ATM and carries a modest balance on his credit card could be a much more profitable customer.

Understanding customer profitability via activity-based costing helps define profitability segments and their profit drivers; it also provides clues on how to improve costs-to-serve (and therefore, profitability) in the future. Whether your approach only ascribes product manufacturing and distribution costs to customers or seeks to fully allocate all costs and capital, identifying customer profitability drivers is a necessary dimension to understanding and segmenting your customer base. The approach also identifies your unprofitable customers and will provide alternative strategies for how to unlock the value hidden in these assets.

A Meaningful Customer Segmentation Process
A customer-centric approach must be able to segment the customer base in multiple ways. It isn't enough to simply know your customers' ages and say, "We'll market IRAs to the 40-year-olds." It isn't enough to know the total assets a customer holds with you and in which accounts. It's much more granular. It's knowing which customers respond to e-mail marketing efforts or mailers, whether they move money in and out of accounts and how often, or their preference for carrying debt on a home equity line versus a credit card. It is packaging all of this data into a single view of the customer that can be updated in real time. You need to know what the customer is doing today, not what she did six months ago.

However, many institutions primarily segment by demographics and the products that their customers own. These segmentation approaches are rudimentary and do not necessarily relate to customers' financial needs or likely behaviors. Without accurate customer segmentation with respect to current needs and/or likely future behavior, companies will have difficulty executing successful strategies for improving customer profitability with new products or increased marketing campaigns. A deficient segmentation process may also negatively impact customer loyalty and ultimately increase costs by mismatching product/pricing offers and appropriate customer segments.

A more sophisticated process of segmenting customers by meaningful dimensions, including demographic, geographic, attitudinal, behavioral and profitability, will yield distinct and manageable groups for targeted activities. Programs such as marketing campaigns tailored for specific offerings (e.g., low-interest home equity loans or debt consolidation) will have much higher success rates over time due to greater customer response. In addition, incorporating a robust segmentation process will help identify movement between segments of specific customers (based on changes in needs and/or behavior) and will pinpoint the emergence of new and distinct segments over time.

Targeted and Appropriate Cross-Selling, Up-Selling and Retention Programs
Undisciplined mass marketing efforts can cost more than the business they bring in. They can also be a turnoff to customers whose mailboxes are bursting with offers. Using the foundation of a single customer view, an understanding of customer profitability drivers and a refined customer segmentation scheme, a company can use sophisticated analytic software to predict "what next?" for individual customers. Analytic software allows a company to build predictive models based on customer segment characteristics and outcomes (i.e., demonstrated behaviors), and then apply those models to other customers to determine which ones are good candidates for similar cross-selling and up-selling offers.

Market basket analysis allows you to predict likely candidates for cross-sell opportunities given historical data on products held by clients, as well as details of active product holdings, customer demographics, payment patterns and other telling variables. For example, you can identify the path certain customers take from simple checking and savings accounts to automobile loans and home mortgages; you can then use that knowledge to score these customers and direct marketing efforts at others who are most likely to follow the same path.

This kind of analysis helps companies understand product affinities by looking for an association between the purchasing of one banking product and another. This association can be detected if two products are sold at the same time or even if there is a time lag between purchases. Either way, banks can identify cross-sell and up-sell patterns and then create profiles of customers that show this behavior. Other customers that match these profiles can then be identified to aid targeted marketing campaigns aimed at increasing customer value.

In a post-acquisition environment, retaining profitable and potentially profitable customers is a top priority. These analytics can be used in a similar way to identify which customers are likely to leave and why – information that can then be used to target effective customer care and retention programs to ensure your best customers remain with your new institution. This ability to predict which customers are likely to attrite – and address the drivers before they become issues – can be a critical competitive differentiator.

Effective Marketing Delivery Systems
Now that you know your customers, understand their profitability drivers and have developed programs appropriate to their segment characteristics, you'll need to apply an array of effective marketing mechanisms to deliver the right offer to the right customer at the right time at the right cost – right?! Fortunately, there are many companies that provide software solutions to accomplish just those objectives.

Marketing automation software helps companies plan, automate, execute and measure marketing campaigns. The best ones will integrate with your "single view" customer database, as well as the processes and analytics you used to assess customer profitability, to develop segments and appropriate cross-sell, up-sell and retention programs.

Interaction management software enables marketers to immediately respond to changes in individual customer behavior to execute real-time cross-sell, up-sell and retention strategies. Sophisticated algorithms can track and recognize changes in individual customer behavior and create real-time triggers and alerts that enable businesses to take instant action. The use of real-time customer behavior to improve customer retention and increase cross-sell and up-sell revenue gives companies an opportunity to take a major step toward one-to-one customer communications.

Marketing optimization software helps companies model and assess the cost/benefit tradeoffs of increasingly sophisticated and frequent customer communications. It can provide insight on how marketing constraints affect profitability and can recommend the best assignment of offers to customers to maximize profitability (or some other objective) given defined constraints. Though many of these software offerings are fairly new, the best ones will integrate with marketing automation software to ensure a closed-loop marketing delivery system.

Preparing for Post-Acquisition Customer Integration
Just as financial institutions prepare detailed plans for cost containment/reduction in an integration environment, an executive must evaluate his company's ability to proactively manage its customer portfolio. As your firm considers a merger or acquisition, ask yourself some of these questions:

• Can we build a single view of our clients using all available data sources? How quickly can we merge an acquired firm's data into ours? And with what level of data integrity?
   
• Do we understand the profitability (and drivers) of our existing customers? Are we more product-centric than customer-centric in our understanding of profitability?
   
• How do we create and target customer segments? Is each defined segment distinct and manageable?
   
• If we acquired a bank today, could we rapidly determine which of our clients might be interested in a unique product offering of the acquired company? Likewise, how long would it take to tailor a pitch to our new customers about products we currently offer? How would we identify those desirable customers who are at greatest risk of leaving?
   
• Can we create high-volume, opt-in e-mail campaigns that provide a highly personalized communication with compelling response rates?
   
• Can our managers and customer service reps access client profiles on their desktops, allowing for smarter customer interactions?

Having affirmative answers for these questions and the ability to execute customer-centric strategies can mean the difference between extracting real value from your new company and becoming one of the many institutions that fails to make its acquisitions pay.

