customer relationship managament
TRANSCRIPT
F I N A N C E
CUSTOMER RELATIONSHIPMANAGEMENT STRATEGIES INFINANCIAL SERVICESAchieving high performance and profiting frominnovations in CRM
By Sarah Dougan
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Sarah Dougan
Sarah Dougan is the Chief Examiner for Customer Relationship Management with the
Chartered Institute of Bankers in Scotland. She is a Lecturer in Marketing at the
University of Paisley and a member of the International Institute of Research where she
has presented a number of papers on Financial Services marketing. Her consultancy
interests cover the Marketing of Services, Customer Care, Marketing Implementation,
Project Management, New Product Development and the creation and delivery of e-
learning systems. She can be contacted at: [email protected]
Copyright © 2004 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved. Reproduction or redistribution of this Management Report in any form for any purpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not of Business Insights. Business Insights Ltd accepts no liability for the accuracy or completeness of the information, advice or comment contained in this Management Report nor for any actions taken in reliance thereon. While information, advice or comment is believed to be correct at the time of publication, no responsibility can be accepted by Business Insights Ltd for its completeness or accuracy. Printed and bound in Great Britain by MBA Group Limited, MBA House, Garman Road, London N17 0HW. www.mba-group.com
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Table of Contents Customer Relationship Management Strategies in Financial
Services
Achieving high performance and profiting from innovations in CRM
Executive Summary 10
The origins and rationale of relationship marketing 10 Creating value for the organisation 10 How to tackle customer defections 11 Achieving customer satisfaction through service quality 11 The implications of eCommerce for CRM 12 Avoiding the pitfalls of CRM 13
Chapter 1 The Origins and Rationale of Customer Relationship Management (CRM) 16
Summary 16 Introduction 16 21st century attitudes towards banks 18
How marketing oriented is your company? 19 Benefits of developing relationships 20
Relationship marketing versus transactional marketing 20 Eight major benefits of developing relationships 21
Long-term profitability 22 Lower costs 22 Repeat customers often cost less to service 22 Opportunities for cross-selling 22 Defection less likely 23 Employee retention 23 Family influence 23 Satisfied customers provide referrals and may be willing to pay a price premium 24
A customer retention plan: reducing defectors and boosting retention rates 24 Measure customer retention 24
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The crude retention rate 25 The weighted retention rate 25
Ascertain defection motives 26 Price defectors 26 Market defectors 26 Are all customers the right customer? 27 Identifying profitable customers for CRM 28
First group of customers to target 30 The middle group of buyers 30 The final, less profitable, group of customers 31
Implementing relationship marketing 31 Defining the value proposition 31 Case study: First Direct 32
Meeting consumers diverse requirements 33 Delivering superior value and engaging entire organisation 33
Implications for practice 35 Demonstrating trustworthiness 36
Generalised trust 36 System trust 37 Personality based trust 37 Process based trust 37
Who owns the customer? 39 Effects of merger activity 40 The “customer is king” 41 “Everyone owns the customer” 43 Sharing information companywide is crucial to widening customer ownership 44
How to evaluate your company’s success in offering customer satisfaction 45
Chapter 2 Creating Value for the Organisation 48
Summary 48 Introduction 48 Developing a segmented service strategy that aims to deliver increased value to the customer and the organisation 50
Step 2: Segment the customer base and determine segment value 52 Step 3: Identify segments’ service needs 53 Step 4: Implement segmented service strategy 55 Finalise segment service strategy plan 56
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Chapter 3 How To Tackle Customer Defections 62
Summary 62 Introduction 62 Case study: Abbey 64 Defection can be remedied 66 Possible reasons for customer defection 67 What are the factors that force customers to switch? 69 Retaining customers in a competitive business 71 Loyalty must start to count for something 72
Chapter 4 Achieving Customer Satisfaction Through Service Quality 74
Summary 74 Introduction 74 Financial services characteristics and their implications for branding and relationship management 75
Intangibility 75 Implications for branding 76 Inseparability 76 Implications 77 Heterogeneity 77 Implications 78 Perishability 78 Implications for branding 79 Fiduciary responsibility 79 Two-way information flows 80 Implications 80
Impact of online delivery for service concepts 81 Consumer empowerment 82
Effective separation of production and consumption 82 Service quality 83 Example: customer care at the ANZ bank 84 ANZ’s ‘Customer Service Charter’ 85 Researching service quality 88 Research objectives 89 The most common research objectives in financial services 89 Research methods 90
Regular customer surveys 90 Customer panels 90 Transaction analysis 91
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Mystery customers 91 The SERVQUAL methodology 93
What to measure 93 How to measure 95
Internet customer questionnaire 99
Chapter 5 The Implications of eCommerce for CRM 116
Summary 116 Introduction 116 How should financial firms respond? 119 Example: internal marketing at Barclays 122 How different companies are approaching eBusiness 124 The reluctant approach of a life insurance company 124 The integrated approach of a national retail banking operation 125 The focus for change in an international insurance company 125 The stand-alone Internet bank 126 Key factors in developing effective strategies for eCommerce 127 The role of senior management 127 Capabilities required in a changing environment 127 Critical success factors 128 The threat of criminal activity on eCommerce 129 Ways to help customers protect themselves against fraud 132
Chapter 6 Avoiding the Pitfalls in CRM 134
Summary 134 Introduction 134 Peril 1: Implementing CRM before creating a customer strategy 135 Example: Fidelity Investments 136 Peril 2: Rolling out CRM before changing your organisation to match 137 Peril 3: Assuming that more CRM technology is better 137 Peril 4: Stalking, not wooing customers 137
Chapter 7 Appendix 141
Example 141 Part A 141
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List of Figures Figure 1.1: First Direct customer communication preferences 33 Figure 2.2: The customer profitability matrix 49 Figure 2.3: A framework for developing a segmented service strategy that aims to deliver
increased value to the customer and the organisation 51 Figure 2.4: Market maps 51 Figure 2.5: The segment competitor profile of an insurance company 54 Figure 3.6: Consumers are more demanding than ever 63 Figure 3.7: More consumers plan to switch in the next 12 months 63 Figure 3.8: Factors that erode satisfaction and trust 71 Figure 4.9: Reasons for customer loyalty 83 Figure 5.10: Reasons for customer preference for face-to-face contact 118 Figure 5.11: Complex products sell in the branch 118 Figure 5.12: Newcastle Building Society’s virtual customer service assistant 119 Figure 6.13: The imperatives of CRM 139 Figure 6.14: The imperatives of CRM, continued 140
List of Tables Table 1.1: The contrasts between transaction and relationship marketing 21 Table 1.2: Customer satisfaction exercise 45 Table 2.3: Customer management stage analysis, problems and opportunities 58 Table 2.4: Customer management stage analysis, problems and opportunities, continued 59 Table 4.5: A comparison of different online metric collection methods 92 Table 7.6: Dimensions of Internet banking service quality 142 Table 7.7: Expectations of an excellent online bank, Part A 143 Table 7.8: Expectations of an excellent online bank, Part A, continued 144 Table 7.9: Expectations of an excellent online bank, Part A, continued 145 Table 7.10: Expectations of an excellent online bank, Part A, continued 146 Table 7.11: Expectations of an excellent online bank, Part B 147 Table 7.12: Expectations of an excellent online bank, Part B, continued 148 Table 7.13: Expectations of an excellent online bank, Part B, continued 149 Table 7.14: Expectations of an excellent online bank, Part B, continued 150 Table 7.15: Expectations of an excellent online bank, Part B, continued 151 Table 7.16: Expectations of an excellent online bank, Part B, continued 152
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Executive Summary
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Executive Summary
The origins and rationale of relationship marketing
An emphasis on customer acquisition can lure firms can into the traps of short-term
promotions, price discounts, or catchy advertisements that are insufficient for loyalty
and retention;
there are eight key benefits associated with relationship marketing. Examples
include: increased opportunities for cross-selling and reduced selling and
administrative costs;
research conducted in 2004 revealed that financial service retailers have
organisational structures that may not be supportive in retaining customers and
adapting to changes in the marketplace;
a key step towards successful customer relationship management is to distinguish the
transaction buyer from the relationship buyer;
many banks have traditionally organised around business lines, so the customer
“owner” is the division that found the customer. This can undermine the
development of CRM.
Creating value for the organisation
The value creation process is centred upon the careful segmentation of the market
and the development of an approach that maximises the value of your most desirable
customer segments and the corresponding life-time value that these customer groups
provide for your company;
market mapping is a technique that can help clarify the market structure and
relationships between suppliers, intermediaries and customers;
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a segmented service strategy can be used to deliver value to the customer and the
organisation.
data from segment analysis can be used as the basis of a segment performance chart
that illustrates the customers’ perceptions of the importance of each service attribute
or need and how well the company performs against them;
there are potential pitfalls associated with each stage of customer management.
These can be avoided through the use of planning.
How to tackle customer defections
Consumer switching is now a major concern throughout the financial services sector,
particularly in the mortgage market.
The rise of customer complaints has been accompanied by a rise in the numbers who
switch their service providers.
Abbey responded to the switching problem in 2003 when their research showed that
43% of customers in the mortgage market were seeking re-mortgage deals.
What returns can you expect from win-back programmes? Aside from significant
insights into the process improvement initiatives most likely to reduce churn, win-
back programmes yield a tangible return on investment.
The growing popularity of packaged bank accounts could be used to leverage both
switch business and retain those that have a current account and mortgage with the
same provider.
Achieving customer satisfaction through service quality
Quality is one of the important dimensions that customers use to differentiate
between services offered by different companies.
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Like other services, the financial services sector has characteristics that pose a
number of problems for creating successful customer relationships. The
characteristics are: intangibility; inseparability; heterogeneity and perishability.
From the buyer's perspective, variations in service quality and inconsistent
performance only increase the risk associated with purchase.
The three most significant benefits for services marketers moving online are
improved consistency, greater consumer empowerment and the move away from
time and space dependency.
The implications of eCommerce for CRM
For many complex purchases, many consumers prefer face-to-face contact with staff
rather than electronic channels.
‘Phishing’ refers to a form of criminal activity that involves the use of fraudulent
emails and websites that are designed to fool recipients into divulging personal
financial data such as credit card numbers, account usernames and passwords. The
result of these scams is that consumers suffer credit card fraud, identity theft and
financial loss. Messagelabs, an anti-virus company, has reported a surge in phishing
emails over the past 12 months. In August 2003, Messagelabs intercepted just 14
phishing emails; it now stops about 250,000 a month.
Providers of online services will increasingly face technical difficulties in adapting
information to small mobile phone or palmtop screens, and enabling transactions to
be carried out from wireless devices.
There is a belief within the financial services organisations studied for this report that
eCommerce enables product information to be far more accessible and many
transactions to be carried out remotely through self-service. Potentially, this changes
the value and the role of existing distribution routes such as branch networks for
banks and intermediaries and sales forces for insurance companies.
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Avoiding the pitfalls of CRM
The rewards of CRM will not be realised unless firms avoid the four common
mistakes associated with the adoption of CRM systems.
According to a survey of 451 senior executives conducted across 60 countries in
2001, one in every five users reported that their CRM initiatives not only had failed
to deliver profitable growth but had also damaged long-standing customer
relationships.
Fidelity exemplifies best practice in CRM because it set strategic goals first and
developed technology around its new business strategies.
Installing CRM before creating a customer-focused organisation is a dangerous
pitfall. If a company wants to develop better relationships with its more profitable
customers, it needs to revamp the key business processes that relate to customers
starting from account enquiries to after sales service.
