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					Customer Loyalty
Customer Loyalty
                                                             Agenda




                   •What is Loyalty?

                   •Evolution of the Loyalty Practice

                   •Loyalty Economics

                   •How XYZ Helps Clients Maximize
                    the Value of their Customer Base

                   •Example

                   •Loyalty Tools

                                                        bc
                                                               Loyalty 2
Customer Loyalty

                                                                     What is Loyalty?




        Loyalty is a perspective on business strategy which emphasizes the
        delivery of superior value to the best customers and employees. Since
        their loyalty is key to profit and growth, their acquisition, defection, share
        of relevant wallet provide focal points for measurement, learning and
        improvement.




                                                                          bc
                                                                                   Loyalty 3
Customer Loyalty
                                  Loyalty is a XYZ & Company Innovation




                   "XYZ & Company...is responsible for virtually
                   all the economic research, financial analysis
                   and consulting in the field of customer
                   retention and recovery"
                        Council on Financial Competition




                                                                   bc
                                                                        Loyalty 4
Customer Loyalty
                                                             Agenda




                   •What is Loyalty?

                   •Evolution of the Loyalty Practice

                   •Loyalty Economics

                   •How XYZ Helps Clients Maximize
                    the Value of their Customer Base

                   •Example

                   •Loyalty Tools

                                                        bc
                                                               Loyalty 5
Customer Loyalty
                                               Evolution of the Loyalty Practice
Over the years, the training on loyalty has evolved from “don’t lose any
customers” to “how do I maximize the value of my customer base”.

                Early in Evolution:                  Current View:
                  Customer Retention                    Customer Loyalty


 Fundamental • Keeping customers: Good              • Customers who buy more: Good
 insights:   • Losing customers: Bad                • Some customers will never buy
                                                     more

 What led to   • ROS/RMS doesn't work in            • Credit/casualty losses
 the             services                           • Low spenders or non-borrowers
 insights:     • Quantification of retention        • Share of wallet economics
                 economics


 Some          • Maryland National                  • American Express
 examples:     • MBNA                               • State Farm
               • Commercial                         • BankInter
               • Baxter IVD & IV systems            • First Commerce
                                                                         bc
                                                                               Loyalty 6
Customer Loyalty
                                                                 Retention vs. Loyalty

   What is the difference between retention and loyalty?


               • Loyalty is an approach to business strategy that emphasizes
                the retaining and growing of profitable customer segments. It is
                particularly powerful in clients who are in low fixed asset
                businesses (i.e., service businesses)

               • Retention is a tool we use in diagnosing and measuring a clients
                success in maximizing the value of their customer bases. Other
                tools include share of wallet and customer segmentation.


               • Retention is often confused with loyalty because the early
                insights of the loyalty practice were around the retention of
                customers. However, using retention rate alone to assess
                loyalty may mislead clients and not maximize value.
                Remember, not all customers create value. We want to help
                clients retain valuable customers.



                                                                                bc
                                                                                     Loyalty 7
Customer Loyalty
                                                                                                                 Profitability Drivers - ROS/RMS
                                                                                                                                 (Profit vs. Share)
We start with the empirically based belief that in many
industries, market share is the key driver of profitability.


                                        Beer Industry                                                                                     Soft Drinks Industry

               10%                                                                                               22%

                     9                                                                                            20

                     8                                                   Anheuser-                                18




                                                                                            (Percent of Sales)
(Percent of Sales)
Operating Income




                                                                                             Operating Profit
                                                                         Busch                                    16                                                                    Coke
                     7
                                                          Miller                                                  14
                     6
                                                                                                                  12                                                       Pepsi
                     5
                                                                                                                  10
                                                            Schlitz
                     4                                                                                                                                  7-Up
                                                                                                                   8
                     3
                                                                                                                   6
                     2              Olympia                                                                                                R.C.
                                                                                                                   4
                     1                                                                                             2                               Dr. Pepper
                                                Pabst                                                                        Cott
                     0                                                                                             0
                      0.05   0.1       0.2    0.3 0.4 0.5 0.7      1.0       2.0     3.0x                              .05          0.1           0.2    0.3 0.4 0.5 0.7   1            2      3x


                                   Relative Market Share                                                                                  Relative Market Share


                                                                                                                                                                 bc
                                                                                                                                                                                   Loyalty 8
Customer Loyalty
                                                                                                                Profitability Drivers - ROS/RMS
However, many service industries
(or other low fixed cost businesses)
                                                                                                                (Profitability vs. Portfolio Size)
show no relationship between RMS
and profitability.
                                                                                    Insurance Industry Example
                                         200%                                                                                                     R² = .022



                                                 Amica
       Profitability (Combined Ratio*)




                                         150%



                                                 USAA Casualty
                                         100%
                                                Prudential Property
                                                                        Allstate
                                                                                                                              State Farm

                                         50%                     Liberty Mutual
                                                                Aetna Casualty
                                                         Farmers Exchange
                                                   Nationwide Mutual

                                          0%
                                            0%                          50%                     100%                   150%                200%

                                                                                  RMS (Net Premiums Written in 1989)

                                                                                                                                           bc
* Claims and expenses as a percent of premium income                                                                                                 Loyalty 9
Source: Best's, Property & Casualty Premium Rankings
Customer Loyalty
                                                                                                                          Profitability Drivers
                                                                                                                  (Profitability vs. Retention)
For these industries, retention is a better driver of profitability.
Companies with higher retention utilize their customer assets
more effectively.                    Insurance Industry
                                        80%                                                                                                R² = .82



                                                                                                                                 Amica
      Profitability (Combined Ratio*)




                                                                                                                 USAA Casualty
                                        100%                                                               State farm
                                                                              Allstate
                                               Liberty Mutual                            Nationwide Mutual
                                                                Prudential Property
                                                                            Farmers Exchange
                                                                            Aetna Casualty



                                        120%
                                           75%                                            85%                                        95%

                                                                                 Customer Retention Rate

                                                                                                                                     bc
*Claims and expenses as a percent of premium income                                                                                            Loyalty 10
Source: Best's, Estimated Retention Rates
                    Customer Loyalty
                                                                                                                                        Profitability Drivers
                                                                                                                                (Profitability vs. Retention)
                                           Credit Card Industry (Disguised)                                                               Advertising Industry
                                4%                                                                                  18%

                                                                  Chesapeake                                                                               Leo Burnett
                                                                                                                    16%



                                                                                                                    14%
                                3%                                                                                                                        FC&B
(Pre-Tax ROA, 5 Year Average)




                                                                        Liberty
                                                                                                                    12%
                                                                                                                                               WPP*
                                                                                                                                                                              Interpublic
          Profitability




                                                                                                    Profitability
                                                                                                                    10%

                                2%                                                  Gotham
                                                                                                                    8%



                                                                      Great Lakes                                   6%


                                                                                                                                          Omnicom               Grey
                                1%
                                                            Midwest                                                 4%



                                                                                                                    2%



                                                                                                                    0%
                                0%                                                                                        90%       92%             94%          96%        98%             100%
                                     70%           80%                    90%                100%


                                                         Retention Rate                                                                             Retention Rate

                                                                                                                                                           bc
                                                                                                                                                                         Loyalty 11
Customer Loyalty
Customer satisfaction was the traditional measure                                             Customer Satisfaction 
of quality in service businesses. But there is little                                                    Profitability
correlation between customer satisfaction indices
and financial measures.
                                 Revenue                                                             Revenue Growth
      100                                                                100

      80                                                                  80

      60                                                                  60

      40                                                                  40

      20                                                                  20

        0                                                                 0
            0      1         2             3    4        5                     (40)    (30)   (20)   (10)    0    10      20   30      40        50
                                 Revenue
                                                                                                     Revenue Change (%)
                                                              Profit
                                    100

                                      80

                                      60

                                      40

                                      20

                                       0
                                           0   40   80       120         160          200     240
                                                                Profit
                                                                                                                    bc
Source: XYZ Survey, XYZ & Company                                                                                                   Loyalty 12
Customer Loyalty
                                                             Agenda




                   •What is Loyalty?

                   •Evolution of the Loyalty Practice

                   •Loyalty Economics

                   •How XYZ Helps Clients Maximize
                    the Value of their Customer Base

                   •Example

                   •Loyalty Tools

                                                        bc
                                                               Loyalty 13
Customer Loyalty
The first step in viewing customers as long term
                                                                    Customer Value
assets is calculating lifetime customer value.




