FEATURE STORY
The ABCs of CRM
THE OBJECTIVE OF CUSTOMER RELATIONSHIP MANAGEMENT (CRM) BOILS DOWN TO ONE SIMPLE CONCEPT: LOYAL, PROFITABLE CUSTOMERS. LOYAL BECAUSE LONGTIME CUSTOMERS TEND TO BUY MORE AND ARE EASIER (AND SUBSEQUENTLY MORE COST EFFECTIVE) TO SELL NEW PRODUCTS TO THAN TRYING TO ACQUIRE NEW CUSTOMERS. PROFITABLE BECAUSE THIS IS WHAT MAKES OR BREAKS A BUSINESS.
Fall2005
BY ALYSSA OVER

Casinos are great examples of CRM. Casinos proactively identify high margin customers (called high rollers) day in and day out throughout the operation. Everyone from the security guards, to the dealers, to the waitresses are aware that they are responsible for finding and catering to high roller clients. Once high rollers are identified, casinos go all out to ensure that these customers are given extraordinary service.Why? The casino makes most, if not all, of its profits on this handful of customers. The casino will continue to deepen its understanding of their habits and preferences to further cater to the high roller’s interest in returning to the casino to spend more money.

CRM IN FINANCIAL SERVICES
Let’s explore how CRM plays out in today’s financial services businesses. In a typical financial institution (Fl), 20% of the customers represent 160% of the profits, according to First Manhattan Consulting study.

A financial institution with $500 million in assets would typically have between 50- 75,000 customers. For a community bank or credit union, this is a huge number of individuals to keep track of. However, 20% of those accounts mean that fewer than 15,000 customers generate all of the profit. From studies done on Fl profitability, it is also known that typically only 10% of the customers will have an account portfolio that is completely profitable. Perhaps more amazing is that 20% of the overall profitable customers will have only one profitable account!

Therefore, who are those 15,000 customers? What are they buying to make them profitable and what else can you be selling them to make them more profitable? In terms of customer retention, a Harvard Business Review Study claims that by retaining 5% more customers, financial institutions can boost profits by as much as 100%. In the above example, you can make a significant profit contribution if you can focus on retaining 7,500 customers. M&T Bank recently stated that the loss of one top customer meant that they needed 20 new customers to replace the profit. If this is the case, it is important for you to know whom these people are that may leave your institution (and take potentially half of your profit with them). What can you do to help keep them? What products or services do they have or should they have to make them more likely
to stay and continue contributing to your financial institution’s profitability?

TOOLS TO TARGET THE LOYAL CUSTOMER
Traditional database systems, MCIF/CIF systems, data warehouses, and such technologies can help identify your most loyal customers. The more advanced systems
allow you to use state-of-the-art profitability analysis such as matched maturity and funds transfer pricing to be as precise as possible when estimating the costs and
revenues associated with doing business at your company. In addition, house holding techniques ensure that you are recognizing profitable customers based on their household or overall account holdings (personal, household, commercial). Some systems now even include analytics and event-based alerts to notify you when something happens, such as accounts being closed or balances changing dramatically that may indicate a customer may be on their way out. Once you identify who and what products/services are profitable, you can enhance the customer records with demographic and behavioral data to build segments and profiles to best target
these customers. The enhanced data can be analyzed using more sophisticated tools such as visual profiling which assists in filtering and presenting the data to show trends, geographic representations and statistical analysis. Marketing professionals use this information to create look-alike models to profile ideal customers. This can help
in identifying potential high value customers from the existing customer base. The marketer can also rent prospect lists reflecting the look-alike characteristics so that they optimize their list and reduce mailing expenses. The better you can target the right prospects, the less time and money you need to spend on sales and marketing efforts to get and keep customers. This contributes directly to your profitability. Many institutions have this data analysis capability in an MCIF or data warehouse.

However, over 60% of enterprises are not using these systems according to a Sedona Study.Why? Let’s go back to the simple CRM examples. If the casino marketing team know who their most profitable customers are, but the dealers don’t, how does this really help the organization? Sure, marketing can send out nice offers in the mail and give you pretty membership cards to indicate that you are special - but if the front-line personnel don’t recognize you as “special”, the data analysis efforts are moot.