There is a point at which communication with customers can turn into harassment.
You may want to forge more relationships with affluent customers, but do they want
them with you? Attempts to build relationships with disinterested customers can
quickly backfire, as you may be perceived as a pest.
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Chapter 1
The Origins and Rationale of Customer Relationship
Management
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Chapter 1 The Origins and Rationale of Customer Relationship Management (CRM)
Summary
An emphasis on customer acquisition can lure firms can into the traps of short-term promotions, price discounts, or catchy advertisements that are insufficient for loyalty and retention;
there are eight key benefits associated with relationship marketing. Examples include: increased opportunities for cross-selling and reduced selling and administrative costs;
research conducted in 2004 revealed that financial service retailers have organisational structures that may not be supportive in retaining customers and adapting to changes in the marketplace;
a key step towards successful customer relationship management is to distinguish the transaction buyer from the relationship buyer;
many banks have traditionally organised around business lines, so the customer “owner” is the division that found the customer. This can undermine the development of CRM.
Introduction
This chapter explains the origins and rationale of relationship marketing and offers tools
and techniques that can be used when implementing relationship marketing programmes.
In 1851 Johann Konrad Fischer, a successful Swiss industrialist, made a diary entry that
described a typical visit to his bank:
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When I returned to the bank a little before nine o'clock I was shown to a seat facing a counter where five cashiers conducted their business. At five minutes to nine the official to whom I had to give my cheque took his place behind the counter. I had it in my hand and showed it to him. He did not say a word but emptied several little bags of gold coins into a drawer. Then he produced the well-known little cash shovel that is used for coins in banks. And then he just waited. At the stroke of nine he asked me if I wanted gold or banknotes. I said I wanted gold. He did not count any of the sovereigns and half-sovereigns but simply weighed them on his scales and then put them on the counter without taking any further notice of me.
Johann Konrad Fischer
It is true that this was only an over-the-counter interaction with a cashier, and even
today such transactions are carried out in a methodical and routine way. The difference
is that this silent, cold, grey attitude the cashier of 1851 displays to his customer would
have been representative of how the bank interacted with its customers throughout its
organisationi. And what was true of banks was also true of every type of retail financial
service provider, whether insurance company, savings institution or building society.
The reasons for this behaviour do not lie in the stereotypical image of Victorians as
stern-faced authoritarian figures. The real reasons for the apparent unfriendliness had
more to do with:
The role these organisations played in society;
the expectations which their customers had from them.
The basic types of services provided by retail financial service organisations have not
changed enormously during the past century and a half. The methods by which these
services are delivered, the culture of the organisations that provide them, and the
i Reference: Business Insights: The Next Generation Delivery of Retail Financial Services: Successfully Managing the Multi-channel Mix, August 2000
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expectations which customers have from them have changed, and to a phenomenal
extent.
Consider the preconceptions of a typical Victorian customer regarding his bank (and, by
extension, regarding other providers of financial services). These preconceptions would
almost certainly have included the following. While the customer might not have
consciously articulated them in this way, they would have been in his/her head, all the
same.
“The fundamental purpose of my bank is to keep my money and other valuables such as
jewellery, gold and share certificates safe.”
“I know I live in a society where most people have little or no money and where the vast
majority of the population are hungry and desperate much of the time. They would be
only too glad to get my money and leave me poor like them if they could get at it.”
“There is a huge divide in this country between those who have financial security and
those who don't. Thank God I am one of those who do.”
“I would be most disconcerted if my bank started being anything less than an ultra-
formal organisation which takes its work, and me, extremely seriously.”
“With the exception of a few eldest sons indulged by their foolish parents, young people
- even those from the best society - rarely have any real money under their command.”
21st century attitudes towards banks
Now consider some of the preconceptions that the modern bank customer brings to their
interaction with the bank.
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“The fundamental basis of my willingness to be a customer of my bank is that I believe
they are giving me the best deal they possibly can. I look for a good rate of interest on
my savings, convenient access to my money and to payment facilities, access to
information about modern accounts as and when required, and authoritative professional
advice about particularly important matters such as mortgages, stock market
investments and pensions.”
“I take it for granted that my bank keeps my money safe. Of course, I live in a society
where nobody needs to go hungry, but there are always crooks about.”
“I need to feel that my bank is continually striving to give me a good deal. I don't ever
want to feel on the wrong side of the divide between those who get a good deal from
their bank and those who don't.”
“In any event, the term `my bank' is not entirely accurate, because in fact I have a
savings account with one bank, a cheque account with another and a mortgage with a
third. I know this is not how my parents managed things, but I myself am entirely used
to having relationships with more than one bank, as well as with several other retail
financial services providers.”
How marketing oriented is your company?
A key difference between the attitudes of the Victorian and the customer of today is that
the latter is more discerning in his or her choice of banking provider. Consequently, the
bank that will prosper in today’s business environment is the one that places customer
satisfaction at the heart of its business operations. This type of bank is described as
‘marketing oriented’. Marketing orientation does not occur because a company has a
marketing department or because the managing director says so. It occurs when the
customer notices the difference. It happens only when all people in the organisation
acknowledge the importance of delivering benefits to customers. In most organisations a
whole range of people have contact with customers. This could include call centre staff,
staff at a bank branch or a financial adviser. A marketing orientation, therefore, is far
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more than simply matching products and services to customers. It has to emerge from
an organisational philosophy and an approach to doing business that places customers
and their needs at the heart of the organisation’s activities.
Many firms, particularly in the financial services sector, have overlooked the importance
of understanding customers accurately because they fail to focus on customer
relationships. They tend to fixate on acquiring new customers as assets they need to
nurture and retain. By concentrating on new customers, firms can easily fall into traps of
short-term promotions, price discounts, or catchy advertisements that bring customers in
but are not enough to bring them back. By adopting a relationship philosophy, on the
other hand, companies begin to understand customers over time and in great depth, and
are better able to meet their changing needs and expectations.
Benefits of developing relationships
Relationship marketing versus transactional marketing
A key part of understanding relationship marketing is to differentiate between
transaction based marketing and relationship marketing. Transaction marketing concerns
the acquisition of new customers and all that is involved in marketing to prospective
customers or encouraging competitors’ customers to switch. In contrast, relationship
marketing is concerned with defending market share and protecting the customer base.
Hence relationship strategies attempt to retain existing customers and generate further
business from them. Relationship marketing belongs to the defensive school of thought
as it focuses on keeping and improving returns from current customers rather than on
acquiring new customers.
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The contrasts between transaction marketing and relationship marketing are summarised
below.
Table 1.1: The contrasts between transaction and relationship marketing Transaction marketing Relationship marketing Focus on single sales Focus on customer retention and customer loyalty Emphasis on product features Emphasis upon product benefits that are meaningful
to the customer Short timescales Long timescales recognising that short-term costs
may be higher but so will long term profits Little emphasis on customer retention Emphasis upon higher levels of service that are
possibly tailored to the individual customer Limited customer commitment High customer commitment Moderate customer contact High customer contact with each contact being used
to gain information to build the relationship Quality is the concern of production and The entire organisation shares a commitment to no one else quality Source: Transaction v relationship marketing (adapted from Christopher et al 1994) Christopher M, Payne A & Ballantyne D 1993, Relationship Marketing, ButterworthHeinemann. Business Insights
There are sound financial reasons for the growing popularity of relationship marketing:
research has shown that the cost of attracting a new customer is estimated to be five
times the cost of keeping a current customer happyii.
Once they decide to buy from a company, customers will be more likely to develop
loyalty when they are consistently provided with quality products, services and good
value over time. They are less likely to switch to competitors if they feel the company is
responding to their changing needs.
Eight major benefits of developing relationships
The four key benefits associated with the retention of existing customers and the
development of long-term satisfying relationships are outlined below.
ii Murphy J 1996 Customer loyalty: happy customers add directly to the bottom line, Financial Times, Mastering Management series, 1 November.
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Long-term profitability
Many customers are unprofitable at the initial stages of the buyer seller relationship.
Students, for example, are unprofitable while at university. After graduation they may
enter careers, take out mortgages and start savings and their profitability to their
financial institution increases, thereby increasing the need to attract and maintain their
custom even while they are not ‘financially stable’.
Lower costs
There are often substantial start-up costs associated with attracting new customers.
These include advertising, sales commissions and the operating costs of setting up an
account. Sometimes these costs can outweigh the revenue expected from the new
customer in the short term.
Repeat customers often cost less to service
Repeat customers are more likely to be familiar with the company and its products and
may make fewer demands on the time of employees.
Opportunities for cross-selling
Over time, business customers often grow larger and may need to purchase in larger
quantities. Individuals may purchase more products as their families grow or as they
become more affluent. Both types of customer may decide to consolidate their
purchases with a single supplier who provides high quality service.
Another advantage of an increase in cross-sale is the corresponding effect on the
organisation’s share of the customer’s total consumption in the particular market. This
has been referred to as an increase in the share of wallet and is simply a measure of the
consumer’s expenditure with the organisation as a percentage of his or her total
expenditure in that market.
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Example of opportunities for cross-selling
A customer saves £2,000 per year to spend on holidays, of which £500 is spent every
year on a week’s vacation in Spain, booked with the same travel operator. Thus, the
travel operator has 25% of the customer’s wallet. Suppose the travel operator decides
to send a mail shot to all existing customers with details of a long weekend in New
York, priced at £300. The customer in this example takes up the offer, foregoing a trip
he intended to take with a competitor. By booking the New York trip, the traveller
increases his total annual expenditure with the travel operator to £800. Thus it can be
said that by cross-selling the trip to New York the organisation has increased its share of
wallet from 25% to 40%iii.
Defection less likely
Satisfied customers will be less susceptible to the pull of competition. Moreover when
customers trust a supplier, they may be more willing to pay higher prices in return for
the assurance of quality service.
Employee retention
An indirect benefit of customer retention is employee retention. The stress associated
with dealing with customers who are unhappy with products and services can lead to
high employee turnover and poor quality. Conversely, customer satisfaction can improve
employee morale and encourage them to remain with the firm.
Family influence
One of the key factors influencing the choice of many purchases for young people is
parental influence. Hence it is assumed that building a relationship with one family
member will have an impact on other members of the same family.
iii Stewart, M (1996) 'Keep the Right Customers', page 16, McGraw Hill
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Satisfied customers provide referrals and may be willing to pay a price premium
Satisfied customers may generate positive word-of mouth and provide free and credible
advertising for the institution.
Referral markets have various names within different industry sectors including:
intermediaries, connectors, multipliers, third-party markets, agencies, networks and
referral sources. In the case of a bank for example, the key referral sources could be
accountants, financial journalists, financial advisers and existing customers. The present
and future importance of these sources of referrals should be identified and a specific
plan developed to determine the appropriate levels of marketing resources that should
be devoted to each of them. Additionally, a cost benefit analysis should be conducted to
evaluate the results of the marketing activities. While a highly focused pilot scheme can
sometimes suggest where the greatest benefit can be obtained, it should be emphasised
that the development of these relationships takes time.
A customer retention plan: reducing defectors and boosting retention rates
For the majority of customers, retention needs to be planned and managed. Outlined
below is a simple four-stage plan to reduce numbers of defectors and boost retention
rates.
Measure customer retention
It is important to know what the current customer retention rate is in order to monitor
improvements. A definition of how retention applies to various products will also be
required. For example, with respect to mortgage business, financial institutions may
want to know the proportion of customers that remain with the institution until their
mortgages are fully paid up compared with those that switch mortgage provider half
way through the contract. In terms of credit cards, the financial institution may be more
concerned with measuring the proportion of customers that make regular use of the card
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compared with those that do not. Retention for fixed term investment may be measured
by the rate of customers who decide to re-invest their money upon maturity of the
investment.