              $15                                                $15,000
                  Single
                 purchase



                                                              Retained for 10
                                                                  Years




               "No matter how valuable I was telling them a customer was, our
                people needed to have that magnitude in their mental balance
                sheet."
                 – Phil Bressler, Domino's Pizza


                                                                           bc
                                                                                Loyalty 14
Customer Loyalty
Customers are costly to acquire. The longer a                                   Customer Profit Pattern
customer stays with a company, the more they
recover the original acquisition cost and earn
additional profit streams.

                                                 Typical evolution of profit
                       7                               by customer
                                                                                                 Price Premium

                       6
                                                                                                 Referrals

                       5

                                                                                                 Cost Improvement
      Company Profit




                       4

                       3

                       2                                                                         Volume

                       1

                       0
                               Acquisition
                               Costs                      Acquisition
             (1)
                           0           1     2        3                 4   5      6      7

                                                            Year
                                                                                                Methodology
                                                                                           bc
                                                                                                       Loyalty 15
Customer Loyalty
Companies with high customer turnover will                                    Customer Profit Pattern
continually be replacing profitable, mature                                    (Credit Card Example)
customer relationships with unprofitable new
ones.


                         80
                                                                                      65   67
                                                                         60     62
                         60                                         58
                                                             55
                                                       49
                                            42    44
                         40
                                      30
       Annual Profits




                         20


                          0


                        (20)


                        (40)

                               (51)
                        (60)
                                0     1     2     3    4      5     6    7      8     9    10

                                                             Year
 Retention Rate:                           50%   67%   75%    80%               88%        90%
                                                                                           bc
                                                                                                 Loyalty 16
Customer Loyalty
                                                                             Impact of 5% Retention Rate Increase on Customer NPV
Depending on the industry, a 5% increase in customer
loyalty can increase profitability by 40-95%.


                  100%                                 95%
                                                                     90%
         Increase in Customer Net Present Value




                                                                                       85%           85%          84%
                                                                                                                                81%
                                      80%
                                                                                                                                                75%


                                      60%
                                                                                                                                                               50%
                                                                                                                                                                              45%          45%
                                                                                                                                                                                                         40%
                                      40%



                                      20%



                                                  0%
                                                                      Life Insurance




                                                                                                                                                 Credit Card




                                                                                                                                                                                                         Management
                                                       Advertising




                                                                                                                                                                                           Brokerage
                                                                                                      Insurance




                                                                                                                                                                                                              Office
                                                                                                                                 Auto Service




                                                                                                                                                                              Industrial



                                                                                                                                                                                            Industrial
                                                                                                                                                                               Laundry
                                                                                                     Auto/Home




                                                                                                                                                               Distribution
                                                                                                                                                                       Ind.
                                                                                                                   Publishing




                                                                                                                                                                                                            Building
                                                                                       Bank Branch
                                                                                          Deposits
                                                         Agency




                                                                                                                                                                                                           bc
Source: "The Loyalty Effect", XYZ & Company, Inc.                                                                                                                                                                      Loyalty 17
Customer Loyalty
                                                                                       Loyalty as a Growth Driver
Improved customer retention greatly accelerates growth.


                                               $160MM
                                                                                                               95%
     Pretax Net Income (Millions of Dollars)




                                               $140MM                                                          retention
                                                                                                               rate
                                               $120MM

                                                                                                               90%
                                               $100MM                                                          retention
                                                                                                               rate
                                               $80MM


                                               $60MM


                                               $40MM


                                               $20MM


                                                $0MM
                                                        0   1   2   3   4   5      6       7    8    9    10
                                                                            Year                     bc
                                                                                                               Loyalty 18
Customer Loyalty

                                                     Loyalty Leaders' Growth vs. Industry
  Companies with the highest customer loyalty rates
  have typical growth rates 2x to 5x the industry average.

                                              Revenue Growth (1989-94)

    Loyalty Leader             Industry                Company       Industry   Relative Rate

    Deere & Co.                Lawn Equipment             5%             1%         5x

    A.G. Edwards               Stock Brokerage            26%            7%         4x

    Intuit                     Financial Software         60%            36%        2x

    Lexus                      Luxury Autos               67%            4%        17x

    MBNA                       Bank Card                  27%            9%         3x

    State Farm                 Insurance                  8%             3%         3x

    USAA                       Financial Services         8%             3%         3x




                                                                                   bc
Source: XYZ Loyalty Practice                                                                Loyalty 19
Customer Loyalty
                                                             Agenda




                   •What is Loyalty?

                   •Evolution of the Loyalty Practice

                   •Loyalty Economics

                   •How XYZ Helps Clients Maximize
                    the Value of their Customer Base

                   •Example

                   •Loyalty Tools

                                                        bc
                                                               Loyalty 20
Customer Loyalty

                                                Strategic Approach to Loyalty
Properly capturing customer lifetime value has four requirements.


                               Lifetime Customer Value




                                                 Retention
   Segmentation         Lifecycle Needs                                Full Potential
                                                  Impact

 • Not all customers    • Capturing 100%     • Attrition rate must    • Customer
   are equal             share of relevant     be used to               behaviors are
 • Segments differ in    wallet requires       "discount"               changeable
   value based on         – dynamic vs.        expected cash          • Value of customers
    – needs                 static view of     flows                    can be increased
    – preferences
                            purchases        • Attrition differs by     through targeted
                          – tracking and       segment and              value sharing
    – behavior
                            projecting how     lifestage                incentives
                            needs evolve
                            with lifestage                             bc
                                                                               Loyalty 21
Customer Loyalty

                                                               Customer Value Segments
Different customer segments create different levels of value for a company.



     150%




     100%
              Best Customers



     50%
              Other Customers



      0%




    (50%)
                Households      Annual Variable Contribution   Fully-Costed Contribution



                                                                                      bc
                                                                                           Loyalty 22
Customer Loyalty
                                                     Customer Value Segments
These "best" customers tend to look quite different from the others.



                                        Best Customer           Other Customer



  Household value:                          $1,118                          $91


  Number of services per household:           4.4                           2.8


  Retention:                                 92%                            83%


  Share of business:                         44%                            16%




                                                                       bc
                                                                                  Loyalty 23
Customer Loyalty
                                                   Strategic Approach to Loyalty
Properly capturing customer lifetime value has four requirements.


                                 Lifetime Customer Value




                                                    Retention
   Segmentation          Lifecycle Needs                                  Full Potential
                                                     Impact

  • Not all customers    • Capturing 100%       • Attrition rate must    • Customer
    are equal              share of relevant      be used to               behaviors are
  • Segments differ in     wallet requires        "discount"               changeable
    value based on           – dynamic vs.        expected cash          • Value of customers
     – needs                   static view of     flows                    can be increased
     – preferences
                               purchases        • Attrition differs by     through targeted
     – behavior
                         • tracking and           segment and              value sharing
                           projecting how         lifestage                incentives
                           needs evolve with
                           lifestage                                      bc
                                                                                  Loyalty 24
Customer Loyalty
A loyalty leader's view of their customer goes                 Customer Corridor
beyond the initial product or service purchased             (Automobile Example)
to capture the total "share of wallet".
                                     Points of Customer Interaction

             Shopping     Purchase        Delivery       Service           Trade-In



  Customer
  Entry




                                                         Service
                        Repurchase                                         Trade-In
                                                        Retention




                                     Points Where Value is Captured


                                                                      bc
                                                                                 Loyalty 25
Customer Loyalty
                                 Creating a Loyalty-Based Business System
                                                          (Lexus Example)
Lexus developed a business system that emphasized the
customer and removed the flaws customers experienced with
competitive products.
               Customer Targeting        Cadillac/Mercedes


               Customer Experience       Remove the flaws


               Advertising               Loyalty theme


               Dealer Network            Partner with select few


               Dealer Training           Loyalty drivers


               Measures                  Percent repurchase and service



                                                                   bc
                                                                          Loyalty 26
Customer Loyalty
Lexus target repurchase rates are 50%         Automobile Repurchase Rates
higher than the industry.




