Marketing Practice Tactical CRM Three Steps to Mining Profits, Not Data
Overview Tactical Customer Relationship Management (CRM) offers marketers an opportunity to use existing customer databases and CRM programs to drive short-term profitability enhancement. Tactical CRM can be particularly effective in quickly rolling out cost-effective customer acquisition programs, targeting customers who yield maximum spend/wallet share, and more precisely managing customer attrition. Our experience with clients in a variety of industries has shown that a three-step process can profitably cultivate opportunities inherent in different stages of the customer life cycle. This process involves: Identifying and prioritizing which life cycle stage to focus on; Assessing existing programs and databases to determine the specific opportunities within the life cycle stage that can be addressed most quickly with greatest impact; and Rolling out cost-effective quick-hit actions to immediately impact near-term earnings. Along with the establishment of clear accountability within the organization and setting up well-defined measurements of financial success, the tactical CRM approach can quickly deliver substantial profitability benefits.
Customer Relationship Management (CRM) the targeted application of customer data to critical business problems can provide substantial (more than 10 to 20 percent) performance improvements to many businesses in less than a year. Often, it can be done by exploiting existing investments, an essential requirement given cost-containment pressures in today s environment. Is this just another in the litany of promises executives have heard about CRM in recent years? Absolutely not. Our client work has demonstrated that in rethinking how to deploy CRM capabilities, companies can discover a potent weapon for enhancing profitability. While most executives think of CRM as a long-term strategic initiative, more and more companies are discovering that focused use of customer and process insights and tighter tracking processes enables them to: 1) quickly field more cost-effective customer acquisition programs, 2) better target those customers who yield maximum spend/wallet share, 3) more precisely manage customer attrition or decreasing customer activity, 4) effectively channel sales force energies, and 5) allocate service budgets with greater efficiency. McKinsey Marketing Solutions 1
In short, a significantly different approach which we call tactical CRM can enhance productivity across a range of key marketing functions (see Exhibit 1). And its benefits can be realized in far shorter time frames than typically associated with CRM programs another critical advantage in a growth-constrained market. Acquisition Development Retention Servicing Exhibit 1 Tactical CRM Impacts Description Rationalizing prospect solicitations and reducing mailing costs at a credit card issuer Tailoring direct mail offers to targeted segments at a retail bank Focusing online ad spend on the most profitable customer acquisition tactics at an auto finance company Acquiring lower-value customers via a lower-cost channel at a small-business health insurance provider Identifying and targeting priority lowpenetration customers for cross-sell at a retail bank Creating client-centric metrics and relationship management at a wholesale bank Migrating key customer segments upward at a luxury retailer Enhancing cross-sell in the personal lines P&C agent channel Targeting offers to reduce downward migration among high-value segments at a retailer Reducing silent attrition for high-risk customer segments at a retail bank Reducing churn in high-value customers at a telecom company Using online servicing to reduce sameaccount call volume at a consumer finance company Impact (within 6-12 months) 5-10% reduction in marketing costs 2.5-4.0 times improvement in response rates 80% lower cost per funded loan 8% profit improvement from lower acquisition costs 20-40% profit increase for targeted segments 5-10% increase in revenue expected 7-17% increase in customer spend 7% increase in total premiums 20-30% reduction in downward migration 34-50% profit increase expected 20% lower overall churn rate 40% reduction in call center costs McKinsey Marketing Solutions 2
Traditional CRM has grown less supportive of short-term value creation for five reasons: 1. The continuous improvement processes inherent in CRM are not always focused on attacking critical near-term business issues of growth, productivity, and profit improvement. The efforts often fail to focus on the most impactful element of the business system. 2. The ability to use existing (but untapped) data to address critical short-term issues is often seriously underestimated. The focus is often on creating new solutions, without attempting to leverage existing data and metrics. 3. The potential impact beyond marketing and sales functions is often overlooked. Indeed, functional and productivity applications that do not directly touch customers, but which can be improved through the use of more specific customer-related data (e.g., marketing productivity, call center management, logistics management), are often ignored. 4. The results that these platforms were built to deliver are often not quantified and rarely tied to financials and budgeting processes via viable targets and key metrics. 5. The CRM initiatives of the 1990s were typically guided by technologists building out elegant long-term platforms, not by business people seeking creative and quick-to-market solutions to pressing near-term issues. Clearly, too many CRM initiatives foundered because marketers spent disproportionate effort and money on building the capability, and not enough on aiming it at identifiable profit opportunities. A tactical CRM approach, however, reverses this equation, identifying business areas in which CRM knowledge can translate into quick-to-market performance improvements. What s more, a tactical CRM approach can demonstrate the potential payoffs to CRM investments in a tangible and compelling way. McKinsey Marketing Solutions 3