As retention is sensitive to the means by which revenue and profit are generated by
different products and customers, it is important to understand the difference between
the crude and weighted retention rates.
The crude retention rate
The crude retention rate measures the proportion of customers that have remained with
the institution over a time period compared with those that have left. For example, if the
company has one million customers at the start of the year and has lost 100,000 by the
end of the year, the retention is 90% (or defection rate is 10%). The problem with this
calculation is that it treats all customers equally. In practice, customers are not equal:
some spend more than others or buy more profitable products than others.
Consequently, some lost customers may be worth more than others.
The weighted retention rate
This problem can be resolved by using the weighted retention rate i.e. weighing
customers according to how much they buy. If the 100,000 lost customers above had
double the buying potential of the average retained customer, the loss to the institution
is greater. If these customers were likely to invest or borrow twice as much as other
retained customers, the financial institution is, in effect, losing two customers each time
one of these leaves. Hence the retention rate is lowered to 80%. The impact of this loss
can be gauged by measuring it against the market trend.
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Ascertain defection motives
Understanding consumers’ motives for defection can help the firm understand why
others may choose to leave and what might be done to encourage them to stay.
Some reasons for defection cannot be prevented. Moving to a different location, for
example, may mean that the supplier is no longer convenient and a switch may be made
to a competitor. Other types of defection can be prevented. For example, some
customers may be prevented from leaving if service levels are improved, while others
may remain through the guarantee of improved service in the future.
Price defectors
Price defectors are among the most difficult customers to retain as they may be
persuaded to remain through the offer of price discounts and special offers, only to
defect when a competitor offers a better deal. Product defection is also difficult to avoid
as customers are unlikely to be dissuaded from switching to a competitor whom they
perceive as offering a superior product. If a customer complains about the quality of
service, the best response is either to improve the service or offer some type of
compensation as this can persuade them to stay.
Market defectors
Market defectors are a particularly difficult group to manage. These are people who
defect to organisations in different sectors because their purchasing priorities have
changed. Examples include customers who decide to forgo a family holiday in order to
save money for household redecorating or consumers who decide to invest in antiques
or property as opposed to traditional investment products in order to accumulate
capital. Very often the reasons for their defection are not obvious to the institution and
are therefore difficult to anticipate and avoid.
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Marketing research provides an extremely useful means of highlighting actual or
potential problems that may force customers to defect. The data from research is
meaningless, however, unless it is accompanied by actions that are tailored to provide
customer satisfaction.
The analysis of customer complaint data provides valuable information about customer
perceptions of the company and its products. It is widely acknowledged that for every
customer who complains, there are probably 10 others who did not voice their
complaint but felt the same way. Such customers may leave the organisation, offering no
reason for defection. The negative word-of-mouth that can damage the reputation of the
organisation compounds this problem.
While complaints can be upsetting for staff within the organisation, they can provide
valuable information about product and service aspects that require improvement.
Once firms have identified the segments they wish to target, many of them make the
mistake of assuming that all customers within those segments are going to be desirable
for marketing campaigns. If customer relationship management is going to be successful,
however, the manager must recognise that some customers are more attractive than
others in terms of their long-term value. This point is examined in greater detail below.
Are all customers the right customer?
Given the many benefits of long-term customer relationships, it would appear foolish for
a company to refuse or terminate a relationship with a customer. This section considers
the view that not all customer relationships are beneficial.
In the absence of ethical or legal mandates, organisations often prefer to avoid long-term
relationships with unprofitable customers. Some segments of customers will not be
profitable for the company even if their needs can be met by the services and products
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offered. This may be the case when there are not enough customers in the segment to
make it profitable to develop a marketing approach, when the segment cannot afford to
pay the cost of the service, or when the projected revenue from the business does not
justify the running costs.
At the individual level, it may not be profitable for a firm to engage in a relationship with
a particular customer who has bad credit or who has a poor risk for some other reason.
Retailers, banks, mortgage lenders and credit card companies routinely refuse to do
business with individuals whose credit histories are unreliable. While the short-term sale
may be beneficial, the long-term risk of non-payment makes the relationship unwise
from the company’s point of view. Similarly, some car rental companies have begun to
check the driving records of customers so that bad-risk drivers can be rejected. This
reduces the insurance costs and accident claims for the rental company and reduces the
rental costs of good drivers. Consumer activists, however, cite privacy issues and
inconvenience to unsuspecting travellers as arguments against the practice. Similarly
many organisations in the financial sector have been criticised for refusing to offer
insurance products or setting high premiums to individuals who have suffered from
health problems.
In addition to the monetary costs associated with serving the wrong customers, there
can be substantial time investments in some customers that, if actually computed, would
make them unprofitable for the organisation. Some customers may demand an inordinate
amount of time from the supplier organisation by making excessive requests for
information and preventing other customers from using the service. Furthermore, such
customers can also place employees under stress and therefore cause deterioration in the
quality of service that has an adverse effect on other customers.
Identifying profitable customers for CRM
A key step towards successful customer relationship management is to distinguish the
transaction buyer from the relationship buyer. The transaction buyer tends to be
interested in price and will easily shift to a competitor who offers a reduced price, even
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when the service may be inferior. The relationship buyer is looking for a supplier they
can trust. Even when they are aware of cheaper products, they will prefer to stay with
the original supplier for the peace of mind. Transaction buyers are rarely profitable as
they only buy discounted items. Very often, relationship buyers subsidise the sales of
transaction buyers.
Database marketing software enables suppliers to separate transaction buyers from
relationship buyers. For those whose customer files cannot be queried by profit per
customer, some system for flagging lower profit transactions is required. In some
businesses there are time periods when all transactions are discounted. Customers who
purchase only in these times are easy to identify as transaction buyers.
The remaining customers represent potential relationship buyers. They can be divided
into three distinct segments:
Those who are significantly the most profitable;
those who are delivering good profit and suggest the capability of becoming top
profit customers;
those who are only marginally profitable.
This leads to one of the most basic database marketing tools: the monetary decile
analysis. This segments customers into tenths, showing the total profit each decile
contributed in the time period specified and the% in the total market that segment
represents. This analysis is consistent with Pareto’s law which shows that 80% of a
business’ revenue derives from 20% of customers. In most businesses, in fact, 60% of
the customer base accounts for at least 90% of sales and an even greater% of the profit.
The next step is to conduct the purchase decile analysis. This involves separating the
total sales and profits into tenths to show how many customers account for each 10% of
company profit. The results of this analysis frequently show that a little more than 1% of
customers account for 10% of company sales with an even smaller segment contributing
30
to 10% of total profit. Therefore, for a company with 150,000 potential relationship
customers, fewer than 1,500 represent 10% of company profit.
This analysis can be used to identify the three distinct segments of profitable relationship
buyers as follows:
First group of customers to target
Those customers who represent 10% of the company’s business and are the most
profitable should be the first to be targeted for CRM. The purpose of the CRM efforts
will be retention. Even although it may be difficult to make these customers more
profitable, CRM should help assure that none of them are lost to the competition.
Example: The Barclays Experience
When Barclays developed a segmentation strategy for their most valued customers they
developed a platinum banking service that included special offers and improved service.
This resulted in a 70% increase in customer income, 11% increase in customer
satisfaction and 80% increase in customers who would endorse Barclays. iv
The middle group of buyers
The balance of the customers in the top 40% or 50% as ranked by sales and profit. It
will be just as important to target this middle group of buyers who are delivering good
profit but may be capable of moving up to the top profit level. Customers in this group
are probably giving some of their business to your competitors. CRM activities for these
customers should be aimed directly at increasing your company’s share of their business.
A detailed ROI analysis at Allsports, a 240-store high street retailer in the UK, revealed
that targeting second best customers could encourage them to spend in line with best
customers, substantially increasing in-store traffic and boosting the bottom line. The
iv Barclays 2004
31
CRM marketing strategy developed for this middle group of buyers more than paid for
the company’s significant investment in database software within a year.
The final, less profitable, group of customers
The third group of customers represent those who, while profitable, are only marginally
so. While it is possible that some in this group would move up the sales ladder as a
result of increased communications, it will probably not be worth the effort. Typically,
this group will represent almost half of the customer file. Hence this simple analysis has
greatly reduced the size of the challenge of implementing CRM.
Implementing relationship marketing
For a relationship to be successful, the firm should focus on:
Defining the value proposition;
delivering superior value and engaging the entire organisation;
demonstrating trustworthiness.
Each focal point is considered in greater detail below.
Defining the value proposition
This requires the identification of the basis upon which the firm will compete. Options
may include: product innovation; superior service; brand image or low cost. The choice
is determined by two key factors: the firm’s core capabilities as these determine the
activities that the firm can do well. For example, a business is unlikely to be able to
create a differential advantage based upon product innovation if it lacks a research and
development base and experience in being first to market. Similarly it is unlikely to
succeed as a low cost operator unless it has introduced stringent efficiencies in its supply
chain.
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Case study: First Direct
First Direct has differentiated itself in the marketplace with its attention to service
excellence. The importance of this investment has been acknowledged when Personal
Finance magazine awarded the bank first place for best customer service for the third
year in a row.
First Direct, part of the HSBC Group, is an interactive Internet bank. Its products
include current and savings accounts, credit cards, personal loans, mortgages,
investment products, shares, pensions and insurance. The company is headquartered in
Leeds, UK.
First Direct’s service excellence is based on the simple premise of listening to what its
customers want and reacting accordingly. First Direct’s staff are recruited for their
listening skills and take part in five weeks of training and 18 months of coaching so that
they understand the business inside out.
Customers have the flexibility to choose how they want to communicate with First
Direct – by telephone, SMS text messages, post, telephone, online and through WAP
mobile phones – and whatever the form of communication, the same information is
available to them. First Direct’s position is at the pinnacle of customer service in the UK
banking market. According to MORI research, first direct has been the most
recommended UK bank and has had the most satisfied customers (of any UK bank), for
the past 12 years.
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Figure 1.1: First Direct customer communication preferences
Electronic banking customers
Internet banking customers
Mobile phone banking customers
WAP banking customers
600,000
420,000
180,000 4,300
Source: Author research and analysis Business Insights
Meeting consumers diverse requirements
The second determinant of the value proposition concerns market opportunities. The
firm must ensure that its offerings match the wants of customers. Wants will vary across
different market segments: some customers will want superior products; others will be
more interested in services or low costs. But some segments will be more attractive than
others. The firm will need to research the size of key customer segments, their growth,
the amount of competition, average operating margins and investment requirements. It
can then identify the profit potential of alternative value propositions.
Delivering superior value and engaging entire organisation
In the past customer focus was not the driving force behind the design of organisations.
Instead organisations were designed bureaucratically to optimise the efficiency of capital
and to reduce risks. Strategy formulation was the responsibility of top management and
34
junior members of staff were responsible for implementation. Job roles were clearly
defined and employees were organised into functional departments e.g. production,
marketing, purchasing. To ensure that strategy was implemented correctly, controls in
the form of supervisors, centralised information systems, budgets and formalised
reporting played a major role. Communication was vertical: information went up and
orders came down. Lateral communication across functions was limited and was the
preserve of senior staff.