                       90%
                                                             75-80%
                                                               78%
                       80%

                       70%
                                        61%
     Repurchase Rate




                       60%

                       50%    45%

                       40%

                       30%

                       20%

                       10%

                       0%
                             Industry   Honda              Lexus (Target)




                                                               bc
                                                                            Loyalty 27
Customer Loyalty

Lexus is approaching their goal with 68% of
                                                                    Automobile Repurchase Rates
previous Lexus owners replacing their car
with a new Lexus.                     New Vehicle Percentage




                           Lexus      68   3    4    2    3    2    4         1    -    1         2

                        Mercedes      14   42   4    2    5    1    7    1    -    1    1         1

                           BMW        13   5    43   -    -    2    4    1    -    3    1         8

                          Lincoln     4    1    1    64   7    1    2    -    -    -    1         -
     Previous Vehicle




                         Cadillac     3    1    1    8    54   1    1    -    -    -    1         1

                           Acura      7    1    1    2    -    35   4    1    1    1    -         2

                                      9    -    -    -    2    2    53   -    -    -    2         21
                           Infiniti

                            Audi      5    2    3    -    2    2    1    16   -    2    -         2

                           Saab       5    -    3    -    4    1    4    1    28   5              9

                           Volvo      2    1    2    -    -    2    1    -    -    29             2

                                      18   9    6    7    9    -    10   2    2    1    28        2
                          Jaguar


                                                                                             bc
                                                                                                       Loyalty 28
Customer Loyalty
                                                                            Service Retention: Auto Dealer
In addition, Lexus service retention is
significantly higher than competitors.


                      100%



                                  80%
                                                                Lexus
    Service Retention (Percent)




                                  60%

                                                             Honda

                                  40%



                                  20%
                                                    Ford


                                  0%
                                        1   2   3   4       5           6       7     8     9        10

                                                           Age of Vehicle


                                                                                                bc
                                                                                                          Loyalty 29
Customer Loyalty

                                                 Strategic Approach to Loyalty
Properly capturing customer lifetime value has four requirements.



                                Lifetime Customer Value




                                                   Retention
   Segmentation         Lifecycle Needs                                  Full Potential
                                                    Impact

 • Not all customers    • Capturing 100%       • Attrition rate must    • Customer
   are equal              share of relevant      be used to               behaviors are
 • Segments differ in     wallet requires        "discount"               changeable
   value based on           – dynamic vs.        expected cash          • Value of customers
    – needs                   static view of     flows                    can be increased
    – preferences             purchases        • Attrition differs by     through targeted
    – behavior          • tracking and           segment and              value sharing
                          projecting how         lifestage                incentives
                          needs evolve with
                          lifestage                                      bc
                                                                                 Loyalty 30
Customer Loyalty
                                                              Customer Lifecycle Profits
Looking only at customer lifetime value, this
                                                                   (Insurance Example)
insurer would conclude that both segments
could be profitable.                                                                  Age 18-24

                   $500                                                               Age 25-34

                   $400

                   $300
 Annual Profits




                   $200

                   $100

                     $0

                  ($100)

                  ($200)

                  ($300)
                           1   2   3   4   5          6   7       8     9        10
                                               Year
                                                                            bc
                                                                                      Loyalty 31
Customer Loyalty
                   Customer Retention Rates Vary Widely by Age Segment
However, the 18-24 year old segment had much       (Insurance Example)
higher defection rates.
                                                                                      Cumulative Retention Rates
                                          100%
                                                 100%
                                                                                                                                                                                Age 18-24
                                   100%
                                                                                                                                                                                Age 25-34


                                                              85%
   Percent of Customers Retained




                                   80%
                                                        72%




                                                                          70%


                                                                                      61%
                                                                    58%




                                                                                                      52%
                                   60%




                                                                                                                      45%
                                                                                45%




                                                                                                                                  41%


                                                                                                                                                  37%
                                                                                            36%




                                                                                                                                                               36%



                                                                                                                                                                          35%
                                   40%




                                                                                                            28%



                                                                                                                            23%


                                                                                                                                        17%



                                                                                                                                                        13%
                                   20%




                                                                                                                                                                     9%
                                    0%
                                             1            2           3           4               5               6           7               8           9           10
                                                                                                      Year
                                                                                                                                                              bc
                                                                                                                                                                          Loyalty 32
Customer Loyalty
                                                           (Customer NPV)
Unless the 18-24 year old retention could be            Insurance Example
improved, they would not be a profitable
segment to target.

                     $500
                                                 $450

                     $400
Net Present Value




                     $300


                     $200


                     $100


                       $0


                    ($100)     ($70)

                             Age 18-24         Age 25-34
                                                             bc
                                                                    Loyalty 33
Customer Loyalty
                                         Root Cause Analysis: Why Customers Drop Out
Root cause is typically utilized to determine causes of
defection. It, too, must be analyzed on a segmented basis.
                                                Depositor root causes of defection


                    Convenience                                   Price                                       Service


        Location of  Speed of       Hours                                       Employees        Mistakes   Processing Unavailability
         branch or    service    (Inconvenient)                                                               delays   of exclusive
           ATM      (Long lines)                                                                                          service

                                                                                                                          Special  Safe    Direct
                                                                                                                        treatment deposit deposit
                                                                     Unfriendly Problem- Knowledge and                            boxes
                                                                                 solving   demeanor
     Far       Bad access
                                                                      "Don't know    Takes too    Unprofessional
                                                                         me"           long      Unknowledgeable


 Home Work
        Drive- Parking Walk
                      through                                                                         Policy not        Concerns
          thru
                                     Charges and fees                               Minimum           waived in           about
                                                               Interest rates
                                                                                    balance            certain           check
                                                                Versus the                         circumstances        coverage
                                                                competition

                                     "Fees"       "Fines"
                                     Too high   Not reversed
                                                                                                                   bc
                                                                                                                                    Loyalty 34
Customer Loyalty

                                  Different Customer Segments Defect for Different Reasons
A segmented view will lead up to develop different strategies
for "best" versus "other" customers.
                                                                                                              Undisclosed
                      150%                                                             100%
                                                                                                               Other
                                                                                                       90%




                                                            Reason for Defection as Percent of Total
                                                                                                              Wait time
                                                                                                               Life Event
                                                                                                       80%
                      100%                                                                                   Convenience
                                  A                                                                    70%
                                                                                                                Rate
   Percent of Total




                                  B                                                                    60%

                       50%                                                                             50%
                                  C
                                                                                                       40%

                                  D                                                                    30%    Service
                        0%
                                                                                                       20%

                                                                                                       10%

                      (50%)                                                                            0%
                              Number of    Segment Profit                                                    Segment A         Overall
                              Households    Contribution                                                                    Customer Base




                                                                                                                                bc
                                                                                                                                            Loyalty 35
Customer Loyalty

                                                   Strategic Approach to Loyalty
Properly capturing customer lifetime value has four requirements.


                                  Lifetime Customer
                                         Value



                                                   Retention
   Segmentation         Lifecycle Needs                                  Full Potential
                                                    Impact

 • Not all customers    • Capturing 100%       • Attrition rate must    • Customer
   are equal              share of relevant      be used to               behaviors are
 • Segments differ in     wallet requires        "discount"               changeable
   value based on           – dynamic vs.        expected cash          • Value of customers
    – needs                   static view of     flows                    can be increased
    – preferences
                              purchases        • Attrition differs by     through targeted
    – behavior
                        • tracking and           segment and              value sharing
                          projecting how         lifestage                incentives
                          needs evolve with
                          lifestage                                      bc
                                                                                 Loyalty 36
Customer Loyalty
                                                     Optimizing Customer Base

Maximizing the value of the customer base requires prioritization of
segments, and the development of tailored approaches.


            "Best customer"                     "All other customers"
               strategy                                 strategy



         • Identify the most valuable           • Reduce the costs to serve
           customers to retain and penetrate      – transition to alternative
         • Develop a robust value proposition        delivery vehicles
           to sustainably meet these               – process/product redesign
           customers needs better than
                                                   – business system redesign
           competitors
                                                   – selective automation
         • Find and attract more of these
                                                   – outsourcing
           customers
                                                   – partnerships
            – internal candidates
            – external prospects
                                                • Price products and services for
                                                  profit
                                                                        bc
                                                                                Loyalty 37
   Customer Loyalty
                                            Value Proposition - Right Customers
   For your target customers, you must translate                 (Bank Example)
   their needs into an improved value proposition.