Q: We've lost trust. How do I regain the trust of my employees after six rounds of layoffs? How does my organization regain the trust of the community after we dumped toxic waste and covered it up? How does my management team regain trust of each other after a nasty political battle?

A: Do you trust me? Good. The truth is, you can't regain trust. Period. You doubt? Think hard about the times you've been betrayed. Did the villain ever find their way back into your heart? If you're like the thousands I've asked, the answer is never. Trust can be gained once and lost once. Once lost, it's lost forever.

So let's ask how we can keep trust from the start. It's really quite easy; if you want to be trusted, simply be trustworthy. The pressures will be great to act otherwise, and if you succumb, well, you'll lose trust and you'll never get it back.

Tell The Truth
I've heard countless discussions about how customers, suppliers, employees, shareholders, or communities can't be told the truth. Maybe we believe that they can't handle the truth, or that the truth will make us look bad, or maybe we don't want to take responsibility for the consequences. So we "position" our statement. We "frame it" carefully. We "massage it." We use careful "spin." In other words, we lie.

Little white lies can work—they help life run smoothly. But bigger lies compound. We end up committing beyond our own moral comfort. This action is recognized in a social psychology principle called "commitment and consistency." That is, once we have taken a position, we are motivated by various pressures to behave consistently with that position, even if it is eventually proven wrong. Our ethical standards slip a bit more each time we hold on to our original stand. Pretty soon, our relationship with the truth is arms-length at best. (For more on commitment and consistency, see the wonderful book "Influence: The Psychology of Persuasion," by Robert Cialdini.)

When people find out you've been lying to them, they know your words can't be trusted. If it's your spouse, they may give you a second chance. If it's your community, they may tell you they're giving you a second chance, but don't count on it.

Of course, there can be genuine reasons you can't tell the truth. Sometimes you're legally bound to remain silent. Sometimes you're negotiating and can't reveal your position. In those cases consider saying, "I can't discuss that." People won't like it, but they won't feel betrayed when the outcome is revealed.

Keep Promises
Keeping promises is an especially powerful form of telling the truth. If you say you'll do something, do it. If you promise you'll show up, be there. If you say you'll deliver high quality, don't skimp. We all know business people who eagerly promise anything to a customer or colleague rather than face their disappointment. They rarely remember what was promised, which is just as well because they couldn't have delivered. Over time, their credibility drops so far that no one in their company believes a word they say.

Your marketing material makes promises, by the way. As a response to the low-carb craze, some cereal companies made "low-sugar" cereals. Read the label carefully and you'll discover they have as many carbs as high-sugar cereals. If you're targeting health-conscious consumers, don't promise them health and then deliver junk food. Keep your promises and you'll keep trust.

Their Interests Before Yours
One powerful way to sustain trust is to put the interests of others ahead of your own. When people know you're looking out for them, they'll believe in your intentions even when you have hard news to deliver or need them to put in heroic efforts.

In the book Good to Great, Jim Collins introduces the "Level 5 leader" who puts the needs of the organization ahead of his or her own ego. Such leaders really inspire us to give our all because they demonstrate by example that with personal sacrifice we can achieve greater success as a group.

Putting others first means knowing their goals and concerns, and helping them. Is a colleague a passionate baseball fan? Give them your Red Sox tickets some afternoon, for no reason at all. Is that the game where the Red Sox win the World Series? Even better! You'll suffer real pain at giving up your tickets. Public sacrifice, if it's real and visible, builds huge credibility when it's in the service of others. And the sacrifice must be real. Reducing your bonus from $2 million to $1.75 million just doesn't count.

Behave Ethically
At its core, people trust you when they know you're safe to deal with. They observe how you treat them and others. Do the right thing in all your dealings and people will get it. They'll know you're trustworthy.

If you get a reputation for taking advantage of others, however, even people whom you have treated well can start to doubt. One CEO wrote articles trumpeting his ethical behavior. Employees knew otherwise; they'd seen him cheat distributors and shirk on his commitments to his partners. So the more the CEO crowed, the more the grapevine passed anonymous notes highlighting his lies.

Changing Players to Gain Trust
Trust isn't one-way, of course—trust happens between two people, or between a person and an organization. You can trust a person while distrusting their organization. I love my trusted bank manager; she fixes my problems even when I feel like the bank is hell-bent on alienating me at every opportunity. (They charge how much for a bounced check?)

You can trust an organization while distrusting its people. Think politics. We can trust our country's integrity even when individual politicians make our stomachs crawl.

In business, one bad manager rarely destroys trust in the entire company. But several bad managers, armed with policies that clearly treat people as disposable implements, can destroy trust in an entire organization.

At that point, bringing in a new management team that takes clear, visible action might have a chance of rebuilding trust. These actions will be hampered because employees have learned to distrust the organization as a whole. But at least the new leaders will have a chance to gain one-on-one trust and translate that into the organizational changes needed to build trust throughout.

Is This Really Necessary?
I must confess that this article has been hard to write. "Do the right thing," "Treat people with respect," "Don't lie." Do these things really need to be said to adults? Apparently so. As businesspeople, we're not trustworthy.

The June 2002 Conference Board Commissions on Public Trust and Private Enterprise Report found that somewhere between 37 percent and 76 percent of employees "observed misconduct they believe could result in significant loss of public trust if it were to become known." Of course, the employees are the public, so public trust is losing on an ongoing basis.

It's up to us to fix the situation. We need to regain the public's trust, which means we need to regain our trust in each other. And it will only happen if we become the most trustworthy people we can become.

Your Action Challenge This Week
Pay attention to how often you tell the truth, how often you make decisions as if other people (customers, employees, suppliers) don't matter, and how often you put the well-being of others ahead of your own. Then ask yourself: Am I someone I would trust?

Additional Information:
Reprinted with permission from Harvard Business School Working Knowledge, April 2005.

Stever Robbins is founder and president of LeadershipDecisionworks, a consulting firm that helps companies develop leadership and organizational strategies to sustain growth and productivity over time. You can find more of his articles at http://LeadershipDecisionworks.com. He is the author of It Takes a Lot More than Attitude to Lead a Stellar Organization.

1. Reduce Unnecessary Customer Interactions
The first step in the customer-mining process is to eliminate the “big rocks”—the customer interactions that are unnecessary because they are the result of poorly designed processes or misleading customer communications.