In recent years three pressures undermined these bureaucratic organisations:
One was the need to cut overhead costs as increasing competition eroded the gross
margins of many firms. This resulted in cutbacks in staff and the reduction of layers
of middle management;
a second pressure was the need to accelerate innovation. It soon became apparent
that fast paced innovation was unlikely to take place in organisations that were
characterised by rules, rigid reporting structures and tight job specifications;
a third problem was that these organisations were not customer oriented. The front
line staff who dealt with customers were are the bottom of the pyramid. Talented
staff did not want these jobs because they lacked prestige and autonomy. Real
decisions lay at the top of the hierarchy – far away from direct contact with
customers and the front line. Not surprisingly, customers frequently found such
organisations unresponsive and their front line staff unmotivated and
unprofessionalv.
Relationship marketing requires structures that support customers and those who are
directly responsible for satisfying their needs: front-line staff. Many traditional
v P Doyle, Value Based Marketing, Wiley, 2000, p96
35
organisations do not do this. Evidence from a research study conducted in 2004vi reveals
that financial service retailers have organisational structures that may not be supportive
in retaining customers and adapting to changes in the marketplace.
Implications for practice
This study is of particular value because it provides information based on the views of
employees who are involved in the practice of customer retention. The indications from
this survey are that relationship marketing is a corporate aim within these firms but that
there are anomalies in its execution, for example in delivering service quality and
tracking individual customers. There are a number of departures from the principles of
relational exchange, for example, there is an emphasis on new product development
(NPD) and cross selling but limitations in addressing individual customer needs,
although marrying products and customer groupings is undertaken. These findings may
be attributable to the acquisition of customers rather than retaining them and the
financial services retailers (FSRs) may still be organised around a pursuit of new
customers rather than focusing on those that they already have.
If FSRs were to benchmark their activities against other retailers, rather than other
banks, more creative ways of creating satisfaction and retaining customers may be
discovered, for example devolving power to staff to address customer needs. The study
indicates that there is scope for improving service quality and harnessing staff
capabilities in retention.
Modern companies are reversing this by turning the organisation upside down and
introducing flatter structures. The aim is to enhance front line positions, improve
knowledge about solving customer problems and improve service. In addition these
firms are recognising that the front lines staff rely upon co-operation with other key
vi vi Farquar JD “Customer Retention in Retail Financial Services – an Employee Perspective”, International Journal of Bank Marketing, vol 22, number 2, 2004
36
departments in the organisation such as production, finance, sales support. This has
resulted in the marketing function and philosophy been dispersed throughout the
organisation rather than being confined to a particular department.
Demonstrating trustworthiness
A fundamental component of all relationship marketing is that of trust between the
customer and the firm. Practical methods of achieving trust include: honest advertising,
effective complaints procedures, the offer of guarantees and the selection of staff who
treat customers with honesty and integrity.
The trust concept can be developed into four sub-categoriesvii:
Generalised trust;
system trust;
personality based trust;
process-based trust.
Generalised trust
Generalised trust derives from social norms. For example, a customer knows that a large
supplier can be expected to stay in business and offer the same components and parts in
the future due to its size and reputation. The customer therefore trusts the supplier to be
the continuous source of components that he requires.
vii Johnson & Grayson and Lane C & Buchanan R, The Social Construction of Trust: supplier relations in Britain and Germany. Organisational Studies, 17, 1996 pp365 - 395
37
System trust
System trust depends on laws, industry regulations and contracts as well as the
professionalism of the other party.
Personality based trust
Personality based trust is based on the human tendency to rely upon another person to
behave in a predictable way according to expectations.
Process based trust
Process based trust is based on long-term relationships between two parties. A customer
who has been doing business with a supplier for some time and is pleased with the
results is inclined to trust the supplier.
Despite the importance of trust as a foundation for relationships, it has been argued that
mistrust of corporations is growing because they put shareholders first.viii
According to Shoshana Zuboff and Jim Maxmin, authors of The Support Economy,
57% of Americans say they don't trust corporate executives or brokerage houses to give
them honest information. And the proportion of Britons saying they have faith in
corporations has switched over the past 30 years from two to one in favour, to two to
one against.
Possible reasons for the scepticism lie in the emphasis that many firms have placed on
the pursuit of shareholder value, which many perceive as favouring the short-term
interests of shareholders rather than customers. Further disillusionment has been
associated with some of the negative publicity surrounding executive share-option
scheme payouts.
viii ‘Our mutual Friends’ by Jonathon Mitchie, The Guardian, 24 June 2003
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How can customers trust a company to put their interests first when it admits to
prioritising shareholder value? Whatever is said about serving the customer, about
corporate social responsibility, about employees “being our greatest asset” and about
stakeholders, UK company law requires public limited companies (plcs) to prioritise the
interests of shareholders. The owners must come first.
A new report in the UK into consumer trust and ownership structures - gleaned from
responses to questions put to a random sample of first-time buyers who hadn't yet
decided which provider to choose for their mortgage - is illuminating.
Some 78% agreed with the statement: “I like the fact that building societies have no
shareholders”. While the demutualisation of building societies allowed members to cash
in on years of value creation by those organisations, they are now answerable to external
shareholders rather than to their members.
Meanwhile, 55% agreed with the statement: “I am more likely to trust a building society
than a bank”. And, crucially, 66% agreed with: “In the future I am more likely to deal
with a building society”.
The results are even more striking when customers of mutual and cooperative
organisations are surveyed. In the case of the Oxford, Swindon & Gloucester Co-
operative Society, faced with the statement: “The Co-op is trustworthy”, 37% agreed
“slightly” and 58% agreed “strongly”.
86% of first time buyers interviewed in the survey confirmed their mistrust of banks
when they agreed with the statement: “The Co-operative acts more in members' interests
because it is answerable to us and not to big City investors”.
This suggests that in the battle for consumer trust, cooperatives and mutuals have an
advantage over plcs: they have to prioritise the interests of consumers, just as plcs have
to prioritise the interests of external shareholders.
39
A cooperative or mutual ownership structure is insufficient to generate trust, consumer
loyalty, repeat business and commercial success unless it is accompanied by competitive
products, excellent organisation and management, as well as investment in product and
process innovation. Here again, cooperatives and mutuals have an advantage because,
rather than paying out profits as dividends to shareholders, any surplus has to be passed
on to members and customers in the form of reduced prices or investment in new
products and processes.
But the extent to which cooperatives and mutuals benefit from their “mutual advantage”
depends on how much they involve their members and customers in business decisions.
This can range from electing directors to surveying customers on what they want. Of
course, plcs survey their customers too. But their purpose is ultimately to make more
money for their shareholders. For the cooperative or mutual the purpose is to benefit
members, customers and other stakeholders - namely the employees and the local
community.
There is a distinct possibility that the increased emphasis on corporate social
responsibility among plcs will be constrained by their obligation to deliver dividends to
their shareholders. Mutual and cooperative organisations can capitalise on this constraint
if they can combine their commitment to the community and the customer by providing
high-quality goods and services at competitive prices.
Who owns the customer?
This is a classic question that has a direct impact on the success of customer relationship
management.
For retail banks, ownership means putting primary responsibility for the customer
relationship with a business, branch, segment - or the enterprise as a whole. How banks
approach the subject says a lot about how they serve and retain their customers.
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Many banks have traditionally organised around business lines, so the “owner” is the
division that found the customer. Often, each unit has its own data set, and the bank has
no bird's-eye view of customers.
From the customer’s point of view this can be a source of frustration for a number of
reasons: responses to enquiries and complaints can be delayed as bank staff have to
investigate customer records; the business lines may operate under a ‘silo’ mentality and
fail to communicate changes to the customer that may be relevant to other departments
and the absence of a customer profile that is shared throughout the organisation may
undermine the accuracy of sales campaigns.
Organising along business lines may become less common as more banks seek a wider
view of their customers, to serve them better and sell them more.
Effects of merger activity
With renewed merger activity, the ownership question and CRM raise special
challenges, particularly if combining banks have divergent philosophies.
When Firstar Corp. bought the old U.S. Bancorp in 2001 and took its name, for
example, the companies had very different approaches to CRM.
Kathy Beechem is the executive vice president of metropolitan banking for U.S. Bank,
the merged company's retail unit. She said Firstar, for which she worked, emphasised
that each branch was its own business; in contrast, the old U.S. Bancorp invested more
in technology.
Firstar's model won - partly, she said, because U.S. Bank had no answer to the
ownership question. “Probably nobody owned the customer,” Ms. Beechem said; the
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line of business may have come closest to doing so, “but there wasn't really the level of
ownership that the Firstar model fosteredix.”
U.S. Bancorp adopted the view that the branch owns the customer, even those who
signed up through a call centre. “We are a branch-centric company,” Ms. Beechem said.
Branches have just as much incentive to retain customers as to add accounts or loans,
she said. In this example, even tellers are empowered to make decisions such as whether
to waive a late fee for a credit card payment if the customer has a full relationship with
the bank.
The “customer is king”
Some banks are steering the relationship through customer segment managers, who
oversee and analyse a demographic group, such as older people or university students.
The theory is that such managers will understand their customers' needs better.
Bob DeAngelis, the director of customer analysis, research, and targeting for Wachovia
Corp. of Charlotte, said the customer segment is king there.
Wachovia bases segments on measurements such as income and number of transactions.
Strategies are then based upon customers' needs and preferences along with the bank’s
objectives for market-share and wallet-share. They then integrate products and channels
into their segment.
“At Wachovia, it is not necessarily who owns the client as much as how all the pieces
come together,” Mr. DeAngelis said. That is a big change from the product-centric
approach at First Union Corp., for which he worked when it bought the old Wachovia in
2001 and took its name.
ix ‘Customer Ownership Crossing Business Lines’ by Thom Weidlich, American Banker, April 27th 2004
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The Canadian retail banking operations of Royal Bank of Canada, which go by the brand
name RBC Royal Bank, are also organised according to segments (the main segments
being “getting started,” “builders,” “accumulators,” and “preservers”) and subsegments.
Ted Brewer, the Toronto company's vice president of CRM and information
management, said segment executives and managers develop retention, attraction,
growth, and cross-selling strategies, supported by centralised operations.
Segment executives recently came up with a “snowbirds” subsegment for the 750,000
customers who spend more than two months a year in Florida or other mild U.S.
destinations. In August 2003, RBC Royal Bank used its sophisticated information
management system to tailor product bundles for the segment that included travel health
insurance, U.S.-dollar accounts, and a credit card.
Some banks are using a book-of-business approach, in which a relationship banker
handles the top 10% or 20% of branch customers.
Ronald Kendrick, the executive vice president of the community banking group at Union
Bank of California in San Francisco, said the bank, the retail unit of UnionBanCal Corp.
(which is mostly owned by Mitsubishi Tokyo Financial Group Inc.), assigns
representatives to customers who maintain a certain asset level.
How do these segments interact with business lines? A program manager: “makes sure
we're definitely doing what we can in terms of pricing and marketing and so forth,” Mr.
Kendrick said, “but that person doesn't own the customer.”
Mike Tierney is the senior vice president of personal financial services at Comerica Inc.
of Detroit. He said it assigns call-centre customers to nearby branches and assigns reps
to the top 20% of branch customers, whom they must contact at least twice a year (four
times for the highest-value customers).
43
Comerica began using this method on the retail side in 2003. Before that, branches knew
who their best customers were but had no communications strategy and the bank was
not measuring sales to the group. This has been replaced by a system that allocates bank
personnel who are responsible for particular customers. If a problem arises with the
customer, the relevant member of staff can easily be identified so that the problem can
be resolved.
“Everyone owns the customer”
J.P. Morgan Chase & Co.'s attitude is that everyone owns the customer, according to
Emily Chien, senior vice president of marketing and cross sales for the retail business.