                                                                                                          “Do these, and
                                         “Treat us         “Recognize the
Customer          "Demonstrate                                                                            I will be willing
                                       better because       impact of life       “Do not nickel
Needs:              that you                                                                               to consolidate
                                        we are good         events on our        and dime me”
                    know us"                                                                                my business
                                        customers”             needs”
                                                                                                              with you”
Banking         • At each point of   • Higher service     • Rethink qualifying • Infrequent
Example:
                 contact               levels              balances for           overdraft fees
                  – platform         • Better pricing      discounts,           • Check order fees
                  – teller
                                                           bundled products
                                                            – loans and
                  – ATM
                                                              deposits and
                  – statements
                                                              investments
                  – teleservice                               balances

Action
Implications:
                • Consolidated       • Dedicated          • Grace period to      • Free checks
                  statements           personal bankers     requalify            • Overdraft to
                • Platform           • Separate teller    • Total vs. deposit      savings/MMA
                  identifiers          lines                balance criteria
                • Teller/ATM         • Separate
                  identifiers          teleservice
                                       phonelines                                                    bc
                                                                                                              Loyalty 38
Customer Loyalty
                                                       Value Proposition - Right Customers
Bank Co. offered a new integrated value                                     (Bank Example)
proposition to high value customers.

       Product                      Service                    Delivery            Communication


• Bundled product to         • Assign a well-trained    • Offer premium        • Emphasize targeted
  include:                     personal banker to        service at each         vs. mass forms of
    – checking                 each customer             point of contact        communication
    – bankcard               • Access MMA/Savings         – separate              – targeted mailings
                               account to cover             teleservice line      – high value phone
    – service discounts
                               overdrafts                   with shorter            calls/ telemarketing
    – free checks
                             • Pre-approve loans            wait times,
                                                                               • Semi-annual
    – tiered savings rates                                  higher quality
                             • Offer financial                                   statement on benefits
    – CD bonus tiers                                      – separate teller
                               planning                                          of product, current
• Total vs. deposit-only                                    lines                usage of features
  balance qualification                                                        • Clear, consolidated
• Create links with                                                              statement for all
  investments, annuities,                                                        accounts
  etc.


                                                                                  bc
                                                                                            Loyalty 39
Customer Loyalty
                             Product Simplification - Low Value Customers
You also need to reduce resources serving the non-         (Bank Example)
target customers. Bank Co. streamlined service to low
value customers.                       Consolidate/Eliminate                                                 New Bundle
                                                Basic            Insurance               Premium
                                              Checking           Checking               Checking                Simple
 Minimum to open                                  $50               $50                    $50             One standard price,
 Monthly maintenance                               $5              $8.99                  $7.99             fee, and balance
 Per check charges                            0.55 over 5       0.20 over 35           0.20 over 20             structure
 Balance for no charge                            N/A               N/A                    $700

 ATM card issuance                                 $5.00            $5.00                 $5.00                  FREE
 Free Automated Transactions                        10               10                    10                     30

 Incentive for not using branch for transactions
                                                    No                 No                    No                    YES

      Bankcard
           APR discount                            No               Yes                   Yes                   Yes
           1st year fee                            Yes             Waived                Waived                Waived
      Ready Reserve
           APR discount                            No                No                    No                   Yes
           1st year fee                            Yes               Yes                   Yes                 Waived



                                     3 products              1 product: Lower costs
                                     Incentive to use alternative delivery
                                     Incentives for bundling other products                          bc
                                                                                                                  Loyalty 40
 Customer Loyalty
                                          Optimizing Customer Base - Summary
  At Bank Co, streamlining offer to low value customers drove (Bank Example)
  near-term profitability which was used to invest in value
  proposition for higher value customers.

                    High Value Customers                   Low Value Customers



• % of Households           20%                   20-40%                             50%

• Average Value            $250+                 $0-$250                             >$0


• Goal                    • Acquire           • Identify high potential   • Reduce
                          • Retain              upsell                    • Lower cost to serve
                          • Penetrate         • Lower cost to serve       • O.K. to defect



• Percent of Year         25%                        15%                           60%
 1 Value Created

• Percent of Year         65%                         2%                           16%
 5 Value Created
                                                                            bc
                                                                                      Loyalty 41
Customer Loyalty
                                                                          Achieving Full Potential
XYZ & Company assists clients in maximizing value of their
customer bases.

                                       Maximize
                      Acquire
                                       Relevant          Cross-sell/         Retain/
                       Right                                                                   Build On
                                       "Share of          Upgrade            Recover
                     Customers
                                        Wallet"
                 • Customer        • Lifetime value     • Customer • Defector            • System
   Analytic        segmentation    • Behavioral          needs           analysis          economics
                 • Decliner        economics             research      • Vulnerability   • Expanded
                   analysis                                              assessment        customer
                 • Revenue sieve                                                           corridor
                 • Channel share/
                   growth analysis
                                                 Product
                                               Development
Implementation   •  Targeted       • Loyalty          • Dialogue       • Recovery        • New
                   acquisition      programs           marketing        units             businesses
                 • Awareness
                   building
                   (advertising)
                                                                                          bc
                                                                                                     Loyalty 42
Customer Loyalty
                                                             Agenda




                   •What is Loyalty?

                   •Evolution of the Loyalty Practice

                   •Loyalty Economics

                   •How XYZ Helps Clients Maximize
                    the Value of their Customer Base

                   •Example

                   •Loyalty Tools

                                                        bc
                                                               Loyalty 43
Customer Loyalty
                                                                         Insure Inc.* - Background
  XYZ developed a retention strategy for Insure Inc., a
  large U.S. auto insurance company.

      • Situation
          – Insure Inc. is the second largest auto insurance company in the US
          – Historically, Insure has been profitable


      • Complication
          – For the past two years, the industry growth rate and profitability have declined
              The market is only growing at the rate of population growth
          – Insure’s growth rate has declined recently, and for the past two years it has
            been running a loss

      • Hypothesis
          – Insure   will be able to regain its strong growth rate and high profitability by
             retaining target customers




*Disguised client case                                                                         bc
                                                                                                    CU7021398RSA 44
Customer Loyalty
                                                      Insure Inc. - Profitability Drivers (p.1)
Following are the drivers of profitability in the auto insurance business:
  Auto Premium - Auto insurance premium paid by customers
  • Premium per customer increases with customer tenure due to the following reasons:
     –customers tend to buy more insurance as they get older. For example, as they get older and their
       family size increases, they buy insurance for a second car
     –customers tend to buy more expensive products as they get older. For example, they tend to buy
       more expensive cars that require higher premiums.

  Investment Income - The income from premium invested in securities
  • It increases from $9 per year for a new customer to $52 per year for a 10 year customer
  • The reason for this increase is a combined result of lower premiums and higher expenses for a new
    customer versus higher premiums and lower expenses for a customer with longer tenure

  Acquisition Cost - Cost of acquiring a new customer. Acquisition cost only exists in the first year
  • For Insure, the average acquisition cost per customer is 5% of the first year premium

  Commission Expense - Sales commission for customer acquisition; paid to the agent/sales
    representative who sells the policy
  • The commission expense for new customers is 17% and for existing customers 6.5% of the premium,
    since it is more difficult to bring in new customers than to retain existing ones



                                                                                             bc
                                                                                                  CU7021398RSA 45
Customer Loyalty
                                               Insure Inc. - Profitability Drivers (p.2)


  Expense Ratio - The ratio of operating expenses (e.g., underwriting, claims expenses) to
    premiums
  • The average expense ratio for new customers is 67% versus 23.5% for a customer with 10
    years of tenure
  • Expenses are typically lower for existing customers because they have fewer questions
    and because insurance clerks can make quicker, more educated decisions based on
    knowledge of customers’ histories

  Loss Ratio - The ratio of accident payout to premium
  • It is about 88% of premium for new customers and 65% of premium for a customer with 10
    years of tenure
  • The reason for higher loss ratios for customers with shorter tenure is that as customers get
    into accidents, their premiums go up and they go to lower premium insurers. Customers
    staying for longer periods are the ones who are less accident prone

  Combined Ratio - The sum of expense ratio and loss ratio




                                                                                 bc
                                                                                      CU7021398RSA 46
Customer Loyalty
               Insure Inc. - Revenue Growth and Combined Ratio Trend
From 1989 to 1991, Insure’s revenue growth rate
declined, while its combined ratio increased.