Advanced business intelligence and analytics capabilities support the kinds of root-cause analysis that can identify problematic customers. These intelligence tools can gather large volumes of data from multiple sources—from all customer touchpoints and enterprise data sources—and integrate that information into a meaningful framework for analysis. Companies can then look for statistical correlations and deviations to identify causes, and then also develop careful, cost-based plans for taking corrective action.

For example, when one leading US bank was considering a marketing campaign to expand its customer base, executives were concerned that already-high call center volumes would be pushed beyond capacity. Using a root-cause analysis tool, the bank found that customers who had established accounts online were calling the contact centers seven times more often than other customers. This insight helped the company realize it needed to refine the Web channel as well as better educate Web customers about how to use that channel. In a matter of days, the bank was able to produce insights that might have previously taken it six months.

2. Take an Intelligent Approach to Customer Self-service
The second stage of the customer value mining process is to focus on interactions that are better handled through a self-service channel—“better,” that is, not just for the company but for the customer. Indeed, not every customer, nor every kind of interaction or inquiry, should be directed to a self-service channel.

Successful companies are able to distinguish between the customers who generate the most profits and those who actually cost the company money. These industry leaders then focus their resources on further cultivating relationships with the profit generators while redirecting other customers to less costly interaction options.

The key is to take a customer- centric approach—tailoring the self-service option to customer need and customer segment, and speeding customers through the process with user-friendly interfaces or interactive voice-response capabilities that do not turn people away in frustration. One impediment to delivering a branded customer experience has been unsuccessful use of integrated voice-response systems. Most people have experienced the limitations of these systems (“Press 9 to tell us how frustrated you are right now”). In addition to damaging the customer experience, the ineffective use of IVR can actually add cost, since up to 80 percent of customers using IVR systems end up talking to a live agent anyway.

For example, when US-based Liberty Wireless—a leading independent provider of prepaid cell phone service—examined the performance of its IVR-enabled customer self-service, it decided to take action: It added speech-recognition capabilities that help automate customer care while also projecting its desired image as a high-tech company. A customer activates these capabilities when using the phone on the Liberty Wireless network for the first time. The application provides a speech-based tutorial that informs the caller about service features.

Though the new customer still finishes the call with a live agent, the first call application saves time by automatically providing essential information to the customer. As a result of these initiatives, the company decreased the number of calls going to live agents by 40 percent, reduced operating costs by 30 percent and lowered calls per subscriber by more than 60 percent. Customer satisfaction scores have increased accordingly.

Web-based self-service capabilities have become increasingly sophisticated as well, and companies are discovering that many of their customers—generally those who are younger and more comfortable in the online world—actually prefer self-service functions for basic information requests and purchasing. Bank of America’s award-winning online banking site has improved customer satisfaction—measured by customers who rate the bank a 9 or 10 on a 10-point scale—from 41 percent to more than 50 percent.

3. Make Contact Center Agents More Effective
At the contact center itself, leading companies are discovering that investments in desktop tools will pay off in increased customer loyalty and lower costs only if they are accompanied by better training and performance support for the service agents. A focus on both workforce performance and enabling technology can have a dramatic effect on the effectiveness, quality and efficiency of the contact center.

Learning programs based on simulation techniques (where agents practice customer interactions in a risk-free environment) and more focused training (where agents can review a short multimedia segment, for example, about a new product or service) are two areas being explored today by companies in search of high performance. For example, BT, Britain’s leading telecommunications carrier, achieved stunning results using simulation-based training for its customer service agents. In one instance, BT was able to raise the rate of sales conversions on a new offering by 102 percent and increase customer satisfaction by 16 percentage points.

New desktop applications and workflow management tools are also having a dramatic effect on the productivity of agents. Not only do they automate the workflow among the workers themselves; they also provide rapid access to information needed to serve customers by integrating multiple channels, desktop applications, business intelligence and customer data sources.

When New York City, for example, implemented its 311 Citizen Service Center in 2003, content management tools allowed the city to transform the service into a “one-stop” resource center where its 8 million residents could have 24-hour access to nonemergency municipal services and information in more than 170 different languages.

The retail bank ING DIRECT—the US subsidiary of the Dutch financial services company—wanted to build rich customer relationships without building expensive bricks-and-mortar branches. To do this, the company needed to combine customer intelligence with real-time analytics to maximize interactions across channels and product lines. By infusing the agent desktop environment with customer insight, the company improved its ability to deliver the most relevant products and messages to individual customers when appropriate during inbound interactions.

The company has had call center offer-response rates as high as 42 percent, and its average offer-to-acceptance rate rose to 9.2 percent, far higher than the channel average of 7.4 percent. As a result of these and other benefits, ING DIRECT began to recover the cost of its investment in three months, and saw a 400 percent ROI in the first year of use.

4. Leverage a Flexible Sourcing Model with Global Reach and the Advantages of Competition
Through 15 years of trial and error, the conventional approach to outsourcing customer contact has definitely produced results: specifically, many customers dissatisfied with their service experience, and many companies unhappy that they never realized the promised cost savings.

To a large degree, these outcomes resulted from companies ceding control of too many elements—innovation, flexibility and scalability—in the process of lowering labor costs. Now they have the opportunity to re-exert control and reintroduce these factors into their sourcing model.

The next generation of customer contact outsourcing will leverage the best mix of options available globally, both for services provided in-house as well as those outsourced. For example, to continuously enhance service levels, the Professional Education Institute—an education and training organization focused on real estate investing and financial management—uses multiple outsourcers. According to Chief Marketing Officer Roger Sinnes, this approach helps the company “create an environment of healthy competition between multiple outsourcers where each vendor has an equal opportunity to earn the lion's share of your call volume. It not only increases overall performance but also gives you that backup if a vendor runs into an issue where they can't handle your calls."

When companies are not locked into a sole-provider arrangement or bound by the constraints of one provider’s infrastructure, they retain the ability to respond quickly to new opportunities and competitive threats.

In addition to offering more flexibility, this approach will also introduce more competition into the outsourcing model. With multiple providers vying to set the best benchmark of both cost and satisfaction, companies will have far more options for delivering the best customer experience at the best possible cost.

With growth back on the strategic agenda, companies are increasingly focusing on attracting and keeping customers, while fending off competitors trying to take those customers away. Responding to market threats while holding down costs means companies must move away from piecemeal CRM investments. Instead, they need to turn to more holistic and transformational programs that touch all customer channels and treat the optimal customer experience as the paramount measure of success.