The New York company has been developing a “common-customer-view technology,”
that is furthest along in the branches and a work in progress at the call centre, according
to Ms. Chien.
Getting that kind of perspective takes a huge effort and a lot of money. Entrenched
cultures can also make the switch difficult. For example, at banks that have been
communicating to customers through lines of business for years, employees are used to
working that way. This can create the major disadvantage of product lines competing
for share of the customer's wallet and preventing opportunities for cross selling.
Kathleen Khirallah, a senior research analyst at TowerGroup in Needham, Mass., said
banks must change the way they measure the performance of individual employees and
business units. Inadequate measures and incentives reinforce “the conflict over who
owns the customer,” she said.
James Beams, the research director for consumer banking and credit at IDC Co.'s
Financial Insights in Framingham, Mass., said recent research shows that banks defining
themselves as customer-centric had lower return on assets than other banks. The reason
may be that they have disempowered their business lines, he said.
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“It really comes down to management effectiveness” in getting customer data to the
businesses, Mr. Beams said.
Sharing information companywide is crucial to widening customer ownership
Louis Barton, the executive vice president for data warehouse and privacy at Frost
National Bank, part of Cullen/Frost Bankers Inc. of San Antonio, said that in the mid-
1990s the bank put in a Teradata warehouse that gives an enterprise-wide view of the
customer. Previously its businesses had different systems.
Gerry Stanczyk, a senior vice president who oversees systems at 1st Mariner Bank in
Baltimore, said it uses Fiserv Inc.'s Customer Service and Call-Centre Solution, which it
began installing in the Autumn of 2000, to view the client's entire relationship.
The connectivity referral management system is a major initiative for Comerica. The
bank began working on the system in 2001 using TouchPoint Referrals from Fidelity
Information Services Inc.'s TouchPoint Solutions.
The system, which lets employees refer a customer to any unit, has brought about a big
cultural change, Mr. Tierney said. “People are looking for every opportunity now and
trying to work with people in other parts of the company who they might have felt
uncomfortable talking to before.”
The exercise below is designed to help you evaluate your success in offering customer
satisfaction. It can be issued to colleagues within your departments or elsewhere in your
organisation.
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How to evaluate your company’s success in offering customer satisfaction
Table 1.2: Customer satisfaction exercise How good are we at each of these? Marks out of ten * and comments 1. Measuring customer satisfaction 2. Using customer satisfaction measurements to change our marketing policies 3. Using customer satisfaction measurements to evaluate and reward staff 4. Ensuring all staff understand our strategy on customer service and quality 5. Setting staff measurable goals for customer service and quality and evaluating performance 6. Consulting staff about customers’ needs, expectations, complaints and taking notice of what they say 7. Managers setting a good example in providing service and quality to customers 8. Working together to remove obstacles and barriers to quality and service delivery 9. Regularly evaluating our competitors service and quality provision 10. Having a clear and actionable service and quality strategy compared to our competitors Total (out of 100) Conclusion/implications/actions *1 = very poor performance; 5 = Average performance; 10 = Excellent performance/market leadership.
Source: Exercise adapted from PIERCY Nigel, ‘Market Led Strategic Change, pp 55 – 59
Business Insights
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47
Chapter 2
Creating Value for the Organisation
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Chapter 2 Creating Value for the Organisation
Summary
The value creation process is centred upon the careful segmentation of the market and the development of an approach that maximises the value of your most desirable customer segments and the corresponding life-time value that these customer groups provide for your company;
market mapping is a technique that can help clarify the market structure and relationships between suppliers, intermediaries and customers;
a segmented service strategy can be used to deliver value to the customer and the organisation.
data from segment analysis can be used as the basis of a segment performance chart that illustrates the customers’ perceptions of the importance of each service attribute or need and how well the company performs against them;
there are potential pitfalls associated with each stage of customer management. These can be avoided through the use of planning.
Introduction
The customer’s value to the organisation is the outcome of providing and delivering
superior value to the customer; deploying improved acquisition and retention strategies;
and utilising effective channel management. Understanding the economics of customer
acquisition and retention and their relationship with lifetime value is fundamental to the
concept of customer value in this context, as is identifying opportunities for cross-selling
and building customer advocacy. It is particularly important to address value from a
customer segment point of view rather than taking an aggregated approach.
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Segmentation is perhaps the most important aspect of value creation from a relationship
marketing perspective, as it provides the opportunity to tailor the offer to the need of
specific segments. Carefully segmenting the market and developing an approach that
maximises the value of your most desirable customer segments and the corresponding
life-time value that these customer groups provide for your company lies at the heart of
the value creation process.
The customer profitability matrix illustrated in provides some generalised guidance for
strategic direction.
Figure 2.2: The customer profitability matrix
Source: CHRISTOPHER M, PAYNE A, BALLANTYNE D, Relationship Marketing, 2002
Business Insights
The appropriate strategies for each quadrant of the matrix are discussed below.
Build: these customers are relatively cheap to service but their net value is low. Can you
increase volume without increasing the costs of service? Can you direct the sales team
to influence these customers’ purchases towards a more profitable sales mix?
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Danger zone: these customers should be looked at very carefully. Is there medium to
long-term prospect of a strategic reason for keeping them? Do you need them for their
volume even if their profit margin is low?
Cost engineer: these customers could be more profitable if the costs of serving them
could be reduced. Is there any scope for encouraging this group to use cheaper online or
telephone services?
Protect: high net sales value customers who are relatively cheap to service are worth
their weight in gold. You should seek relationships with these customers, which will
make them less likely to turn to alternative suppliers. At the same time you should
constantly seek opportunities to develop the volume of business that you do with these
customers, while keeping strict control of costs.
Pulling these strategies together results in a framework for segmented service strategy.
Companies need to take an integrated approach to identifying different customer needs
and developing service strategies that both match the service requirements and take into
account the economic value of customer segments.
Developing a segmented service strategy that aims to deliver increased value to the customer and the organisation
A framework for developing a segmented service strategy that aims to deliver increased
value to the customer and the organisation is outlined below.
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Figure 2.3: A framework for developing a segmented service strategy that aims to deliver increased value to the customer and the organisation
Step 1 Define the market structureStep 2 Segment the customer’s base and determine segment valueStep 3 Identify segment’s service needsStep 4 Implement segmented service strategy
Source: CHRISTOPHER M, PAYNE A, BALLANTYNE D, Relationship Marketing, 2002
Business Insights
In order to segment the market properly you need to define the market structure clearly.
Market mapping is a technique that can help clarify the market structure and
relationships between suppliers, intermediaries and customers. A market structure map
defines the distribution and value added chain between the suppliers and final users. An
example of a market map for an insurance company is shown below.
Figure 2.4: Market maps
Source: CHRISTOPHER M, PAYNE A, BALLANTYNE D, Relationship Marketing, 2002
Business Insights
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Market maps can be used to show the percentage of turnover and the percentage of
profit made through each distribution channel and to illustrate the current and future
importance of that channel. In the insurance example the insurance brokers and high
street branches provide relatively low profit returns because of large commissions and
expensive overheads, so the company might decide to try to migrate these customers to
direct call centre sales. Those customers who use computers for other forms of
shopping might find the eCommerce channel using the Internet appropriate for their
needs.
Once the company understands the market structure it can then take the appropriate
steps for each channel and make strategic decisions about channel mix, re-channelling. It
needs to develop detailed metrics of market share, sales volume and profitability
throughout the market map.
Step 2: Segment the customer base and determine segment value
This involves segmenting the customer base using appropriate criteria and estimating the
value of the customer segments.
Using a modelling approach, companies should then consider customer segments on the
basis of their projected lifetime profitability. Each segment is analysed using profitability
modelling over an appropriate time period. This involves:
Determining the profit projections in each segment;
determining the realistic opportunity for increasing customer retention in each
segment and how this may vary under the time period under consideration;
identifying the potential increase in projected gross profits for each period and in
lifetime profitability, as a result of improved customer retention.
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Step 3: Identify segments’ service needs
This stage is concerned with investigating the service needs, expectations and
performance levels within each customer segment. Companies need to identify
performance levels for both themselves and their competitors. Service needs and
performances can be determined by a range of market research techniques such as focus
groups and in-depth interviews with customers. Using this research, companies can then
identify segments with similar service priorities.
Often research will identify gaps between the customer’s requirements and the actual
offers available. Companies can use tools such as gap analysis (see Chapter 4) to help
them understand unfulfilled needs.
Service performance charts can be used to depict comparisons visually. These
comparison charts appear to be much more widely used in logistics and customer
services than in general marketing, but have considerable potential for helping
companies develop a segmented service strategy. An example of such a chart is shown
in Figure 2.5. This uses data from a fictitious insurance company.
The segment competitor profile can be used to show customers’ perceptions of the
performance of the company and its competitors. It also shows the relative importance
of each attribute to the customer. The segment performance chart, derived from this
segment data in Figure 2.5 provides a simple but visually powerful means of illustrating
the customers’ perception of the importance of each service attribute or need and how
well the company performs against them. This analysis needs to be undertaken for the
company overall and for each market segment.
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Figure 2.5: The segment competitor profile of an insurance company
Source: Christopher M, Payne A and Ballantyne, Relationship Marketing, 2002 Business Insights
The attributes depicted in Figure 2.3 are those that are important for the insurance
company discussed above. They enable the organisation to identify, overall and by
segment, how it measures up against both customers’ key performance criteria and
customers’ perception of their relative importance. Clearly the organisation must
perform well in the areas that are most important to customers.
At this point the organisation should know, overall and for each segment, which are the
most important customer criteria and how it is performing relative to its competitors. It
can now start to consider those customer segments for which it is most suited.
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Step 4: Implement segmented service strategy
The final step involves implementing a segmented service strategy based on the existing
and potential value of the different customer segments and the organisation’s service
capabilities and strengths, relative to its competitors. This step involves three stages.
Reviewing existing segment performance to identify areas of over-performance and
under-performance.
It is important for the firm to invest in those service areas that the customer perceives as
important, otherwise resources may be squandered.
Identifying costs of selectively improving service levels and fit with the company’s
capabilities.
Based on the segment data the company has identified, it will need to consider five
broad strategies that are described below.
(a) For the most attractive existing segments, where there is a strong fit with the
company’s capabilities and overall good performance, the decision on where to invest
should be clear.
(b) Investment should be directed at segments which are not very profitable at present
but where there is potential to increase their value.
(c) Some segments are of secondary importance, so while strategies may be developed
for maintaining the relationship there may be little reason to invest in customer service.
(d) In segments where there is low or negative profitability and a poor match with the
organisation’s capabilities the company may elect to deter customers.
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(e) For potentially high profit segments, which do not match existing capabilities for the
firm, the strategy may not be clear. Should the company invest to improve performance
or should it allow these groups to defect if they are dissatisfied with the service on offer?
A company should base decisions regarding these five groups on a review of the
following:
Relating current segment performance to the company’s capabilities;
identifying all segments where costs can be saved through service reduction in over-
performance areas;
reallocating those funds to service improvement in under-performing areas based on
customer importance and segment priorities;
estimating additional costs required to reach the customer retention improvement
targets, identified in step 2;
identifying the potential lifetime profits of segments in net terms (that is by reducing
the potential increase in gross profit calculated in step 2 by the costs involved in
improving retention);
finalising segment priorities based on the above analysis.
For the potentially high profit segments that do not match existing capabilities of the
firm, each firm will need to make a decision based on its own circumstances.