                             10%                                               110%
                                   9%
 Revenue Growth in Percent




                                                   Combined Ratio in Percent
                             8%
                                                                                                            103%
                                                                               100%
                             6%

                                         4%                                                  96%
                             4%
                                              3%                                90%
                                                                                       89%
                             2%


                             0%                                                80%
                              1989      90    91                                      1989   90             91


                                                                                                   bc
                                                                                                        CU7021398RSA 47
Customer Loyalty
                                                Insure Inc. - Profitability Trend
As a result, Insure’s profitability declined.


                            10%

                                   5%
 Profitability in Percent




                             5%


                            0%
                                        (2%)
                            (5%)


                      (10%)
                                                                        (10%)
                       (15%)
                           1989          90                             91



                                                                   bc
                                                                          CU7021398RSA 48
Customer Loyalty
                                                                                        Insure Inc. - Profit per Customer by Tenure

Since longer-term customers are more profitable than shorter-tenure
ones, Insure can improve profitability by retaining customers.

                                        1,500                                                                                 $1,350
                                                                                                           $1,205
                                                    Investment Income
                                                                                  $988
                                        1,000          $890
  Profit per Customer (1991 Dollars)




                                                                                                                                            Net
                                          500                                                                                               Profit
                                                 Auto Premium                                                        Net                    $507
                                                                                                                     Profit
                                                                                                                     $137
                                                   Acquisition Cost
                                            0
                                                 Commission Expense                            Net
                                                                                               Profit
                                                    Expense                                    ($144)
                                        (500)        Ratio              Net
                                                                        Profit
                                                                        ($663)
                                       (1,000)                                                                                ($843)
                                                   Loss Ratio                    ($1,132)                 ($1,068)

                                       (1,500)
                                                    ($1,553)

                                       (2,000)
                                                         1                          2                        5                 10

                                                                                        Years of Customer Life


                                                                                                                                       bc
                                                                                                                                               CU7021398RSA 49
Customer Loyalty
                          Insure Inc. - Profit per Customer by Tenure Steps

There are three steps in determining the profit per
customer by tenure.



      Step 1:          • Determine number of customers by tenure

      Step 2:          • Calculate the value of each profit driver per
                        customer by tenure


      Step 3:          • Determine the net profit per customer by tenure




                                                                         bc
                                                                              Loyalty 50
Customer Loyalty
                              Insure Inc. - Profit per Customer by Tenure
                                Step 1: Number of Customers by Tenure
Insure’s 15MM customers were broken down by tenure as follows:

             Years of            Percent of             Number of
              Tenure             Customers              Customers
                1                   22%                   2.3MM
                2                   18%                   2.7MM
                3                   16%                   2.4MM
                4                   12%                   1.8MM
                5                    8%                   1.2MM
                6                    6%                   0.9MM
                7                    5%                  0.75MM
                8                    4%                   0.6MM
                9                    3%                  0.45MM
               10                    3%                  0.45MM
               11+                   3%                  0.45MM
                                   100%                   15MM



                                                                 bc
                                                                      Loyalty 51
Customer Loyalty
                                                   Insure Inc. - Profit per Customer by Tenure
                                         Step 2 (p.1): Auto Premium per Customer by Tenure
 Auto premiums were calculated for each customer tenure group.

            Customer                      Revenue from     Number of         Auto Premium
             Tenure                      Auto Premiums     Customers         per Customer
                   1                      $2,907MM          3.3MM           $881 = ( $2,907MM      )
                                                                                          3.3MM
                   2                      $2,616MM          2.7MM           $969

                   3                      $2,434MM          2.4MM           $1,014

                   4                      $1,967MM          1.8MM           $1,093

                   5                      $1,404MM          1.2MM           $1.170

                   6                      $1,101MM          0.9MM           $1,223

                   7                        $984MM          0.75MM          $1,312

                   8                        $805MM          0.6MM           $1,341

                   9                        $590MM          0.45MM          $1,311

                  10                        $584MM          0.45MM          $1,298


*Numbers are not exact due to rounding                                               bc
                                                                                                  Loyalty 52
Customer Loyalty
                                 Insure Inc. - Profit per Customer by Tenure
                              Step 2 (p.2): Investment Income per Customer
Investment income was attributed to each customer tenure group.

                   Auto          Percent of   Average     Interest
  Customer      Premium per      Premium      Interest   Earned per
   Tenure        Customer         Invested      Rate     Customer
     1             $881            14%         7.1%         $8.8 = ( $881*14%*7.1%)
     2             $969            28%         7.1%         $19.3
     3             $1,014          35%         7.1%         $25.2
     4             $1,093          38%         7.1%         $29.5
     5             $1.170          42%         7.1%         $35.1
     6             $1,223          42%         7.1%         $36.5
     7             $1,312          46%         7.1%         $42.8
     8             $1,341          48%         7.1%         $45.7
     9             $1,311          56%         7.1%         $52.1
     10            $1,298          56%         7.1%         $51.6




                                                                      bc
                                                                               Loyalty 53
Customer Loyalty
                                                    Insure Inc. - Profit per Customer by Tenure Steps
                                                        Step 2 (p.3): Acquisition Cost per Customer
 The customer acquisition cost - consisting largely of advertising, part of
 agents’ salary, and merchandising support - was calculated.
                                                                              Percent of Costs
                                                                              to Acquire New       Amount Spent
                                                        Amount                  Customers          on Acquisition
                     National
                     advertising:                        $96MM                     62%*              $59.5MM

                     Local
                     advertising:                     $42.2MM                      59%*              $24.3MM

                     Part of agents’
                     salary:                          $17.0MM                     100%               $17.0MM

                     Merchandising
                     support:                         $42.3MM                     100%               $42.6MM

                     Other:                             $1.8MM                    100%                $1.8MM
                                                                                              Total = $145.2MM


                                                    $44 per new policy =        ($145.2MM )
                                                                                  3.3MM

*Advertising spending for existing customers is a part of overall expenses.                                      bc
                                                                                                                      Loyalty 54
Customer Loyalty
                              Insure Inc. - Profit per Customer by Tenure
                Step 2 (p.4): Commission Rate per Customer by Tenure
The commission rate per customer
tenure group was determined.
                       Auto           Average
     Customer       Premium per      Commission       Commission per
      Tenure         Customer           Rate            Customer
        1             $881             17.00%            $150       ( = $881 x 17%)
        2             $969             6.47%             $63
        3             $1,014           6.47%             $66
        4             $1,093           6.47%             $71
        5             $1.170           6.47%             $76
        6             $1,223           6.47%             $79
        7             $1,312           6.47%             $85
        8             $1,341           6.47%             $87
        9             $1,311           6.47%             $85
        10            $1,298           6.47%             $84




                                                               bc
                                                                           Loyalty 55
Customer Loyalty
                                       Insure Inc. - Profit per Customer by Tenure
                        Step 2 (p.5): Operating Expense per Customer by Tenure
 Operating expenses - consisting of expenses plus losses - were
 calculated for each customer tenure group.
                       Percent of                                  Percent of                                  Operating
                       Expenses          Total                       Losses     Total Loss                      Expense
            Number     driven by      Expense      Expense          driven by      for         Loss            (Expense+
Customer       of      Customer     for Customer     per           Customer     Customer        per               Loss)
 Tenure    Customers    Group           Group      Customer          Group        Group      Customer         per Customer

   1       3.3MM          38%       $1,940MM        $588 ( $1940MM) 23%         $2,544MM       $771($2,544MM) $1,359
                                                           3.3MM                                      3.3MM
   2       2.7MM          13%       $670MM          $248             20%        $2,217MM       $821              $1,069
   3       2.4MM          12%       $618MM          $258             18%        $1,946MM       $811              $1,069
   4       1.8MM          10%       $496MM          $276             13%        $1,377MM       $765              $1,041
   5       1.2MM          7%        $348MM          $290              8%         $842MM        $702                $992
   6       0.9MM          5%        $269MM          $298              6%         $606MM        $673                $971
   7       0.75MM         5%        $238MM          $317              5%         $492MM        $656                $973
   8       0.6MM          4%        $192MM          $321              3%         $362MM        $604                $924
   9       0.45MM         3%        $140MM          $312              2%         $236MM        $524                $836
  10       0.45MM         3%        $137MM          $305              2%         $204MM        $454                $759
                         100%       $5,048MM                         100%       $10,826MM