Today, a combination of new strategies for handling customers, more flexible investment options, and creative operating models makes it possible to achieve high performance by aligning customer treatment with customer profitability.

Additional Information:
Tom Van Horn leads the Accenture Communications & High Tech Customer Contact Transformation business. With extensive experience in both inbound and outbound large-scale customer contact initiatives, Mr. Van Horn has worked in the call center industry as well as with telecommunications, technology and media companies. He is based in Denver.

Harrah’s Entertainment, the world’s largest gaming company, doesn’t just leverage the power of its CRM systems to understand the past. It relies on CRM to predict the outcome of future marketing campaigns. This sophisticated approach encourages the best customers to return to its casinos again and again.

The company’s CRM architecture includes software for predictive analysis and business intelligence. This innovative blend of advanced technology and marketing expertise is a winning combination. “We’ve really chosen a path less traveled,” says David Norton, senior vice president of relationship marketing.

Through Harrah’s Total Rewards program, customers earn credits each time they visit and play. Accumulated credits are traded for rewards, cash, coupons or complimentary services, and tallied to determine customer loyalty levels of gold, platinum or diamond. Associated services and privileges become increasingly valuable with each new level.

“Using information gathered almost exclusively through card use, we have assembled a centralized, award-winning data warehouse containing information about how our customers interact with us,” explains Harrah’s President and CEO Gary Loveman. “Decision-science-based analytic tools allow us to better understand our customers so that we can offer them the best reasons to visit and play at our properties.”

Harrah’s first established a segmented marketing approach in 1998. Using historical data, which showed how often customers visited and how much they spent, these early modeling efforts provided basic segmentation based on various demographic trends.

Historical data show how often a customer visits Harrah's casinos, explains Norton, but predictive models reveal which customers are likely to visit other casinos in the market as well. Once these customers have been identified, Harrah's can target them for campaigns that will draw them back to Harrah's casinos.

Clearly, the Total Rewards is more than just a loyalty program — it’s an essential component of a highly advanced customer relationship management system.

Without its advanced CRM capabilities, Harrah’s would have to send blanket marketing materials to everyone on its mailing list, which would lower the profitability of its campaigns significantly. Instead, the company can divide customers into more than 80 different segments for each marketing campaign and target only those who are most likely to respond.

Since nearly 50 percent of Harrah’s revenue is driven by marketing, and the precision of its CRM capabilities helps to ensure the effectiveness of those efforts. Most importantly, the program helps Harrah’s staff treat all of their best customers — not just the high rollers — like VIPs.

Additional Information:
Jeanette Slepian is President of BetterManagement, a unique mix of educational activities connecting decision makers with relevant information. BetterManagement is based in Beaverton, Oregon, and has offices in Germany and Australia.

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.

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.

1. Refocus Your Strategy
At a strategy level, banks spend more time trying to squeeze more value from customers rather than finding new ways to provide value to customers. This approach reinforces a product driven business model in which separate lines of business work independently and ultimately destroy profit through unfocused cross-sells. To get profitability on track, retail banks must refocus their strategy from the “customer-in” rather than “product-out.” Success requires deeper insight into customer value to focus resources and offerings on the most profitable customers backed by a clear visibility into customer needs.

2. Retool Your Mechanics
The second step is retooling the mechanics of customer value: cost, potential value and needs. By combining Activity Based Costing methods with a firm grasp on the potential value of customers (how much profit could a customer deliver?) and their needs, banks take one step closer to competitive advantage. Retooling their customer-value mechanics leads to a prioritized set of customer groups backed by a fully scored database and value model. These are the tools a bank needs to deliver profitable customer experiences across marketing, sales and service.

3. Realign Your Organization
Customer value insight truly pays off when retail banks begin to align their organizations around customers rather products or lines of business. Start by managing the customer experience. From relationship managers to ATM, a retail bank must deliver a positive and consistent experience to high-value and high-growth customers. To achieve this goal, owners within marketing lead the way and track progress through key metrics. Behind it all sits an integrated technology infrastructure that takes customer intelligence out of a back room full of experts and into the hands of customer-facing employees.

To download a copy of the full white paper, please click here.

Roy Cardiff runs a mail-order business that tracks sales to each customer. He recently decided to cut costs by curtailing catalogs to those customers who are least likely to buy from him in the future.

His customers break down into three categories: those who made several small purchases throughout the past year; those who made a single purchase but for a much larger amount, and those who have had a long but sporadic relationship with his firm.

Which segment of customers should Smith prune from his mailing list?

According to several Wharton marketing professors who have studied this issue, there is no easy answer, despite new and increasingly sophisticated efforts to measure what is called “Customer Lifetime Value” (CLV) – the present value of the likely future income stream generated by an individual purchaser.

“For many companies, their whole business revolves around trying to understand which customers are worth keeping and which aren’t,” says Wharton marketing professor Peter Fader, who used the mail order example above in a recent co-authored paper entitled, Biases in Managerial Inferences about Customer Value from Purchase Histories: Intuitive Solutions to the Mailing-List Problem. “This has led managers from a broad cross section of industries to seek out more refined measures of CLV, using data-intensive procedures to identify top customers in terms of their likely future purchasing patterns.”

The goal is not only to identify customers, but to reach out to them through cross-selling, up-selling, multi-channel marketing and other tactics – all of which are tied to metrics on attrition, retention, churn and a set of statistics known as RFM – recency, frequency and monetary value.

“CLV is a hot area,” notes Wharton marketing professor Xavier Dreze, co-author of a new paper entitled, A Renewable-Resource Approach to Database Valuation. Although CLV is by no means new – it has long been used in business markets dealing with large key accounts – the concept has been energized by the increasing sophistication of the Internet “which allows companies to contact people directly and inexpensively.” CLV, Dreze says, “sees customers as a resource [from whom] companies are trying to extract as much value as possible.”

Yet many companies are discovering that CLV – which is one component of Customer Relationship Management (CRM) – remains an elusive metric. First, it is hard to calculate with any degree of certainty; second, it is hard to use.

“The only number a manager can have much confidence in is a customer’s current profitability,” says Wharton marketing professor George Day. “And the basic question becomes, now that you have that data, what are you going to do with it? Some companies use this information to create different programs for different value segments. In the financial services industry, for example, customers get different levels of service depending on how big an account they are. But there is always the risk that by doing this you anger other customers.”