Tactical CRM: Aiming at Profitable Opportunities Tactical CRM achieves returns within compressed time frames because it uses existing information, processes, and products, rather than inventing new ones. The new approach moves a company quickly toward positive results via a series of incremental steps, each of which rings the cash register, builds capabilities, and creates profits that can fund succeeding steps. Our experience with tactical CRM, based on multiple industries, underscores the opportunities inherent in different stages of the customer life cycle for distinct sectors. Accordingly, different tactical CRM levers provide the greatest impact for these situations (see Exhibit 2). Industries such as credit card and wireless, for example, have historically been marked by an intense focus on customer acquisition and, later on, by churn/retention concerns. In this era of consolidation, large chain retailers and retail banks have enormous customer bases, making customer loyalty and cross-selling their primary concerns. Exhibit 2 Key Levers by Industry High-impact opportunity area = Acquisition Development Retention Reducing acquisition costs Increasing usage/ upward migration Increasing crosssell Increasing client retention Reducing silent attrition/ downward migration Improving service queuing/ tiering Servicing Improving profitable channel migration Credit Card Retail Banking Retailing Telecom Pharmaceutical Energy High Tech McKinsey Marketing Solutions 4
Exhibit 3 Tactical CRM Approach Step 1 Identify and prioritize focus Step 2 Within focus, find greatest bang-for-thebuck opportunities Step 3 Implement quickhit actions Key Question What portion of a customer s life cycle or a company/industry s business system is most critical? - Acquisition - Development - Cross-sell - Retention - Servicing - Loyalty Within the highestpriority focus, what are the key opportunities as indicated by current processes and existing data in terms of: - Impact - Timing How can these opportunities be captured quickly? What actions can be quickly crafted, combined, and put in place to create immediate impact? The tactical CRM approach uses the following rigorous threestep process to profitably cultivate these types of opportunities (see Exhibit 3): 1. Identify and prioritize which life style stage to focus on, leveraging industry knowledge and senior management intuition, as well as strategy. As previously noted, each industry has an overall pattern of customer life cycle value opportunities and resulting high-impact levers. Do we need to cross-sell more profitably? Is silent attrition a critical threat? Can service queuing (i.e., giving best service to high-value customers) provide greater customer satisfaction at lower cost? Once the opportunity set is identified, prioritizing the action steps is next. Criteria for prioritization include economic upside, ease of implementation, time it will take to realize impact, and frequency with which decisions need to be made. 2. Assess existing information and processes to determine which specific opportunities within the customer life cycle stages (identified in step 1) can be addressed in the shortest time frame and with greatest impact. McKinsey Marketing Solutions 5
3. Develop and implement quick-hit actions to immediately impact near-term earnings, without building extensive new technology. A disciplined and thoughtful approach can actually institutionalize key processes and capabilities while yielding short-term benefits, avoiding redundancy, and bypassing efforts that do not yield results. Applying the Three-Step Tactical CRM Approach We have successfully applied a tactical CRM approach at companies representing a variety of industries. In each case, we developed a set of programmatic levers targeted approaches, tools, and metrics focused on levers such as reducing acquisition cost and reducing silent attrition to produce the greatest impact. Following are five examples of this tailored approach: Reducing acquisition costs in consumer credit cards: Acquisition was the greatest business system challenge to the credit card industry through the 1990s. Despite efforts to target offers based on creditworthiness, marketing costs continued to climb for most issuers given the flood of direct mail and declining response rates. In this demanding environment, acquisition effectiveness and cost reduction were clearly identified as our client s top priorities. Next, quickly assembling and analyzing solicitation data indicated a strong correlation between sales rate metrics and contact rate metrics. We then helped the company to quickly implement a solution that reduced over-solicitation, and used the savings generated to target other prospects with substantially higher response rates. Additional analysis indicated that the cost per piece could be significantly reduced. To exploit this opportunity, the company implemented techniques to improve weight measurement as well as the use of Standard-A (versus more expensive first-class) mail wherever possible with appropriate graphics, drop shipping, and co-mingling. These actions resulted in a 5 to 10 percent reduction in marketing costs within 6 months providing a significant boost to reducing acquisition costs. McKinsey Marketing Solutions 6