                                                                                               bc
                                                                                                          Loyalty 56
Customer Loyalty
                                     Insure Inc. - Profit per Customer by Tenure
                                     Step 3: Net Profit per Customer by Tenure
The final step was to determine the net profit for each
customer tenure group.
   Net Profit = Auto Premium + Investment Income - Acquisition cost -
   Commission expense - Operating expense

           Customer        Net Profit
            Tenure        per Customer
              1              -$663           = $881 + $8.8 - $44 - $150 - $1359
              2               -144
              3               -95
              4                11
              5               137
              6               209
              7               297
              8               376
              9               442
              10              507

                                                                                  bc
                                                                                       Loyalty 57
Customer Loyalty
                                                                     Insure Inc. - Root Causes of Defection
By far the biggest contributor to defection is price, followed by
customer service and billing and endorsements.
                          25%
                                                                                                        No longer need
                                                                                                        Other
                                                                                                        Claims
                                  20                                                                    Billing and
                                                                                                        Endorsements
       Voluntary Defection Rate




                                                                                                        Customer Service
                                                                                                        Price
                                  15



                                  10



                                  5



                                  0
                                       1       2-5         6-10              11-15     16-20     >20
                                                            Tenure (number of years)


                                   Insure should target customers whose price elasticity is low, and
                                   improve its customer service and billing and endorsement.
                                                                                                   bc
                                                                                                         CU7021398RSA 58
Customer Loyalty
                                                                         Insure Inc. - Target Customers
The XYZ team determined that Insure should target the 45-74 year old
age group. These customers are willing to pay higher premium for
quality service, and it costs less to serve them.
                             3.0


                             2.5
      Cost and Price Index




                             2.0

                                                                          Target customers
                             1.5


                             1.0
                                                                               Price


                             0.5
                                                                               Cost


                             0.0
                             Under 20   20-24   25-34   35-44    45-54     55-64       65-74   Over 74

                                                         Customer Age


                                                                                                  bc
                                                                                                         CU7021398RSA 59
Customer Loyalty
                                                  Insure Inc. - Retention Program
The retention program is focused on delivering a value
proposition for target customers.


  Target customers:       45-74 year olds



  Key value
  proposition elements:   Service: Superior customer service
                                   Fast and error-free billing and endorsements

                          Pricing: Premium pricing




                  • Retain target customers
                  • Recover target customers who have recently defected
                  • Acquire target customers

                                                                           bc
                                                                                  CU7021398RSA 60
Customer Loyalty
                                                                Insure Inc. - Retention’s Impact on Profitability
By implementing the retention program, Insure could increase
customer retention by 10.3% by 1995 and improve profitability by
approximately $2B.                                                                                           Billing and
                                                                                                             Customer Service

                                             2,500
   Net Income Impact (Millions of Dollars)




                                                                                               $2,002M
                                             2,000
                                                                                                Fewer
                                                                                              Acquisitions
                                                                                   $1,577M
                                             1,500

                                                                        $1,153M

                                             1,000
                                                             $740M                             Targeted
                                                                                              Acquisition
                                              500
                                                     $358M



                                                0
                                                     1991    1992        1993        1994        1995

   Retention rates
   improvements:                                     1.2%    2.5%        4.2%        6.5%         10.3%


                                                                                                        bc
                                                                                                                CU7021398RSA 61
Customer Loyalty
                      Insure Inc. - Retention's Impact on Profitability Steps
There are four steps in determining the effect of
improved targeting and increased retention on
profitability.

      Step 1:    • Estimate retention rate improvement


      Step 2:    • Calculate profit improvement due to fewer acquisitions


      Step 3:    • Determine profit improvement due to improved billing and customer
                  service. As a result of its improved services, Insure not only retains
                  customers, but also reduces costs to serve all customers

       Step 4:   • Calculate profit improvement due to improved customer targeting




                                                                                bc
                                                                                     CU7021398RSA 62
Customer Loyalty
                              Insure Inc. - Retention's Impact on Profitability
                                        Step 1: Retention Rate Improvement
Insure’s goal was to increase retention by 10.3% by 1995.

                1990       1991       1992       1993       1994           1995
Total
number of
customers:      15MM       15MM      15MM       15MM        15MM          15MM

Number of
existing
customers:      11.70      11.88      12.08      12.33      12.68          13.25

Number
of new
customers:       3.30      3.12       2.93       2.67       2.33           1.76

Retention
rate:           78.0%      79.2%     80.5%      82.2%       84.5%         88.3%

Retention
             (= 11.7MM )
                 15MM
improvement
(from 1990):      ---      1.2%       2.5%       4.2%       6.5%          10.3%

                                                                    bc
                                                                         CU7021398RSA 63
Customer Loyalty
                               Insure Inc. - Retention's Impact on Profitability
                 Step 2 (p.1): Profit Improvement Due to Fewer Acquisitions
Profit improvement due to reduced number of acquisitions were
estimated to result in $402MM in savings by 1995.

Number of            1990        1991         1992          1993          1994             1995
new customers:      3.30MM     3.12MM        2.93MM       2.67MM         2.33MM          1.76MM

Decrease in number
of acquisitions by
tenure:
1 year tenure                   0.180MM        0.195MM     0.255MM       0.345MM          0.570MM
                             (=3.30-3.12MM) (=3.12-2.93MM)

2 year tenure                                 0.180MM       0.195MM      0.255MM          0.345MM
                                          (=1991 customers)

3 year tenure                                             0.180MM        0.195MM          0.255MM
                                                     (=1991 customers)

4 year tenure                                                            0.180MM          0.195MM
                                                                   (=1991 customers)

5 year tenure                                                                            0.180MM
                                                                                   (=1991 customers)

                                                                             bc
                                                                                    CU7021398RSA 64
Customer Loyalty
                                  Insure Inc. - Retention's Impact on Profitability
                    Step 2 (p.2): Profit Improvement Due to Fewer Acquisitions

Improved                                1991          1992          1993          1994             1995
Profitability due
to decreased          Profitability
acquisitions:        per customer
                       by tenure
1 year tenure          -$663        $119.34MM    $129.29MM       $169.07MM      $228.74MM       $377.91MM
                                 (=0.180MMX$663)

2 year tenure          -$144                             25.92      28.08         36.72             49.68
                                                  (=0.180MMX$144)

3 year tenure           -$95                                         0.72          0.78              1.02
                                                             (=0.180MMX$95)

4 year tenure           $11                                                         -1.98           -2.15
                                                                            (=0.180MMX-$11)

5 year tenure           $137                                                                     -24.66
                                                                                          (=0.180MMX-$137)

Total                                              $155.21MM    $197.87MM      $264.26MM       $401.81MM
                                      $119.34MM
Improvement

                                                                                     bc
                                                                                            CU7021398RSA 65
Customer Loyalty
                                 Insure Inc. - Retention's Impact on Profitability
                          Step 3 (p.1): Profit Improvement From Better Service

Profit improvement from improved billing would total $47MM by 1995.

Average profit improvement        1991       1992        1993      1994           1995
from better service across
all customers:                    $2.00      $3.40      $5.20      $6.10         $7.00

Number of
customers:                       15MM        15MM       15MM       15MM          15MM


Customers retained
due to improved
billing (45% of total):         6.75MM      6.75MM     6.75MM     6.75MM        6.75MM
                              (=15MMx45%)


Profit improvement
from improved billing:          $13.50MM    $22.95MM   $35.10MM   $41.18MM     $47.25MM
                            (=6.75MM x $2.00)

                                                                      bc
                                                                           CU7021398RSA 66
Customer Loyalty
                                  Insure Inc. - Retention's Impact on Profitability
                           Step 3 (p.2): Profit Improvement From Better Service
Profit improvement from improved customer relocation and recovery
were estimated at $34MM and $24MM, respectively, by 1995.