In addition, it’s hard to predict how long a customer will stay with the company or how ‘growable’ he or she is. “In the last analysis,” Day says, “companies don’t really know how profitable customers are.”

Rolling the Dice
CLV is an intuitively appealing concept, but one that for a variety of reasons can be very hard to implement, notes Wharton marketing professor David Bell in an article entitled, Seven Barriers to Customer Equity Management.

CLV, say Bell and others, works best in industries where there is a high cost of acquiring or retaining customers, such as in financial services, airlines and hotels. “It’s also useful in situations where you have a skewed distribution of transactions – i.e. where a small number of people drive most of the business, as in hotels – and where firms can offer rewards and inducements to affect customer behavior,” Bell notes. An example would be airlines companies that can upgrade passengers to first class – a benefit that is considered big to the passenger but whose cost to the company is small.

Collecting data on CLV can offer particular companies a number of benefits, Bell adds. For example, the individual transaction data collected by a hotel helps the company identify its best customers and cross-sell them other products. It also allows company marketers to target that group for customer feedback. Using that feedback, the company can then make smarter decisions about where to most efficiently allocate its marketing resources. Suppose the data shows that a significant percentage of the customers come from upstate New York and are in their 50s; the hotel can use that profile for more accurate outreach, he notes.

Bell points to Harrah’s Casino as a CLV success story. Based on information gleaned from its loyalty program, Harrah’s can now figure out “who is coming into the casino, where they are going once they are inside, how long they sit at different gambling tables and so forth. This allows them to optimize the range, and configuration, of their gambling games.”

Others cite the health care and credit card industries, direct marketers and online email marketers as potential benefactors of CLV data, in part because they are characterized by direct customer contact and easy tracking abilities. For instance sales forces within the pharmaceutical industry, Dreze points out, can use relevant data to decide how often they should visit doctors’ offices to pitch their companies’ drugs.

Basically, says Day, CLV is most applicable “any time you have a database with customer profile and transaction information. But if you are working through channels – using a value-added retailer, for example, or any similar situation where you don’t have a direct relationship with the customer – then it is not as easy to implement.”

Beware Those Angry Customers
Now that marketers can collect better purchase transaction data to help determine a customer’s lifetime value, how should this data be used?

The answer, suggest some researchers, is “cautiously.”

“People are idiosyncratic,” says Bell. “On the individual level, it’s hard to predict customer behavior. It’s easier to predict the behavior of market segments. We can say, for example, that on average the business travel sector will stay “x” number of nights at the Hilton. But if we try to predict how many nights Mr. Jones will stay at the Hilton, it’s a more difficult forecasting problem.”

One of the difficulties with implementing the CLV approach, adds Bell, is that the models forecasters use are very sensitive to assumptions. For example, models frequently make assumptions about how long a customer will continue a relationship with the company, whether that relationship is an active one and how much the customer will spend. Yet some of these assumptions may be inappropriate. “Just because I spent $100 last year doesn’t mean I will spend $100 this year,” says Bell. “Or if a customer is inactive, is it because he has temporarily stopped using the product or has switched to a competitor?”

The problem with Internet valuations was that “many companies made inappropriate assumptions about how much customers were worth, how much it cost to acquire them and how long they would stick around,” Bell notes. “The calculation of a dollar value turns out to be very sensitive to these critical assumptions. Any errors that you make can be compounded, which means you can end up with wildly different estimates if just one of the assumptions is off.

“And yet a lot of companies are now using some measure of your lifetime value to determine how they should treat you,” he adds. “If I am an average customer I get put on hold. Otherwise, two rings and I strike right through to a real person. But that assumes that people are fairly static. You have put them in certain buckets and they stay there. Yet perhaps if you had treated me better in the beginning, I would have become a better customer.”

In addition, when firms value their own customers, they are making inferences based on what they know of a person’s history with that firm. “There is missing data. I don’t know what you are doing elsewhere. It could be that you spend $100 with me every year, but are also spending $500 with one of my competitors,” says Bell, referring to ‘share of wallet,’ or what a customer spends with your company versus what that customer spends with your competitors. “That is the problem with this methodology. You are trying to assign values to people based on information you have acquired about their transactions with you and nobody else.”

Any model a company uses can provide only one input into the decision process, Bell adds. “Intuition, managerial judgment, have to be there as well.”

Day cites the case of a manufacturer of large scale components who learns he has an unprofitable account. “What do you do? The account may be unprofitable but in these kinds of business markets, that account could be 15% of your sales. It takes a lot to announce that you can’t afford to service them anymore ... Lifetime value is after the fact. The tricky part is forecasting the prospective value; how do you know what this customer will do in the future?” A company’s biggest risk, he adds, is that they “inadvertently turn off customers” who may have become profitable to them in the long term.

Fader suggests that some CLV models ignore the “inherent randomness” of individuals. “These models look at customers’ past behavior and view each one as if he or she were a fixed annuity that pays off at certain stages … But the pattern of past transactions isn’t the best, or the only, predictor of the future.”

Water Skis and Goggles
While tactics like cross-selling and up-selling have been around for years, these days they are used more frequently and aggressively to try to augment customer lifetime value, says Fader. Their success, he suggests, is mixed.

In cross-selling, a company that has sold you water skis, for example, will try to also sell you goggles. For marketers, the appeal is clear. “It’s easier to sell to somebody that you already know,” says Dreze. “It is trying to maximize the value of the relationship that you already have.” Fader, however, is “somewhat skeptical of the tactic. If someone’s behavior within a category is largely random, then when you take the randomness in one category and cross it with the randomness in another category, it’s often very hard to make any valid connections.”

Up-selling can also be problematic. Consider Amazon, which provides free shipping once a customer spends “x” dollars, or offers a second book for a discounted price once the customer has bought the first book. “In the Amazon example, perhaps a customer would have paid full price for the second book and didn’t need the reduced offer,” says Fader. “Some companies put too much emphasis on up-selling. It’s hard to quantify the true impact of these efforts. Looking at the sales numbers alone doesn’t indicate the amount of incremental profitability that can be directly tied to the marketing effort.”