Finalise segment service strategy plan
The outcome of the process outlined in this framework should be a detailed service
strategy plan that identifies:
The choice of strategic position in terms of the organisation’s offer and its rationale;
which segments are to be emphasised within each channel;
57
the overall lifetime profit improvement opportunity based on selective improvement
of service and resulting customer retention;
clear and detailed metrics so that the future performance of the relationship
marketing strategy is continually monitored and reviewed.
Once the above analysis has been completed, the firm is now in a position to embark on
a customer management programme. The table below encompasses all the essential
elements of practical customer management as well as the typical problems that can
occur at each stage.
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Table 2.3: Customer management stage analysis, problems and opportunities Stage Definition Typical problems and opportunities Targeting When suitable customers are Targeting is imprecise. So, attempts to identified and induced to join cross-sell to all existing customers, irrespective company of their suitability, can be a loss-making activity Enquiry Customer is in the process of management joining Welcoming After the customer has Usually a short, but critically important stage. joined, depending on the In many cases improper management of enquiries complexity of the product leads to lost customers. Sometimes this process is or service, it is important too expensive compared with subsequent to ensure that the customer customer value. At this stage, customers’ is securely on board e.g. expectations are often set for future treatment, yet knows whom to contact if they are often disappointed. there are problems, knows how to use the product or This is also often a very short stage, yet it is clear service from what happens that they often do not know who to call or what to do. For decisions involving significant outlays, customers may need to be reassured that they have made the right decision, and given the opportunity to say whether they felt they could have been handled better during the buying cycle. Getting to know This is a crucial period, whenMany companies assume that this stage does not both sides exchange exist and that their customers go into a mature information with each other. State of account management. Yet the early additional customer needs cancellation of that applies to many types of may become apparent, and insurance policies and loans indicates that this is the customer's profile of clearly not so. We cannot expect that no use of the product or service customers will cancel early, but we can expect to becomes known. More is to be able, through data analysis, to identify also learnt about the customers most likely to, and implement customer's honesty and preventative action. Experience in financial ability to pay etc. services shows that if we try, we will have some success.
Source: FOSS B and Stone M, CRM in Financial Services,2002 Business Insights
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Table 2.4: Customer management stage analysis, problems and opportunities, continued
Stage Definition Typical problems and opportunities Analysis from other industries with long term Relationships with customers indicates that Communications behaviour, brand attitudes and Satisfaction with the category are good predictors Loyalty. These can be formed early on in the Relationship, e.g. if they respond to your Communications, rate your brand highly and are satisfied with how you have arranged their portfolio of products or services, then they will be more likely to stay with you. Customer The relationship is now This is the ideal state, though quite a few Development being managed securely, customers never reach it, and often dip into the with additional needs next state or remain in the previous state for a being identified in time long time. This is best detected by short and met where feasible. questionnaires that can be administered by mail, telephone or sales staff. Managing The customer has such This stage is defined in terms of what the Problems severe problems that supplier should do, but of course the need for it special attention is needed is so often missed and the customer goes straight to ensure that the customer into pre-divorce e.g. after a mis-handled service returns safely to account event or a change in the customer’s need which management. If this attention remains undetected. If a company does not is not given, the customer is handle the initial problem well, and the customer so dissatisfied that divorce is leaving, companies often fail to recognise that imminent. There is a this is happening. Surprisingly, many companies possibility that the customer give up here, and even pride themselves that they will be persuaded to return make it easy for customers to cancel. If the after a 'cooling off' period. Reason for the cancellation or termination of the relationship was a change in circumstances or a move by the customer out of the category, then brand loyalty may be intact, and in some cases e enhanced, if the supplier made termination easy. Win-back Sometimes, the relationship The targeting of win-back campaigns is made ended because of high price difficult because many companies are poor at or the wrong product, so defining and identifying lost customers and win-back can be initiated because they do not have a reliable database. when these issues are resolved. Win-back is hardest if the customer left due to poor service, unless the competitor's service is worse.
Source: FOSS B and Stone M, CRM in Financial Services,2002 Business Insights
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61
Chapter 3
How To Tackle Defections
62
Chapter 3 How To Tackle Customer Defections
Summary
Consumer switching is now a major concern throughout the financial services sector, particularly in the mortgage market.
The rise of customer complaints has been accompanied by a rise in the numbers who switch their service providers.
Abbey responded to the switching problem in 2003 when their research showed that 43% of customers in the mortgage market were seeking re-mortgage deals.
What returns can you expect from win-back programmes? Aside from significant insights into the process improvement initiatives most likely to reduce churn, win-back programmes yield a tangible return on investment.
The growing popularity of packaged bank accounts could be used to leverage both switch business and retain those that have a current account and mortgage with the same provider.
Introduction
This chapter examines recent trends in switching behaviour and considers the reasons
customers switch from their financial service provider. A case study of an organisation
that was successful in its attempts to harness customer defections is included and tactics
suggested that could be used to identify potential defectors.
Recent research from Henley management centre confirms that customers are more
demanding than ever. The rise of customer complaints has been accompanied by a rise in
the numbers who switch their service providers. Consumer switching is now a major
concern throughout the financial services sector, particularly in the mortgage market.
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Figure 3.6: Consumers are more demanding than ever
39
27
19
17
40
41
33
24
0 10 20 30 40 50
Complained in personabout poor services/
faulty goods
Complained on phoneabout poor service/faulty
goods
Told relatives/friends tostop buying from aparticular company
Written letters ofcomplaint/protested to
companies
20041997
Source: The Henley Centre: Leisure Tracking Survey 1997 & Planning for Consumer Change 2003 Business Insights
Figure 3.7: More consumers plan to switch in the next 12 months
17
17
15
9
7
7
6
3
6
14
5
8
7
4
4
4
0 5 10 15 20
Electricity
Car insurance
Gas
Credit card
Mobile phone network
Landline
Internet service
Current account
Likely to change supplierin next 12 monthsChanged supplier in last12 months
Source: The Henley Centre, Planning for Consumer Change 2003 Business Insights
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Case study: Abbey
Remortgaging activity is slowly creating a market base that is centred on low rate deals
and customers that then quickly move from deal to deal. This segment has grown
significantly in recent years and in 2003 accounted for 43% of gross advances. The
reasons were attributed to increased consumer knowledge about the potential gains from
switching their mortgage providers and a pricing structure that favours new customers
by offering them price reductions and low rates while existing customers have to pay
higher rates. The combination of these factors had created a general perception among
mortgage buyers that switching is a smart option. Abbey’s concern about this
development echoes research that had been conduced by the Henley management centre
in 2003. When presented with the statement, ‘Companies should reward loyal customers
instead of offering the best deals to new customers’ 81% of respondents agreed.x
Abbey’s response to the problem was to develop a strategy with three main themes. The
first theme was to quickly respond to those customers who have contacted Abbey and
may be thinking of leaving. Customers in this category were most likely to contact call
centre staff and use the following phrases:
What deal can you offer me?
Will you please send me a redemption statement or balance?
What level of penalties are attached to my mortgage?
Can you match the rate that I am being offered by company x?
These customers were then managed by a dedicated telephone team responsible for
managing existing customer relationships. The second response was to improve Abbey’s
ability to identify those customers who were about to reach the end of discount periods
x The Henley Centre, ‘Planning for Consumer Change’ 2003
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on their mortgage products and were likely to seek another product with a competitor.
As a result they built a propensity model based on consumer profiles and results from
tests. This enabled them to address the following questions:
Which prospects are most likely to respond to particular marketing efforts?
How can we identify those customers who are most similar to those who have
already purchased similar products?
Can we identify the customers who are the displaying the highest risk of defection,
so that we can target retention activities?
What is the most appropriate product to offer this customer?
Abbey created profiles of typical defectors and developed a set of contact strategies for
the group prior to maturity. The Abbey experience showed that the ideal contact period
for retaining potential defectors is two to three months prior to maturity. Customers
who had been contacted less than 2 months to maturity had already started shopping
around, had been contacted by the IFA or were in the process of remortgaging.
Customers who were contacted more than 3 months to maturity were less willing to
consider remortgaging.
The final feature of the strategy has been to give customers more reasons to stay. Abbey
has made additional inroads to improving loyalty rates by offering special deals to
existing customers who move home. These customers are offered help with the cost of
moving home and are able to keep their existing mortgage with the new property,
thereby avoiding the time-consuming process of applying for a new mortgage. Another
policy that is aimed at rewarding loyal customers is the ‘Deal for Life Mortgage’. This
was created as a result of research that confirmed consumer preference for remaining
with one lender if they perceive fair treatment. The mortgage charges 0.5% over the
base rate for life, can be transferred to the consumer’s next home and is free from
penalties. Abbey have also launched a mortgage that rewards existing customers with
1% cash back off their mortgage every 2 years.
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A key lesson from Abbey is that they have aligned their strategy for customer
acquisition with that of customer retention. They have also used a robust propensity
model as the basis for creating the building blocks of retention.
Defection can be remedied
All too often, companies view a lost customer as lost forever. This is as true in financial
services, where frequency of purchase is comparatively low, as in other sectors. Many
marketers in financial services firms have mistakenly used continuous customer
acquisition programmes to combat this problem.
Independent financial advisers and providers alike can give in to disappointment,
purging customers from databases or banishing them to the regulatory “archive”. There
is an alternative: they can take steps to ensure that the customer comes back, if not
immediately, then the next time that a policy or investment is reviewed or supplemented.
Defection does not have to be the end of a relationship.
Some customers officially communicate their intent to leave, for example, through
policy cancellation. Others make no apparent declaration, simply buying elsewhere next
time. The silent defector problem is compounded by typical communications activities
that are in one direction, for example, a periodic newsletter or statement.
Without dialogue, it is difficult to know whether the customer's circumstances or
attitudes have changed.
The best answer is regular dialogue. If this is beyond the reach for the entire customer
base, then focus on certain segments and rely on purchase behaviours and other informal
signals that defection is looming in the others. The quicker an organisation realises that
termination is possible, the better equipped it is to take action.
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Possible reasons for customer defection
The reasons for defection add valuable insight for the future and help to determine the
case for a win-back programme. Possible reasons for defection are suggested below.
The intentionally lost customer: this customer may have been unprofitable, a poor
payer or taken too much resource to service (perhaps resisting the move to online
management). This customer must be identified and eliminated from any win-back
initiative.
The unintentionally disenchanted customer: for them (if not captured in time by a
chum management programme) your performance did not match their expectation or
desire. This customer may have been unhappy with the product, the service or an
unexpected rise in annual premiums, for example. They may have had a poor complaint
resolution or disapprove of changes to a policy or an individual financial adviser. This
customer should be evaluated for future worth.
The stolen customer: for one or more reasons this customer has been lured away by a
competitor’s company, products or innovation. There need not necessarily have been a
price or interest rate advantage. This customer is potentially worth winning back.
The bought customer: this has been particularly rife in mortgages. If the reason is
purely price then this customer is less likely to be profitable or loyal.
The changed customer: this one might have altered circumstances and no longer need
your products or services. This will not become apparent until you engage in dialogue.
Successfully identifying and classifying lapsed customers' defection criteria is crucial.
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While the winning back itself is often a lengthy process, the programme will quickly
yield a wealth of information about the reasons for defection. This can be used to reduce
other defections and boost satisfaction levels among remaining customers.
Once segmented, a pilot involving all target groups is recommended, taking a
percentage of each and retaining a control group of customers in each category against
which to measure the programme's success. As with customer satisfaction and churn
management programmes the design and flow of the dialogue is key.
The most sensitive group is the unintentionally disenchanted customer, who may have
given your organisation signals or cries for help which were simply not picked up.