Improving the acquisition/servicing mix in small-business health insurance: The challenge in serving the small-business market lies in the economics of customer contact, both for acquisition and servicing. During our initial brainstorming and high-level analysis with one health insurer, we found that the cost of acquisition was astronomical, and that the activities of different channels (e.g., agents, call center) were typically uncoordinated. A further analysis of the data indicated that although customer relationships were creating value, it was not always commensurate with the cost of acquisition within the channel. Thus, a key issue was the use of more expensive and effective channels in closing the sale on low-value accounts and, conversely, the use of less-effective channels in targeting high-value accounts. We subsequently developed a simple model to predict the lifetime value of a prospect and used this metric to allocate prospect leads to channels commensurate with their potential, as well as the channel cost and effectiveness. This hybrid marketing approach increased premiums by 6 percent and profits by 8 percent within 6 months. Improving spend/wallet share and marketing productivity for a grocer: Many grocers have implemented loyalty programs, but few are taking advantage of the wealth of customer data they provide to rapidly improve business performance. One quick-win tactical opportunity is to leverage customer data to increase same-store sales and improve the management of promotions. For most grocers, promotional spend is driven by manufacturer funding. Using customer data can allow grocers to allocate these dollars more effectively and negotiate better deals with manufacturers. Based on this step 1 hypothesis, our retail grocery client took five of the most heavily promoted categories and analyzed the impact of promotions on individual customer buying habits. The client was able to determine for what percentage of customers spending remained the same, spending was increased by switching over from another product, and spending was increased through purchases of increased quantities. Armed with this data, we built a process enabling the grocer to reallocate promotion McKinsey Marketing Solutions 7
spend to drive more incremental sales and higher-margin sales. These actions increased return on promotion spend by 50 percent across categories. And for a grocer with razor-thin profit margins of 2 to 3 percent, this improvement in sales and marketing productivity dramatically increased profitability. Improving customer retention for a department store: Department stores are relentlessly focused on driving same-store sales and top-line sales growth. Most spend limited time assessing individual customer performance, although concentration of spend typically follows a 30-70 rule (i.e., 30 percent of the shoppers generate 70 percent of the sales) in which top shoppers pay frequent (at least once a month) visits, on average. Not surprisingly, focusing more heavily on these top shoppers can yield results very quickly. Based on our discussions and analysis during step 1, it became clear that while broadly targeted retention programs generally fail at retailers, they work quite well for top customers. That is because these customers have easily observable shopping patterns early in the year that are highly predictive of potential costly downward migration (i.e., loss of wallet share) and attrition in the precious holiday season. To capture this opportunity in step 2, we quickly developed attrition prediction models that assessed a customer s shopping behavior in the first 4 months of the calendar year in a way that would predict attrition for the rest of the year. By focusing on top segments, the model predicted attrition candidates with over 80 percent accuracy, versus less than 60 percent accuracy for average shoppers. In step 3, proactive, tailored retention programs were launched by month 6 for the rest of the year. These actions reduced attrition and downward migration among top customers by over 60 percent, and the programs delivered ROI of over 150 percent. Reversing silent attrition of retail bank deposits: The profitability of a commercial bank is driven by its deposit business, particularly from those customers who maintain large balances in their checking and savings accounts. As deposit margins were squeezed through the 1990s, deposit volumes became McKinsey Marketing Solutions 8
even more important to banks. While many banks therefore emphasized customer and deposit acquisition (e.g., by promoting direct deposits, by worksite marketing to new hires), balance retention was typically overlooked. By first identifying key issues and analyzing customer data with one bank, we focused on enhancing profitability by stemming the silent attrition (i.e., the reduction of balance size over time which reduces account profitability) of balances. We then analyzed time-series data to identify high-risk customer groups and key drivers of balance reduction within accounts. Preemptive alerts were designed in step 3 and tested to drive proactive and timely actions in response to the alerts. The estimated impact was a 10 to 15 percent reduction in silent attrition within 6 to 12 months, which should result in incremental profits of more than 30 percent for these high-risk segments. Getting Started While changing the CRM direction of a company is far from easy, it may be an economic imperative particularly if what you have spent on CRM to date is not commensurate with returns, and if the current economic environment has created a pressing need for near-term earnings. In launching a tactical CRM approach, we recommend three quick planning activities: 1) identifying the key levers that will generate the greatest short-term economic impact, 2) deciding who is accountable within the organization, and 3) setting up a clear financial definition and measurement of success. Once these components are in place, the tactical CRM approach can be leveraged to deliver substantial economic benefits quickly. Margo Georgiadis, Raj Seshadri, and Corey Yulinsky are Principals in McKinsey s Marketing Practice For additional information or copies, please call (203) 977-6800 or e-mail mckinsey_marketing_practice@mckinsey.com McKinsey Marketing Solutions 9
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