A sales tactic similar to cross-selling is multi-channel marketing. “It used to be that most companies had only one touch point with the customer,” says Fader, “but now there are many kinds of retail outlets, plus the Internet, direct mail, call centers, etc. It leads to an issue of resource allocation. If one customer uses the Internet and another uses the call center, should we treat them differently? Clearly you might want to push some people to the Internet because it’s cheaper than staffing a call center, but the question is, which customers? What are the behavioral characteristics of people who can be pushed? Should you risk angering loyal call center store customers by trying to move them online or should you focus on less loyal ones even if you can’t get as much value out of them?”

What it gets down to, says Fader, is that “some selling tactics are good, some are bad, but in general it’s hard to sort out the returns on these marketing investments and link them back to ongoing CLV measurement/management. As companies try out many different tactics on their customers, they inadvertently ‘contaminate’ the CLV numbers, making it even harder to figure out which customers to target or ignore in the future.”

Ongoing Research
In a recent paper entitled, Investigating Recency and Frequency Effects in Customer Base Analysis, Fader, along with co-authors Bruce Hardie, Chun-Yao Huang and Ka Lok Lee, look at how database marketers assessed the value of different customer groups in relation to their past behavior patterns before CLV became so widely-used among managers. “The most popular framework classified prospects based on RFM: the recency, frequency and monetary value of past transactions,” Fader says.

RFM has its roots in direct marketing, one of the most progressive industries in terms of using CLV concepts. Fader and his colleagues wanted to know how the simple RFM measures relate to the more complex CLV estimates, perhaps as “leading indicators” of future purchasing. “If you have a customer who has bought a lot of merchandise but not lately, and a customer who has bought some merchandise lately, which one is better in terms of CLV and is therefore more desirable?” Fader asks, referring back to the opening example. “And how do the tradeoffs between recency and frequency play into this?”

In their paper Fader and his colleagues suggest that simple statistics such as recency and frequency can in fact offer valid estimates of future lifetime values, i.e. “that a limited amount of summarized transaction data, when viewed the right way, can yield CLV forecasts that are just as accurate as those generated from the entire highly-detailed purchase history. The challenge for practitioners is knowing which summary statistics to use, and how to use them correctly. Many common ‘rules of thumb’ don’t lead to very effective managerial policies,” he says.

In Biases in Managerial Inferences about Customer Value from Purchase Histories: Intuitive Solutions to the Mailing-List Problem, Fader, David Schweidel and Robert J. Meyer set aside their complex equations in an effort to gain a better understanding of these rules of thumb. Fader recognizes the fact that “in most real world settings, the identification of key customers still has a strong intuitive component.” In other words, despite modeling tools that use purchase transaction data to project future buying patterns, “managers make extensive use of subjective rules for identifying those customers who are likely to be the best (or worst) source of future sales.”

The paper notes that little empirical work has been done examining the ability of managers “to form inferences about customer potential from sales histories…” The researchers address this issue by setting up situations where participants are shown purchase histories for a series of customers and asked to make different assessments about them.

What we found, says Fader, is that managers are inconsistent in their use of summary information such as recency, frequency and monetary value. The ways that managers use these cues vary drastically based on the task they are facing (e.g. figuring out which customers to add to the mailing list and which to drop) as well as the format used in presenting the customer purchase history data to managers. “It is vitally important to understand how managers are affected by these external factors before we encourage them to use any ‘black box’ models ... We need to balance our high-tech model-building efforts with a better understanding of the psychological aspects that underlie managerial decision making.”

In A Renewable-Resource Approach to Database Valuation, researchers Dreze and Andre Bonfrer offer a “new way to look at customers. Traditional CLV looks at the net present value of all income generated by one customer. Part of the assumption when marketers compute lifetime value is that at some point the customer will defect,” says Dreze.

But when you make that assumption, he adds, “you severely underestimate the value of the database. If you were trying to optimize your marketing actions based on that formula, you would make the wrong decisions. The reason is because yes, you lose some percentage of your people every year, but you will acquire new ones. You need to take into account the acquisition of new customers when you value the database.” In other words, Dreze says, “it is important to maximize the database value and not the customer value.”

In other research, Noah Gans, Wharton professor of operations and information management, looks at the issue of CLV from an optimization standpoint: If a company has limited resources, which customers should it focus on?

Gans has developed theoretical models looking at how the average time that a customer stays with a service provider is affected by the overall level of service quality. “There can be a strong increase in the expected time a customer will stay with you as you improve the average service quality,” he says. But there are other issues that also must be considered: What is your competitor doing? What does it cost for a customer to switch services? How does the evolution of technology affect the transaction?

At some point a company makes inferences about what kind of customer it is dealing with. “Then it takes an action offering the customer a certain level of service quality. In a call center, for example, this would mean giving the customer priority over other callers. That is an operating control the company is using to manage what the customer gets and the costs of serving that customer.”

Gans says he want to use marketing models to make better operating decisions. “I am waiting for somebody to hand me a model of how customers behave – how they respond to different levels of services – and then I can describe the costs of providing a certain quality of service.”

He uses the example of cross-selling. “It’s a very simple problem. You decide at the end of a service whether you should cross-sell. At a call center, for example, cross-selling from an operations point of view adds length to the time of a call and makes other callers wait longer. You need to know how much cross-selling you want to do, when to do it, how much extra capacity it takes, and so forth.

“Any decisions have to take into account the four core marketing factors: price, promotion, product and place of distribution, which all involve marketing but which also have a direct impact on operations.”

Gans addressed some of these issues in a recent paper entitled, Customer Loyalty and Supplier Quality Competition. The paper, he says, comes up with mathematical formulas for a service provider’s "share of customer" as a function of its and its competitors’ overall levels of service.

It then shows that there’s a natural service-level "standard" that competing suppliers will converge to. “In real life, you often hear about these things under the rubric of ‘world-class service-level’” he says. “In call centers, for example, answering 80% of the calls in 20 seconds or less is a common standard.” The paper also shows that the more competitors there are in a market, the higher the industry standard, as one would expect.

In terms of maximizing CLV, Gans believes that for companies there is value to tracking the history of what each customer does and deciding, based on that history, what bucket to place the customer in. “Then, based on your inference about the characteristics of that bucket, you can decide how best to treat these customers, whether it’s cross-selling, up-selling or whatever. But you have to temper that decision because at any given time a customer comes to visit you, you don’t really know what kind of customer he or she is. So your optimal decision has to take into account your uncertainty about how the customer will respond.”