Again, there has been a preponderance of this in mortgage redemption requests.
What returns can you expect from win-back programmes? Aside from significant
insights into the process improvement initiatives most likely to reduce churn, win-back
programmes yield a tangible return on investment.
Success measured in terms of redeemed customers varies considerably between
segments and between products, and results can take some time to prove absolutely.
One example, however, includes high-end motor and household insurance provision that
achieved a 35% win-back the following year (predominantly from unintentionally lost
customers).
Understanding how and why customer churn occurs is critical. The churn occasion
arises when the quality of the customer’s experience falls below a certain threshold
relative either to competition (comparison churn) or to the consumer’s own
expectations (frustration churn). A key requirement is the identification of the areas of
the consumer experience that are to blame. Churn events are sudden moments of clarity
when customers’ perceptions of their service change. Customer satisfaction surveys
often fail to catch enough customers who have had these epiphanies because the
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customers have already left. In the following section below we consider the possible
reasons why customers may decide to switch their financial service supplier.
What are the factors that force customers to switch?
A pioneering study in 1995xi created a model that contained eight switching incidents.
These incidents were pricing, inconvenience, core service failures, service encounter
failures, employee responses to service failures, attraction by competitors, ethical
problems and involuntary switching plus seldom mentioned incidents. These incidents, in
overview, can be described as follows:
Pricing: this category subdivides into high prices, price increases, unfair pricing
practices and deceptive pricing practices;
inconvenience: this category subdivides into location, opening hours and waiting
too long either for an appointment or for delivery;
core service failures: this category subdivides into mistakes, billing errors and
service catastrophes;
service encounter failures: this category subdivides into uncaring, impolite,
unresponsive staff;
employee responses to service failures: this category subdivides into reluctant
responses, a failure to respond or patently negative responses;
attraction by competitors: this category subdivides into consumers whose
responses focused on the positives of the service provider they switched to as
opposed to the negatives relating to the service provider they switched from;
xi Keaveney SM 1995 ‘Customer switching behaviour in the service industries, an exploratory study’, Journal of Marketing, 59, Spring 71 - 82
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ethical problems: this category subdivides into dishonest behaviour, intimidating
behaviour, unsafe or unhealthy practices or conflicts of interest; and
involuntary switching and seldom-mentioned incidents: this category subdivides
into switching because the service provider or customer had shifted location or the
service provider had changed alliance.
Pricing, service failures and inconvenience appear to be the dominant types of incidents
that influence consumers in a bank switching decision. In a recent survey in the Asian
banking industry, these incidents were found to account for about 90% of switching
incidentsxii.
More than 90% of respondents in the Asian survey chose not to approach bank staff to
discuss the underlying matters prior to switching. The reason why the vast majority of
respondents chose to remain silent is attributed to their belief that they would be wasting
their own time if they “voiced”. This behaviour may be caused by certain types of
changes in bank policy such as decisions to close branches or to introduce a higher fee
structure. These policy decisions are made at the highest level in banks and individuals
or groups of individuals may feel they have insufficient influence to persuade senior
executives to reverse their earlier decisions. The setting up of a scheme which seeks
feedback from discontented customers may be beneficial to banks wishing to retain a
proportion of those customers who would otherwise have defected.
The Stroud and Swinton Building Society worked with Manchester Business school to
identify the factors that undermined consumer satisfaction and trust. The results are
summarised below.
xii Gerrard P and Cunningham J.B. ‘Consumer Switching Behaviour in the Asian Banking Market’, Journal of Services Marketing, vol 18, Number 3, 2004
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Figure 3.8: Factors that erode satisfaction and trust Satisfaction ‘eroders’ Trust ‘eroders’ Waiting for calls to be answered Not keeping promises Poorly trained staff Wrong advice/information Lack of empathy Non-return of telephone calls/emails/letters IVR Overcharging/hidden charges Unavailability of people to take calls Lies/untruths Insensitivity to problems and complaints
Source: Manchester Business School Business Insights
Retaining customers in a competitive business
The rise of consumer switching has emphasised the importance of retaining existing
customers. This concern is particularly prevalent in the mortgage market as mortgages
are perceived by many to be the main product worth switching. Some lenders, such as
Abbey, are approaching this problem by changing their focus to embrace loyalty rather
than offering short-term deals to new customers.
There are circumstances where lenders may find it difficult to retain business such as
when a relationship breaks down and both partners seek new providers. However, an
increase in overall retention could possibly be achieved by educating customers about
the different mortgage types on the market, proactively offering customers the best deals
available and explaining the long-term issues and costs relating to mortgages. Innovative
long-term deals that avoid the inconvenience of the remortgaging process could also
prove attractive to some buyers.
Another solution to the switching problem is to avoid those customers who have a
switching track record. Some lenders have asked potential remortgagors how long it has
been since they last remortgaged. In this way, lenders are able to assess how likely the
person is to switch in the near future. Gathering and using customer information to
greater effect may prove to be a key to future success. Lenders could focus on
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improving customer relationships to differentiate themselves from other players in the
market.
Loyalty must start to count for something
The reverse side to gaining remortgage business are active attempts to retain existing
customers and rewarding them for their loyalty. The finance industry seems pretty adept
at virtually penalising those that stick with them while offering 'rate tarts' a much more
attractive offer. This strategy has depended on consumer inertia in the past but there are
signs that consumers are starting to 'wise up'.
Existing customers can be more effectively tied to their lender. Rewarding loyalty is
actively being encouraged in other sectors, notably the credit card sector where churn
has been very evident since the entry of the U.S. monoline providers in the mid-1990s.
Marketing tools such as a greater use of 'cashback' and an 'Air Miles' type of reward
scheme may have applications in the mortgage market. Advertising campaigns can
concentrate on highlighting the benefits featured in a new improved mortgage package.
The growing popularity of packaged bank accounts could be used to leverage both
switch business and retain those that have a current account and mortgage with the same
provider. However, discounted mortgage rates will have to be exactly that, offering a
clear price differential to the standard rates available. A sliding scale of rates depending
on mortgage size, deposit offered and the savings of the home buyer will also do much
to increase the perception that the lending industry is flexible and providing deals that
reward consumers.
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Chapter 4
Achieving Customer Satisfaction Through Service
Quality
74
Chapter 4 Achieving Customer Satisfaction Through Service Quality
Summary
Quality is one of the important dimensions that customers use to differentiate between services offered by different companies.
Like other services, the financial services sector has characteristics that pose a number of problems for creating successful customer relationships. The characteristics are: intangibility; inseparability; heterogeneity and perishability.
From the buyer's perspective, variations in service quality and inconsistent performance only increase the risk associated with purchase.
The three most significant benefits for services marketers moving online are improved consistency, greater consumer empowerment and the move away from time and space dependency.
Introduction
Financial services are part of the wider services sector and, as such, share certain
characteristics that managers must consider in their attempts to deliver service quality
and create favourable brand images among consumers. This section examines the nature
of these characteristics in relation to financial services.
Customer satisfaction is fundamental to building loyalty. When the service provider
understands how the users will evaluate services, it will be possible to identify ways of
managing these evaluations to create long-term relationships. Quality is one of the
important dimensions that customers use to differentiate between services offered by
different companies. This section considers the ways in which companies can deliver
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value and quality to their customers. It then goes on to examine the techniques that can
be used to monitor customer satisfaction with services.
The significance of brands cannot be overestimated, a fact that is evident in the large
sums of money that new and established brands are devoting to advertising and
marketing campaigns. The well-known and established brands provide assurance of
probity and safety. Hence trust is a key factor in creating consumer satisfaction.
Branding, however, is much riskier online. The consumer may well be far less forgiving
online since any problems or delays are associated with the brand name as opposed to
the cashier or member of staff. The entire bank is held accountable for the unsatisfactory
experience. Operating both online and offline can also send conflicting messages, hence
the need for consistency and synergy when the same brand image is utilised.
Financial services characteristics and their implications for branding and relationship management
Like other services, the financial services sector has characteristics that pose a number
of problems for creating successful customer relationships. The characteristics are:
intangibility; inseparability; heterogeneity and perishability. The following paragraphs
will critically evaluate the characteristics in relation to financial services.
Intangibility
This is the most fundamental difference between a product and a service. Services are
deeds, processes or performances that cannot be assessed using any of the physical
senses. A prospective purchaser of a product such as a television can examine it for
physical integrity, aesthetic appearance, sound and visual quality. Many advertising
claims relating to these tangible properties can be verified by inspection prior to
purchase. On the other hand, services have no tangible properties that can be evaluated
prior to purchase.
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Implications for branding
There are two special problems associated with intangibility for financial services: in
making the product difficult to grasp mentally, it compounds the already complex
consumer decision-making process when purchasing. Second, it means that products
cannot be displayed or demonstrated to customers, posing problems in the advertising
and trial of products.
Marketers often try to overcome these problems by incorporating tangible features in
their service offerings. Many financial services, for example, contain tangible elements
on which the service can be judged or evaluated, such as the branches, ATMs, account
statements and promotional literature. If the bank wishes to convey the idea that its
services are quick and efficient, it could concentrate on a bright, clutter-free interior in
its branches. Office equipment, such as computers, desks and staff uniforms should look
modern. The bank’s advertisements and other communications should suggest
efficiency, with clean and simple designs and carefully chosen words that communicate
the bank’s positioning. If these factors create the impression for the consumer that
he/she is receiving a service that is reliable, professional and efficient, then the chances
of creating a long-term relationship with customers increases.
The decision to market financial services on the Internet can pose problems, as the
above facilities are unavailable for consumer evaluation. In this instance the provider can
concentrate on creating and maintaining a website that is easy to use, aesthetically
appealing and informative.
Inseparability
When manufacturing a tangible good such as a car, production, selling and buying take
place over several discrete stages and locations with quality control implemented at each
stage. In contrast, services are sold, then produced and consumed simultaneously. Thus
production and marketing become interactive processes. Inseparability results from
services being processes or experiences. Thus the service becomes a performance in real
time in which the consumer co-operates with the provider. With financial services it may
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be argued that advice is produced and consumed simultaneously. If you receive advice
about investing in a pension scheme, however, the results of the advice will not be
known until the point of maturity several years later. This adds to the problem of
consumer evaluation, especially with complex financial products such as pensions and
investments.
Implications
Inseparability adds to the difficulty of consistent quality control as service production
and consumption take place simultaneously. Customer satisfaction will be highly
dependent on what happens in ‘real time’, including actions of employees and the
interactions of employees and customers. This underlines the need for care in staff
selection, training and evaluation.
Inseparability often creates problems when demand rises. A goods manufacturer can
make more, or mass produce and stock up in anticipation of growth in demand. As this
is not possible for service firms, the following options can be considered:
The service provider can learn to work with larger groups so that more customers
can be serviced simultaneously (e.g. a pop concert can cater for a larger audience if
it is held in an open air venue instead of a concert hall);
the service provider can learn to work faster,
staff can be trained to perform tasks and utilise time more efficiently,
the service provider can train more service providers, for example, through the use
of call centres.
Heterogeneity
Some services have greater potential than others for variation from highly customised to
highly standardised services. There has been a tendency to view the variations in quality
or the inability to apply a consistent performance over time as a problem. The greater
78
the human involvement, the greater the variations in service quality. Financial
institutions are predominantly people-based institutions; most customers would
traditionally interact face-to-face with tellers in the branches. Yet technology has
enabled the service offering to become more standardised through the use of ATMs,
telephone and online banking.