Additionally, in a true CRM environment, the front-line personnel not only need information to service the customers, but they can provide critical information and
insight back to the organization from their personal contact with each individual. Enabling them to do this quickly and easily is a key aspect in instituting a CRM culture.
Interactive information is data that is collected from a person-to-person or person-
to-computer dialogue. An example of this would be the customer that walks into a branch to deposit their paycheck. While talking, the teller notices that the customer is pregnant. This is critical information to capture as it offers great opportunities to cross-sell products such as estate planning, college savings instruments, life insurance, etc. Most likely, this isn’t information you will be able to find in your transactional system nor any data enhancement service. Yet, it can help identify opportunities for the Fl to sell high margin products.

Take this a step further. Financial institutions want to know what to cross sell and what is the “next best product.”A CRM system can analyze an individual’s existing purchases, behavior and other people’s purchases that are similar to recommend the next best product to sell to that customer. If you have ever bought a book on Amazon.com and have seen the message that suggests you might be interested in other related books or books that were purchased by people who bought similar book(s) - this is a good example of “next best product”.

What most institutions don’t realize is that without the integration of interactive
data, such recommendations could be dead wrong. Take for example the customer who walks into the branch to conduct a transaction. The employee sees that this customer has a large amount in a low-interest bearing savings account and the system tells them to cross sell a CD, with a special rate for such high balances. The teller offers this to the customer, but leams that they are saving to put a down payment on a new house. The system wouldn’t know this but the teller uncovers this fantastic opportunity to notify the mortgage department. Capturing this information is essential.

Doing something with it is the next requirement. As noted before, CRM’s second differentiator is the ability to share information across the organization. In the example above, you must get this mortgage lead to the right person, and fast! The Internet affords you a means to pass information around easily - via email or Webbased applications.Whether leads/referrals are generated on the front line or by marketing
in the back office, ensuring they are followed-up in a timely, efficient manner is key to reducing costs and increasing sales. The better CRM systems utilize workflow techniques to automate the process and provide reminders and automated escalation so that leads and customer requests do not go un-served. In addition to the passing of information, some CRM systems provide an online repository of information needed by employees to carry out their jobs. Tellers require rate information, account and special program information while a marketing manager needs reports on profitability, leads, and competitors’ websites. CEOs like the ability to access information at a moment’s notice so they can manage the business and respond to requests or issues as they arise.

The information needs to be easy to access and must be customizable to fit each individual’s specific needs. Internet portal technology offers a great way to implement this. Think of a portal as a way to have a company Intranet that can be customized for each user and authorized users can add or change information on the fly. This can not only make everyone’s job easier but it can save an organization significant money in saving paper and the time and effort associated with information distribution. The third part is the one most important to the customer but usually the one ignored by most companies.When a request or issue is raised by the customer, it is absolutely mandatory that it does not go unanswered. Even if you don’t have the answer itself at first, acknowledging that you received the request, are following-up on it, and eventually closing it out, can be the most challenging for the typical organization composed of many individuals touching the customer and relying on colleagues for closure. In essence, don’t drop the ball.

Most CRM systems do not embrace the idea of process or the not-so-new concept of workflow. Having a systematized way to ensure follow-up and track the timeliness as well as the overall process itself can help optimize customer service and identify opportunities to improve productivity.

So perhaps the definition of CRM should be expanded to: the ability of an entire organization to effectively identify, acquire, foster and retain loyal, profitable customers. Truly successful organizations are able to communicate and share information about their customers and ensure personnel are responding to customer needs in their efforts to achieve the best possible service and profitability. Don’t feel bad if you’ve been confused about all the hype about CRM. As with any industry trend, many vendors have jumped into the arena with many definitions offering differing ways to improve customer relations.

The bottom line, however, is know your customers.Who is making you money and who is not? Next, know your products and operations.What is making you money and how? Finally, take that knowledge and apply it to programs and directives to allow the rest of the organization to participate in creating more profitable customers and anticipating the best way to service customers and prospects. In many ways, we’ve been doing this all along...it is, in fact, as fundamental as perhaps the ABC’s.

Alyssa Over is a respected expert in financial services Customer Relationship
Management (CRM) and is the special section contributor for BusinessWeek for both
CRM and The Real Time Enterprise (RTE).

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