Customers retained                 1991        1992        1993       1994            1995
due to better relocation
support (32% of total):          4.80MM       4.80MM     4.80MM     4.80MM          4.80MM
                              (=15MM x 32%)
Profit improvement
from improved
customer relocation:            $9.60MM       $16.32MM   $24.96MM   $29.28MM      $33.60MM
                            (=4.80MM x $2.00)
Customers retained due
to better customer
recovery (23% of total):        3.45MM        3.45MM     3.45MM     3.45MM          3.45MM
                             (=15MM x 23%)


Profit improvement
from improved                     $6.90MM    $11.73MM    $17.94MM   $21.05MM       $24.15MM
customer recovery:           (=3.45MM x $2.00)

                                                                        bc
                                                                               CU7021398RSA 67
Customer Loyalty
                                   Insure Inc. - Retention's Impact on Profitability
                               Step 4: Profit Improvement due to Better Targeting

Profits would improve by $1,495MM in 1995 due to better targeting.

                                  1991         1992          1993      1994            1995
    Average
    improvement in
    profit per new
    customer:                     $67          $99           $125      $151            $174

     Number of new
     customers:                  3.12MM      2.93MM         2.67MM   2.33MM          1.76MM
    Total number of
    customers acquired
    due to better targeting:     3.12MM       5.40MM        7.01MM   8.09MM          8.59MM
                                          (=3.12MMX79.2%*
                                          +2.93MM)

    Total profit increase:      $209MM     $534MM           $877MM   $1,222MM      $1,495MM
                             (=$67X3.12MM)



*1991 retention rate                                                     bc
                                                                                CU7021398RSA 68
Customer Loyalty
                          Insure Inc. - Total Retention Impact on Profitability


There would be a total increase of $2B in profitability by 1995.

                            1991        1992           1993          1994            1995

 Profit improvement       $119.34MM $115.21MM       $197.87MM $264.26MM $401.81MM
 due to fewer
 acquisitions:
 Profit improvement from
 Higher Retention due to
  - Billing:             $13.50MM     $22.95MM      $35.10MM       $41.18MM $47.25MM
  - Customer Relocation: $9.60MM      $16.32MM      $24.96MM       $29.28MM $33.60MM
  - Customer Recovery:    $6.90MM     $11.73MM      $17.94MM       $21.05MM $24.15MM

 Profit improvement
 due to better            $209.0MM    $534.2MM      $876.7MM       $1,221.6MM $1,494.9MM
 targeting:

  Total                    $358MM     $740MM        $1,153MM       $1,577MM      $2,002MM


                                                                        bc
                                                                              CU7021398RSA 69
Customer Loyalty
                                                                       Insure Inc. - Summary
By pursuing the following activities Insure can achieve
its target retention rate thereby improving profitability.


 • Insure Inc. sought to improve its growth rate and profitability in the slow growth auto
  insurance industry
 • The XYZ team demonstrated the value of retention
   – customers    do not turn profitable until year 4
   – the   profitability of a 10-year customers is almost four times that of a 5-year customer
 • The root causes of defection included price, customer service, and billing and endorsements
 • The XYZ team recommended that Insure target the 45-74 year old segment because it was
  the least price sensitive
 • By implementing a retention program whereby target customers were provided with superior
  customer service and fast and error-free billing and endorsements, Insure could increase
  customer retention by 10.3% and profitability by approximately $2B in 5 years




                                                                                    bc
                                                                                         CU7021398RSA 70
Customer Loyalty
                                                                           Insure Inc. - Profitability Improvement

 By improving its customer retention rate, Insure could decrease its combined
 ratio, to match that of Firm State, the largest insurance company in the country.

                          106%
                                   Farmers
                          103%                 Insure Inc.     USWide


                          100%                                     Mututal Liberal
         Combined Ratio




                          97%                                                        Firm State

                                                                                                  Gekko
                          94%


                          91%                                                                                   Amica


                          88%


                          85%
                             70%       73%   76%     79%         82%       85%       88%         91%      94%      97%    100%

                                                             Customer Retention Rate (percent)




Notes:                                                                                                                   bc
                                                                                                                              CU7021398RSA 71
Customer Loyalty
                                                             Agenda




                   •What is Loyalty?

                   •Evolution of the Loyalty Practice

                   •Loyalty Economics

                   •How XYZ Helps Clients Maximize
                    the Value of their Customer Base

                   •Example

                   •Loyalty Tools

                                                        bc
                                                               Loyalty 72
Customer Loyalty
The next section describes the methodologies for                Loyalty Tools
completing loyalty analysis.                                  (Methodologies)

           • Retention              • Customer definition
            Rate                    • Retention definition
                                    • Retention rate methodology

           • Customer Value         • Typical methodology
            (NPV)                   • 80/20 suggestions

           • Share of Wallet        • Share of wallet methodology
             – customer             • Example frameworks
               corridor
             – customer sieve

           • Root Cause             • Qualitative and quantitative
            Analysis                • Root cause analysis
                                    • Sample interview discussions
                                    • Tips and suggestions
                                                                     bc
                                                                          Loyalty 73
Customer Loyalty
                                                             Customer Definition
To calculate retention we first work with                  (Retail Bank Example)
the client to define a customer.

 Customer
                      Account           Individual          Household
 Definition:




  Physical                              Multiple             Multiple
                   Single Account
  Measure:                             Accounts/            Accounts/
                                       Individual           Household




                    Easy to Track    Possible to Track   Difficult to Track




                                                                        bc
                                                                              Loyalty 74
Customer Loyalty
                                                             Customer Definition
Next, we work with the client to define retention.
                        Suggested definition of retained customers

          Car Servicing             Customers returns for annual service

          Vending Machine           Customer continues to use machine/pays
          Supplier                  monthly or annual fee
          Household Contents        Customer renews policy annually
          Insurance
          Airline                   Over a certain proportion of annual air travel
                                    expenditure retained
          Supermarket               Over a certain proportion of weekly spend
                                    retained
          Bank Current Account      Account open and experiencing similar volume
                                    and value of transaction activity
          Mortgage                  Customer redeems mortgage without taking out
                                    a new one or merely paying it off

                                                                      bc
                                                                              Loyalty 75
Customer Loyalty
Next, we calculate retention rate.                                        Customer Retention Rate Methodology
                                                                 No. of customers at year end who were
                             Retention Rate Calculation =         customers at the beginning of the year                   x100
                                                               No. of customers at the beginning of the year



                             100.0%
                                                                                                   New Customers
                                                                                                                         Customer
                                                                                                                         Retention
                              80.0%                                                                                      Rate (85%)
      Percent of Customers




                              60.0%



                              40.0%



                              20.0%



                              0.0%
                                                 1st January                                        31st December



                                                                                                                    bc
Note: If given customer start date or customer tenure you calculate average retention rate 1-(   1    )
                                                                                               tenure                          Loyalty 76
Customer Loyalty
The next section describes the methodologies for                Loyalty Tools
completing loyalty analysis.                                  (Methodologies)

           • Retention              • Customer definition
            Rate                    • Retention definition
                                    • Retention rate methodology

           • Customer Value         • Typical methodology
            (NPV)                   • 80/20 suggestions

           • Share of Wallet        • Share of wallet methodology
             – customer             • Example frameworks
               corridor
             – customer sieve

           • Root Cause             • Qualitative and quantitative
            Analysis                • Root cause analysis
                                    • Sample interview discussions
                                    • Tips and suggestions
                                                                     bc
                                                                          Loyalty 77
Customer Loyalty
                                                                             Calculating Customer NPV
When calculating customer NPV we are building
these stacked bars for our client.

                                             Typical evolution of profit by
                                                       customer
                       7
                                                                                               Price Premium

                       6
                                                                                               Referrals

                       5

                                                                                               Cost Improvement
      Company Profit




                       4

                       3

                       2                                                                       Volume

                       1
                                                                                               Base
                       0
                               Acquisition
                               Costs                       Acquisition
             (1)
                           0           1       2       3                 4   5     6     7

                                                             Year

                                                                                          bc
                                                                                                      Loyalty 78
Customer Loyalty
                                                                            Calculating Customer NPV
Step 1:   Create the Bars
                                                                                (Typical Methodology)

   Component

                   • Collect all costs related to acquiring a new customer (e.g., advertising, direct marketing,
Acquisition Cost    application processing, set up costs, etc.)  number of new customers. Apply this to time zero

                   • Analyze spend by tenure group for product to estimate average base product contribution per
Increased Spend     customer per year of lifetime

                   • Calculate propensity to hold other products by tenure group
Other Product      • Analyze spend by tenure group for each cross-sold product
Purchase           • Analyze cost by tenure group for each cross-sold product
                   • Use this to estimate average incremental product contribution per customer per year of lifetime
Reduced
                   • Analyze costs by tenure group for product to adjust product contribution per customer per year of
                    lifetime
Operating Costs
                   • Determine proportion of customers generated by referrals (i.e., number of referrals per customer.)
Referrals           Capture value of referral in customer annual contribution in years appropriate

                   • Analyze any increase in price by tenure group. Adjust contribution per customer per year of
Premium Pricing     lifetime

                   • Collect all costs related to closing an account/losing a customers (e.g., closure processing costs,
Avoided Closure
                    write-offs, product collection, etc.)  number of defectors. Apply this to the year in which defection
Costs
                    occurs
Step 2:            • Discount these customer contribution flows using client specific discount rate
                    and tenure implied by retention rate                                              bc
                                                                                                                   Loyalty 79
Customer Loyalty
To 80/20 analysis, focus on the economic drivers       Calculating Customer NPV
that will have the most impact.

