Retail banks missing opportunities by focusing on products, not customers

SAS, Peppers & Rogers Group study explores banks' use of customer value metrics

BetterManagement LIVE 2005, LAS VEGAS   (Oct. 26, 2005)  –  Retail banks today remain locked in measuring success by product lines rather than by customer value. Yet to reap true competitive advantage, they must refocus their strategies on customers rather than on products. That's the conclusion of a new research study announced today by SAS and Peppers & Rogers Group. 

SAS, the leader in business intelligence, offers a host of powerful software solutions that help companies turn customer data into valuable customer intelligence. Peppers & Rogers Group is the recognized global leader in customer strategy consulting. The study, Measuring Customer Value in Retail Banking, also explored challenges and opportunities that retail banks experience in developing and integrating customer value metrics into their product-based business models.

The financial services industry has been widely recognized as a leader in customer intimacy. Retail banks in particular are often praised as pioneers in deploying best-in-class strategy and technology to develop profitable customer relationships. Much of this progress has been built on gaining insight into customer value and then using this insight for strategic and tactical decision making.

The SAS and Peppers & Rogers Group study surveyed 48 executives from 18 U.S. retail banks ranging in asset size from $12 billion to $1.3 trillion. It asked participants about the application of customer value metrics, the process for measuring customer value, and the impact of customer value metrics on their organization.

Measuring customer value is part of a broader approach to building lasting and profitable relationships called customer value management. This approach includes measuring and understanding the current and future value of a customer, across multiple products, and then acting on that knowledge, whether through out-bound sales and marketing efforts like marketing campaigns, or in-bound customer service interactions. The goal of customer value management is to align the entire organization to enhance the relationship between the bank and the customer across multiple products.

Survey Says "¦

According to the study, retail banks reported a high degree of confidence in their customer value models "“ the average accuracy score was 7.6 on a 10-point scale. While customer value models are perceived to be accurate, their value to the organization has not been fully realized. Per the study, while more than half (52 percent) of respondents reported that using customer value metrics for decision making drives success at their organizations, 44 percent were undecided. And when asked if the use of customer value metrics provided a competitive advantage, only 34 percent said yes, while 33 percent said no and another 33 percent were uncertain.

'Many retail banks have yet to realize the full potential of integrating customer value metrics into their business models," said Jeff Gilleland, financial services strategist at SAS. 'While banks have a good understanding of a customer's value across multiple products, they have yet to link this insight to "˜customer potential' and then implement coordinated customer development plans across products and channels. Competitive advantage lies in a bank's ability to integrate customer knowledge, which only that bank has about the customer, and then to act on that knowledge in ways that create intimacy with the customers that matter most."

While all the retail bank executives surveyed recognize the potential importance to their organizations of measuring customer value, the way customer value measures are being used and the perceived benefit varies between institutions. On one hand, banks are actively calculating customer value: every single executive surveyed reported that their bank calculates customer value, and has been using this key metric for decision making for an average of nearly seven years. Senior executives at retail banks view -- and use -- customer value strategically. Two-thirds (67 percent) of those surveyed said that senior managers at their banks use customer value in decision making, and more than three-quarters (78 percent) use customer value in strategic planning.

Refocus strategy on customers

While retail banks have long known that growing customer loyalty, customer profitability and share-of-wallet are the keys to competitive advantage, the survey discovered that only 17 percent of retail banks are organized around customer value.

And even though most retail banks today use customer value to generate insight into customer opportunities, the vast majority of customer value applications tend to be tactical rather than strategic. Nearly three-quarters (72 percent) of the surveyed executives noted that their banks use customer value metrics to help measure the effectiveness of sales campaigns, while only 17 percent use them in measuring the overall success of the organization

'Retail banks must refocus their strategy from product-out to customer-in," said Michael Lengel, principal with Peppers & Rogers Group. 'Customers are the scarcest resource in business today, even scarcer than capital. A sound customer strategy helps banks to focus on not just any customers, but the right customers, i.e., those who offer the highest value today and tomorrow. In most cases, this involves divesting the customers that no longer fit within the strategic focus, allowing banks to align customer-facing activities around customers with the highest value and growth potential."

Perhaps the most significant reason that banks have not realized the full potential of tracking customer value is related to management accountability. According to the research, only 6 percent of the executives surveyed hold anyone responsible for changes in customer value. 'This lack of ownership creates miscues at the organizational level," said Lengel. 'For instance, most retail banks incent and reward employee performance based on selling as many products as possible. But why should a segment manager in credit cards care about increasing customer value if she's rewarded on the number of accounts opened per quarter? Ownership must happen at the management level and the customer-facing level."

What conclusions can one draw from the survey results?  While customer value metrics are becoming imbedded in retail banking business models for decision making, banks remain locked in measuring organizational success by product lines of business.

'This study highlights the fact that retail banks must refocus their strategy on customers and customer value management rather than solely on products and product management," said Gilleland, the SAS industry strategist. 'By doing so, banks can build strategies that increase profitability and result in a stronger customer franchise. But until they do so, competitive advantage will remain elusive and out of reach."

White paper on study available

For a free white paper exploring the findings of the joint SAS and Peppers & Rogers Group banking study and offering advice on ways to measure and analyze customer value to capture competitive advantage, visit http://www.sas.com/clv.

Today's announcement of survey results was made at the BetterManagement LIVE Worldwide Business Conference, which addresses critical business management issues from around the world. BetterManagement LIVE brings together more than 800 attendees from the public and private sectors to share insights and knowledge. More than 85 speakers in seven focused tracks represent a broad spectrum of executives, academics, consultants and financial experts.

About Peppers & Rogers Group

Peppers & Rogers Group is a management consulting firm recognized as the world's leading authority on customer-based business strategy. Founded in 1993 by Don Peppers and Martha Rogers, Ph.D., the firm is dedicated to helping companies compete and win by identifying differences within their customer base, and using that insight to maximize the value of each and every customer relationship. Peppers & Rogers Group is a division of Minneapolis-based Carlson Marketing Group. The firm maintains a global client list that includes AT&T Wireless, Bayer Corporation, Bentley Systems, BMW of North America, LLC, Boise Office Solutions, DuPont, Ford Motor Company, Hewlett-Packard, Jaguar Cars, Lincoln-Mercury, Lowe's, Merial, Microsoft Business Solutions, Roche, SAP, Scottish Power, Telesp, The United States Postal Service, Verizon, Visa International, Wolters Kluwer and Wyeth Nutrition. 

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