Additional Information:
All materials copyright of the Wharton School of the University of Pennsylvania.
http://knowledge.wharton.upenn.edu. Published: July 30, 2003

Insights and Opinions
During BetterManagement LIVE 2004, we interviewed analysts, industry leaders and visionaries to obtain their insights on emerging trends, upcoming challenges and innovative solutions. Watch these interviews for information that can help you shape your strategies and tactics.

Applying Customer Insight in Banking: An Interview with Bryan Foss
Bryan Foss, IBM Global Financial Solutions, discusses the key to developing customer-centric strategies, the challenge of delivering good customer experience and how a bank becomes "smart."

Competing for Customers: An Interview with Tom Friedman
Tom Friedman, Retail Systems Alert Group, discusses the challenges facing retail organizations today, how retailers stay competitive in a highly competitive industry and why customer lifetime management is important.

Thriving in our Current World Economy: An Interview with Nigel Holloway
Nigel Holloway, The Economist, discusses what lead to the European economy decline, how the war on Iraq impacts our economy and why outsourcing considered such a threat in the United States.

Defining Manufacturing Success: An Interview with John Brandt
John Brandt, the MPI Group, dispells the myth that Chinese manufacturing plants do not focus on quality or innovation. Brandt discusses and explains the top 3 elements that managers must do better to be competitive and why your employees are the most valuable asset you have to lose.

Making Your Marketing Efforts "Simply Better": An Interview with Patrick Barwise
Patrick Barwise, London Business School, discusses some of the survey results. He explains why being "unique" may not be a strategic advantage and how businesses are using new media marketing to more effectively research their customers.

Sprint Redeploys ABM: An Interview with Cynthia Thomas
Cynthia Thomas, Sprint, discusses how Sprint began their ABM implementation and how organizational and marketing changes affected their second ABM implementation. Thomas also shares some of their best practices and lessons learned.

Leveraging Warranties: An Interview with Eric Arnum
Eric Arnum, Warranty Week, explains how manufacturers use warranties as a strategic advantage, how regulatory requirements have impacted warranties and what warranty reports are on his wish list.

Don't forget, BetterManagement offers a wide range of resources to help you explore these and other topics! We publish articles from from over 250 information resources worldwide - business publications, professional organizations, academic institutions, consulting firms, and solutions providers. We present online seminars and e-learning courses that allow you to keep your knowledge and skills current. Our online store offers selected books and educational resources for futher research and study.

Arguably, there's no hotter topic in customer strategy these days than loyalty programs. Banks, airlines, supermarkets, and telecom companies are among those that optimistically reward customers with points or discounts for their consistent patronage.

In the past some points-based loyalty programs amounted to little more than bribes to close business. But today loyalty programs are moving beyond short-term discounting tactics, and are fast becoming an important element of an overall customer strategy based on dialogue, insight, and personalized offers. Take for example how hotels are using information gleaned from loyalty programs to customize the customer experience by adding such personal touches to rooms as exercise equipment. Banks are starting to reward their most valuable customers for an increased share of wallet by tying together several products into points-based loyalty programs. These examples show loyalty as a customer strategy. We applaud that. What these hotel and banking programs do is reward different customers differently.

That's an important factor, because to use loyalty effectively as a customer strategy your company must build its programs so as to entice the right customers to remain loyal. A customer who is a tough price negotiator or a frequent user of support services, for example, may not be a good target for a loyalty initiative even though that customer is predisposed to be "loyal." So the trick is to ensure that your retention efforts are focused not necessarily on the most loyal customers, but on the most profitable customers, and to quantify the value created by an increase in retention. Remember that increasing the customer's lifetime value is your goal—not just higher loyalty per se.

The most basic kind of loyalty program is based purely on transactions. Customers accumulate points that can be redeemed for free goods or discounts on related products. It's a tactical or promotional marketing initiative, and may be effective at stimulating revenue in the short term. But a program built only on points and discounts can easily be trumped by competitors. The more successful it is the more competitors will be tempted to create their own programs, offering more points per transaction or rewards with higher values. An airline frequent flyer program may allow high-value passengers to upgrade to first class, but simply tracking a customer's miles or value won't yield information about their individual attitude toward the airline, which may be the key to why they fly it, and may provide insight into how to grow the relationship.

Priority #1: Uncover Customers' Needs
Beyond the basic points program, however, a more effective loyalty program will enable a company to learn more about its customers by tracking not just their purchases but also their attitudes and needs. A loyalty program can serve as a platform to facilitate richer, more frequent dialogues with customers, to learn things about them that might not be revealed by their transactions. One airline passenger may value onboard service and interaction, for instance, while another one simply wants to be left alone. Or one banking customer wants some expert advice and counsel on the right savings program, while another customer simply wants the bank to serve up a range of alternative savings options.

If Citibank's new share-of-wallet-based loyalty program not only gives customers an incentive to use more of the bank's services, but also provides information to Citibank about the kinds of products and services particular individual customers are most interested in, then the program will generate more value for Citibank, while at the same time making itself more difficult for any competitor to match. The degree to which customers find real value in a loyalty program -- beyond the price-off deals and prizes -- will depend on how different they are in their needs. As we explain in detail in our book Enterprise One to One, the more diverse customers are with respect to their needs, the more useful it is for a company they deal with to ferret out those individual needs and treat different customers differently according to each one.

Before a loyalty program can increase a customer's value to the firm it must first increase the firm's value to the customer. So, one important goal for your loyalty program should be to uncover more and more of each customer's needs. Then, by meeting those needs, you can create a solid basis for loyalty, improving the right customers' lifetime values and earning a higher Return on Customer^sm in the process.

In the end increasing the return on investment on any particular customer -- no matter what his level of loyalty -- requires the customer to change his or her otherwise expected future behavior in such a way as to yield more value. With a more thoughtful loyalty program you'll generate more insight into the motivations and needs of your individual customers. And with better customer insight you should be able to make your value proposition more compelling, timely, and much more relevant for each individual customer. With any luck you'll influence his behavior in a positive way—but increasing his loyalty to you is just one aspect of that behavior change.

Additional Information:
Reprinted with permission from Peppers & Rogers Group 1to1 magazine.