                                Vending
                                Machine      Supermarket     Airline
                                Supplier
             Acquisition
                                  High       Low-Medium      Medium
             Cost
             Increased
                                 Medium         High         Medium
             Spend
             Other Product
                                 Medium         Low           High
             Purchase
             Reduced
                                 Medium         Low           Low
             Operating Costs

             Referrals         Low- Medium      High          High

             Premium
                                 Medium         Low           High
             Pricing
             Avoided
                                  High          Low           Low
             Closure Costs

                                                                       bc
                                                                            Loyalty 80
Customer Loyalty
The next section describes the methodologies for                Loyalty Tools
completing loyalty analysis.                                  (Methodologies)

           • Retention              • Customer definition
            Rate                    • Retention definition
                                    • Retention rate methodology

           • Customer Value         • Typical methodology
            (NPV)                   • 80/20 suggestions

           • Share of Wallet        • Share of wallet methodology
             – customer             • Example frameworks
               corridor
             – customer sieve

           • Root Cause             • Qualitative and quantitative
            Analysis                • Root cause analysis
                                    • Sample interview discussions
                                    • Tips and suggestions
                                                                     bc
                                                                          Loyalty 81
Customer Loyalty
                                                                                                       Share of Wallet Calculation
                                       Customer’s spend on client’s                                            (Banking Example)
Share of Wallet =                                   product
                                        total relevant pool of spend
                                                                                                                                 Bank Y Share
                                           (e.g., lifecycle spend)
                             Overall                                                                Components

            100%


                            Investing
             80%



             60%

                            Lending

             40%



             20%
                          Transacting



               0%
                          Total Wallet                                     Transaction                Lending        Investing

                                                                                              Bank Share of Wallet
                                                                                                                             bc
Note: Client proprietary market research is usually required for calculating share of wallet for a particular
   customer or segment                                                                                                                     Loyalty 82
Customer Loyalty
To diagnose share of wallet opportunities we         Share of Wallet Frameworks
often use “customer corridor” framework.

                               Customer Corridor
                             (automobile example)

                                     Points of Customer Interaction

            Shopping      Purchase        Delivery        Service          Trade-In



 Customer
   Entry




                                                          Service
                        Repurchase                                         Trade-In
                                                         Retention


                                     Points Where Value is Captured


                                                                      bc
                                                                                 Loyalty 83
Customer Loyalty
To diagnose share of wallet “leaks” we often                                             Share of Wallet Frameworks
use the “customer sieve” framework.
                                                     Customer Sieve                                          Total Wallet
                                                     (retail example)
                                                                                             Store Coverage                 No Store Coverage


                                                                                    Aware                        Unaware


                                                                   Ever Visited                 Never Visited


                                                 Continue Visiting                Stopped Visiting

                                        Purchase
                                                                   Non-Purchases
                                       (past year)

               Annual Purchases at               Annual Purchases
                 Discount Store                   at Other Stores

             Number of       Purchase per
               Visits            Visit

                     Share of Wallet
Resulting actions:                                      • Address root causes                 • Promotions      • Advertising     • Build Stores
                                                           –   selection                      • Couponing
                                                           –   line length
                                                           –   service/assistance
                                                           –   location/convenience
                                                                  number of service people
                                                                  effectiveness                                     bc
                                                                                                                                   Loyalty 84
Customer Loyalty
The next section describes the methodologies for                Loyalty Tools
completing loyalty analysis.                                  (Methodologies)

           • Retention              • Customer definition
            Rate                    • Retention definition
                                    • Retention rate methodology

           • Customer Value         • Typical methodology
            (NPV)                   • 80/20 suggestions

           • Share of Wallet        • Share of wallet methodology
             – customer             • Example frameworks
               corridor
             – customer sieve

           • Root Cause             • Qualitative and quantitative
            Analysis                • Root cause analysis
                                    • Sample interview discussions
                                    • Tips and suggestions
                                                                     bc
                                                                          Loyalty 85
Customer Loyalty
                                         Steps in Root Cause Analysis Process

                Step One                              Step Two



               Qualitative                          Quantitative
               Interviews                            Interviews


           • Qualitative probing of               • Design quantitative
             defectors to provide list              questionnaire
             of potential defection               • Select sample of
             reasons                                defectors
           • Can be conducted                     • Test and edit
              – person to person                    questionnaire
              – in a focus group                  • Select and train
              – by telephone                        interviewers
              – by post                           • Conduct interviews

                                                                      bc
                                                                           Loyalty 86
Customer Loyalty
 Root cause “trees” are the backbone of root cause                                                        Root Cause Trees
 research. Their flow helps interviewers “peel the onion”
 with defectors to learn the true reasons for the defection.
                                                    Depositor root causes of
                                                           defection


                 Convenience                                 Price                                                Service


Location of        Speed of           Hours                                  Employees         Mistakes         Processing     Unavailability
 branch or          service       (Inconvenient)                                                                  delays       of exclusive
   ATM           (Long Lines)                                                                                                     service



                                                                                                                        Special   Safe   Direct
  Far          Bad                                                   Unfriendly                Knowledge
                                                                 “Don’t know me”                                      treatment deposit deposit
              access                                                                          and demeanor
                                                                                              Unprofessional                     boxes
                                                                               Problem- Unknowledgeable
                                                                                solving
                                                                             Takes too long
 Home     Work

                                       Charges and       Interest rates      Minimum                              Policy not     Concerns
                                          fees              versus the       balance                              waived in     about check
                                                           competition                                             certain       coverage
     Drive-   Parking     Walk
     Thru               through                                                                                circumstances

                                         “Fees”         “Fines”
                                         Too high      Not reserved
                                                                                                                      bc
                                                                                                                                   Loyalty 87
Customer Loyalty

It is essential to understand the                              Customer Retention
underlying root causes for defection.                 (Sample Telephone Interview)

    Interviewer:   Our records indicate that you cancelled your car insurance policy last
                   month. Could you tell me why you decided to leave Insurance & Co.?

    Customer:      I left because of your prices               Top Line Defection Reason
    Interviewer:   Were they too high?

    Customer:      Yes.

    Interviewer:   Do you pay lower premiums at your new insurance company?

    Customer:      No, but the agents at Direct Line were much more helpful
                   than the ones at Insurance & Co.

    Interviewer:   How were they more helpful?

    Customer:      They took the time to explain different coverage options for my car, and
                   they said they would try to get me a good discount

    Interviewer:   Is there anything else that Insurance & Co. could have done
                   differently to keep you as a customer?

    Customer:      Well, about 2 years ago I had a claim and I remember...         Root Cause
                                                                              bc
                                                                                         Loyalty 88
Customer Loyalty
                                                     Root Cause Analysis Tips

       • Probe respondents to generate competitor data
         – towhich competitor did they defect?
         – what dimension triggered the defection?
         – what is competitor’s performance on defection dimension?




                                 Confirms root causes
                      Sets the benchmark the client must meet or
                               exceed to retail customers

       • In some cases (e.g., insurance), explore lifecycle events which may have
         triggered customers’ evaluation of competitor options
           – determine point at which previously loyal customers became
             vulnerable to competition
       • Measure both frequency of each root cause and its relative importance
           – ask respondents to distribute 100 points across all root causes
             according to frequency and relative importance
       • Always link root cause research to segmentation
           – address root causes of valuable customers’ defection
                                                                      bc
                                                                                 Loyalty 89

				
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