It’s time for Cingular’s final exam. The nation’s second-largest wireless company, with 21.6 million customers to Verizon’s 29.4 million, has spent the 18 months since its creation building a brand, integrating its back offices and figuring out what to do with its two clashing wireless technologies.

This summer, Cingular finally launches service on Verizon’s home turf, in the number-one wireless market in the nation: New York. Success in New York and across the U.S. will rely on Cingular’s ability to integrate its dozen original networks into one seamless whole. The prize: millions of cell phone customers.

"To me, the national footprint is the whole story," says Wharton public policy and management professor Gerald Faulhaber.

Cingular’s Jigsaw Puzzle
The Cingular born in October 2000 was a Frankensteinian patchwork of a company, sporting 60 call centers, 11 billing systems and the leftover IT systems of several legacy acquisitions. Formed from the merger of SBC and BellSouth’s wireless units, the newborn company was still dealing with the aftermath of even earlier mergers, such as the absorption of SNET, PacBell Wireless, Cellular One and Comcast Cellular into SBC.

The company first focused on integrating and unifying – and they did it fast. Cingular will have shrunk to 20 call centers and two billing systems by the end of 2002, says Kathy Dowling, Cingular’s senior vice president for customer service. According to Roger Entner, a wireless analyst with the Yankee Group, that puts Cingular ahead of Verizon, which is juggling at least a dozen billing systems.

One billing system would be best – but two is better than more, says David Croson, Wharton professor of operations and information management. “If I were Cingular, I would build a single flexible-price billing system that could handle many different types of plans, create a custom set of plans replicating each acquisition’s legacy and pricing, and deep-six each proprietary billing/customer service system … At that point, continuing or terminating the different service plans becomes a marketing decision, not a systems decision.” Croson says.

According to Entner, Cingular has already done a good job at unifying its back-office systems, cutting down on the number of network operations centers and call centers. “They’ve done their homework on the back office side.”

But as Faulhaber points out, in an intensely competitive market such as wireless, the carrier can’t afford a misstep. “When you have a choice between Cingular, Verizon, AT&T Wireless and maybe Sprint, you’re not going to put up with much,” he warns.

Filling in the Gaps
Cingular may be huge and diverse, but up until this month it wasn’t truly national. With no small carriers left to snap up in New York City, the company found itself locked out of the nation’s most populous metro market.

So Cingular cut a deal with Voicestream, the smallest (and most financially struggling) of the national carriers. Cingular needed airwaves in New York; Voicestream wanted to enter California and Nevada, where Cingular has a strong network. The two firms formed a joint-operating company in the three states, and Cingular and Voicestream buy airtime minutes from the joint venture.

Meanwhile, Cingular has gone in on another venture with AT&T to build out GSM (global system for mobiles) infrastructure in rural areas where that digital network is weak. “They can compete nationwide quite well now,” Entner says.

The Cingular-Voicestream joint venture allowed the companies to circumvent the huge costs of building duplicate networks from scratch. But G. Anandalingam, adjunct professor of operations and information management at Wharton, believes Cingular’s multifarious network strategy may backfire. “If you look at any telecom network, one of the biggest costs is the interconnect cost where they pay somebody else for carrying their traffic. I’m sure that Cingular’s cost structure will be much worse than Verizon’s.”

Currently there is one major integration challenge left for Cingular. Thanks to earlier acquisitions by both SBC and BellSouth, the company is saddled with two different, incompatible digital wireless network systems. Where Verizon only acquired carriers that used analog or the CDMA (code division multiple access) digital system, Cingular juggles analog, TDMA (time division multiple access) and GSM.

TDMA customers entering Cingular’s GSM markets must roam on another carrier’s service – even though Cingular serves that city – and vice versa. Customers may not notice, but the roaming costs Cingular money.

Bringing the whole system over to one technology will create cost savings in the long term, says Anandalingam. “What customers really want is a good service, the right price and the ability to reach lots of people without getting into a roaming environment. [Cingular] has gotten a good job done [running both TDMA and GSM systems], but it’s coming at a cost, and the cost is an additional investment needed to ensure translation between the two networks.”

The company agrees, according to Dave Williams, Cingular’s vice president of strategic planning. Cingular is in the process of switching its TDMA markets over to GSM, the standard adopted by most of the world outside the U.S. And though there’s a significant cost involved in installing the new technology, Williams and analysts say Cingular has it pretty much under control.

"The most difficult issue with building out wireless is the acquisition of radio sites," says Williams. "We already have those, with TDMA. Overlaying a new technology … is just a case of putting extra cabinets on the sites." The company’s goal is to have half their cities covered by the end of 2002 and the entire network switched over by 2004, he says.

Jeff Rickard, a wireless analyst with Current Analysis, says new TDMA/GSM hybrid phones will help smooth the transition for customers. Cingular is introducing two hybrid phones this year, one from Nokia and one from Sony Ericsson. They’ll also have time to push GSM handsets on former TDMA customers, Rickard says, adding that “it’s not like they’re just going to automatically turn TDMA off and turn GSM on.”

A Cingular Future
As it gears up to assault Verizon in New York, Cingular has been focused on expanding its network and promoting its brand rather than further acquisitions. "All their marketing money during their first year was basically spent on establishing a brand name and thereby destroying the old ones [SBC and BellSouth]. It’s a significant issue," Entner says.

But there’s a danger inherent in switching brand names, Croson notes. "Customers are never more vulnerable to being poached as when their old provider has just been gobbled up … [They] expect nothing less than complete perfection during the transition."

Analysts say Cingular has avoided bleeding customers during this crucial period and has run a top-notch marketing campaign, but that both Cingular and Verizon have suffered from a low number of "net adds" – new customers joining their services. Cingular’s net adds dropped from 866,000 in the first quarter of 2001 to 234,000 in 2002. "Something is not adding up as much as it should be," Entner suggests.

This also may not be the last round of acquisition for Cingular, and speculation abounds as to who will be the next major wireless carrier to fall prey to acquisition. Faulhaber says Sprint is in a weaker position than other carriers; as a CDMA carrier, though, it would be a natural technology match with Verizon. That might send Cingular or AT&T stalking each other or Voicestream, which is currently owned by German firm T-Mobile.

Says Paul Dittner, a wireless analyst with Gartner Dataquest: “Over the next couple of years, we anticipate there’s going to be consolidation” among the major wireless carriers.

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