Implications
From the buyer's perspective, variations in service quality and inconsistent performance
only increase the risk associated with purchase. Even though the marketing and delivery
of an investment product may be able to be standardised, the final outcome may still be
uncertain as a result of factors outside the control of the financial institution. For
example, two people may invest the same sum of money in the same pension for the
same length of time, but because they started the pension at different times, they may be
affected by different economic conditions, hence the returns may be different for each
investor. A customer experiencing a good return may be satisfied with the quality of the
investment. Conversely, the person experiencing a poor return will conclude that the
investment was a poor product and may decline to purchase other services from the
company. Potential problems associated with this factor can be avoided by maintaining
clear communication with the consumer to keep him/her notified of the product’s
performance. Care should also be taken to determine the consumer’s attitude to risk
before making an investment. In cases where investments are performing badly, several
financial institutions have been warning their investors about the need to either top up
their investments or seek alternative funds.
Perishability
Services differ from goods, as they cannot be stored. A producer of cars that is unable
to sell all its stocks can store cars for future sale. The problem of perishability for the
service supplier is that it presents an inability to build and maintain stocks. Thus, it is
argued, fluctuations in demand cannot be accommodated in the same way as goods.
This was evident when the launch of Intelligent Finance, the new Halifax bank, was
delayed as the bank's senior managers predicted that its IT systems would be unable to
79
cope with the demand for services. Rather than disappoint customers, the bank
postponed the launch until it could be confident of no embarrassing hitches. When
demand exceeds capacity customers are likely to be sent away disappointed, since there
will be no inventory available for back up. Thus, an important task for marketers is to
find ways of smoothing demand levels to match capacity.
Implications for branding
As services are deeds or performances, they cannot easily be stocked as inventory after
being produced. Although facilities, equipment and labour can be held in readiness to
create the service, these elements simply represent productive capacity, not the product
itself. If there is no demand during a given time period, unused capacity is wasted.
During periods when demand exceeds capacity, customers may be sent away
disappointed or asked to wait until sufficient capacity is available to serve them.
Demand forecasting and creative planning are therefore important and challenging
decision areas. The fact that services cannot be returned or resold also implies a need for
strong recovery strategies when things go wrong. A good example of a recovery
strategy was evident when the Royal Bank of Scotland announced that it would
compensate investors who were about to experience shortfalls in their endowment
policies due to an actuarial error.
Fiduciary responsibility
Fiduciary responsibility refers to the implicit responsibility of financial service
organisations for the management of their customers’ funds and the nature of financial
advice supplied to their customers. In a financial services marketing exchange the
consumer is essentially buying a set of promises: the financial institution promises to
take responsibility for looking after the buyers’ funds and their financial welfare. Thus
trust and confidence in the financial institution are imperative. These factors can only be
earned through direct experience with the company and its personnel. Prior to any
involvement with the company consumers will evaluate other cues about the company
such as its size and corporate image, before making a decision to use its services.
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Two-way information flows
Financial services usually involve regular two-way transactions over an extended time.
Examples of these transactions include: the issuing of statements; account handling;
branch visits; use of ATMs etc. This type of interaction provides the potential to create
detailed profiles about consumers’ account balances, account use, saving and borrowing
behaviour, credit card purchases, all of which could be used to improve customer
loyalty. Recent research in the Financial Times shows, however, that many of the
traditional high street banks are failing to capitalise on this information because their IT
systems are out-of-date. Many banks are using different databases in each of their
departments and are unable to produce a detailed up-to-date record of their customers
as each database may contain errors in spelling names or addresses. Furthermore, most
databases are based around products rather than customers, so there will be one for
current accounts, another for credit cards and a third for mortgages. They will also be
dedicated to particular distribution channels such as a branch network, postal operations
or telephone banking.
Implications
The more marketing oriented banks are using IT systems that are focused on individual
customers. Staff dealing with a current account, for example, would know that the
account holder also had a mortgage, credit card and unit trust with the bank. They
would also use that information when dealing with the customer through a branch, by
post, on the telephone or online. These banks have the advantage of being able to offer
their customers a more personalised service and can also promote other services that are
tailored to individual customer needsxiii.
xiii (Source: FT.com, Financial Times Survey, ‘Hard Lessons of Merging Software’, 2000)
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Impact of online delivery for service concepts
Online customers have raised expectations. They expect higher standards in terms of
service, convenience, speed of delivery, competitive prices and choice. They also want,
if not expect, to be in control, secure and safe.
How then does the move to online delivery affect the issues associated with the
marketing and delivery of services? The online environment is well suited to the delivery
of quality service. As products that are essentially intangible and information based,
services can be delivered directly online and do not necessarily need to be supplemented
with traditional service delivery outlets.
In many ways technology, and specifically, the Internet have minimised - if not
eliminated - the problems stemming from the unique characteristics of the service
product. Specific areas where online services can be perceived as superior to traditional
delivery include the following:
Reduced time dependence
24-7 access to websites reduces the time dependency on the service provider needing to
have extended opening hours and allows the consumer to make first contact (web/email)
at their leisure rather than within a set time frame for phone or direct contact.
Consistent service delivery
Websites can provide a consistent performance in customer transactions.
Consistent imagery and branding
Careful selection of a site design can be instrumental in creating effective branding. In
much the same way as a clean, attractively decorated bank branch with friendly staff can
enhance consumer loyalty, the provision of a well organised website can fulfil the same
role.
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Customer led customisation
Consumers can work within the elements of a website that represent most value and
significance to their own interests e.g. identify which investment product suits their
interests.
Consumer empowerment
This has arisen from the range of choice for service delivery across the Internet. When
buying financial services products, for example, it is much easier for consumers to
compare and contrast competitors simply by visiting the different websites from the
convenience of their homes.
Effective separation of production and consumption
The producer of a service is able to upload a divisible information product or service
that can be consumed in their absence.
The three most significant benefits for services marketers moving online are improved
consistency, greater consumer empowerment and the move away from time and space
dependency.
In the previous chapter we considered the reasons customers switched their suppliers.
We now consider the factors that persuade customers to remain loyal to their service
provider. These are illustrated in Figure 4.9.
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Figure 4.9: Reasons for customer loyalty
6539
3228
2525
2214
10667
0 10 20 30 40 50 60 70
Good customer serviceToo complicated/can't be bothered
Security of a big, established companyLike the company / brand
Know / are familiar with the staffWant to support local suppliers
Get loyalty points / rewardsTied to a contractEthical company
Influence of friends and familyOrganic supplier
Not stated
Reasons for customerloyalty
Source: The Henley Centre, Planning for Consumer Change 2003 Business Insights
Service quality
“A customer is a dumb, annoying arrogant and counterproductive pest who constantly bothers me with only one goal: to stop me from doing my real work”.
Guido Thys, Customer Chasers Club
Given the importance that consumers attached to good customer service, the
components of service quality are now considered.
The characteristics of services described above have challenged many organisations in
their attempts at designing quality standards that will be readily accepted by potential
customers. Such problems are compounded by the absence of absolute standards of
service excellence: i.e. one customer’s idea of a disappointing service may be another’s
idea of service excellence. In this way an infrequent traveller who has won a first class
air ticket may consider all aspects of the service to exceed their expectations, while a
regular business traveller with higher expectations may express dissatisfaction because
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of slow check-in procedures and an inattentive cabin crew. As service quality is essential
for successful customer relationships, we shall consider ways to overcome the
difficulties described above and suggest methods for implementing service quality
systems in financial organisations. In so doing, we will suggest some of the ways in
which firms can incorporate a differential advantage in their service offering. In the
example below, we consider how the ANZ bank succeeded in differentiating itself
through its commitment to service quality, thereby improving its customer retention and
satisfaction ratings.
Example: customer care at the ANZ bank
The ANZ bank is one of Australia’s largest banks with more than five million customers
and assets of AUD $247 million. It employs more than 28,000 people and is represented
in Australia, New Zealand, Asia, the Pacific, the UK and the United States.
When the bank decided to embark on a campaign to measure and improve customer
satisfaction and loyalty, it decided to identify the individual components of perceived
customer value.
Four headings were used to measure customer perceptions of their service and products.
These were:
Brand affinity – this was achieved be measuring customer evaluations of the bank’s
ability to meet the promises of its Customer Service Charter (see below);
Overall relationship – this measured the overall quality of customer transactions in
branches, telephone, online facilities and other channels;
Product features – products were measured against those of competitors as well as
their ability to meet consumer needs;
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Customer service – this provided data on general service criteria egg perceptions of
staff friendliness, efficiency, waiting times and ability to resolve queries.
Data from the above were then measured against relative costs i.e. interest rates,
charges and fees. The comparison between the costs and the quality perceptions enabled
the bank to determine whether its brand proposition was attractive enough to be
included in the customer’s shopping basket.
The ANZ brand values are captured in its Customer Service Charter illustrated below.
ANZ’s ‘Customer Service Charter’
At ANZ we are committed to providing our customers with a better level of service. This Customer Service Charter sets out how we plan to achieve this and further restore their faith in us.
Our Promises
1. Simple accounts, fees and charges
We will keep our accounts and fee structures simple and transparent:
• All our communications will be concise and clear.
• We will help you understand the total cost of your loan by giving you access to tools to make comparisons and well-informed decisions.
• We will provide you with simple choices for everyday personal banking: - Unlimited ANZ transactions for a $5 monthly fee, or - A set number of free ANZ transactions and a low fee for every additional transaction
• There will be no monthly fee charged on our standard variable home loan
2. Simple, fast account opening
We will refund one month’s standard fee or it’s equivalent if we do not meet our
account opening standards:
• Personal Banking – we will have your account available within 24 hours of satisfying identity requirements
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• Personal Loans – we will answer standard loan applications within one (1) working day
• Home Loans – we will answer standard loan applications within two (2) working days
• Car Loans – we will answer standard loan applications within one (1) working day
3. Quick, convenient branch banking
We know that access to face-to-face banking is important to you. We are committed to
delivering this service:
• Our tellers will aim to serve you within five (5) minutes of your arrival
• We will keep a selection of our Victorian branches open at times that are more convenient to you, during weekdays and on Saturdays
• Over the next six months we will review our branch opening times nationally
• We will give you adequate notice of changes to branch locations, working to minimise the effect on you
4. 24 hour, 7-day accessibility
We will provide 24 hour, 7 day banking services through a combination of phone
banking, call centres, Internet Banking, EFTPOS and ATMs:
• Our Internet banking service, EFTPOS service and our web site www.anz.com will be available more than 99% of the time
• Our automated phone banking service on 13 13 14 and our ATMs will be available more than 98% of the time.
• Over the next year we will be adding up to 100 new ATMs across Australia
• Our 13 13 14 enquiries phone service will be available from 8am to 8pm on weekdays
• Our Credit Card enquiries phone service on 13 22 73 and our Lost and Stolen Cards hotline on 1800 033 844 will be available 24 hours a day, 7 days a week
• Our Esanda phone service on 13 23 73 will be available from 8am to 8pm AEST weekdays and 9am to 5pm AEST Saturdays.
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5. Fast, efficient phone service
Many transactions can be completed quickly over the phone by calling ANZ on 13 13
14 or our Credit Card enquiries phone service on 13 22 73. These are our promises if
you wish to speak to a customer service representative:
• We will aim to answer your call within one (1) minute of you pressing ‘0’ to speak with a customer service representative.
• We will advise you of the expected time before your call is answered if it is likely to take longer than 30 seconds.
• If you need phone access to your branch, please ask the customer service representative who answers your call.
6. Respect for personal information and privacy
We will keep any information you have provided to us private. The ANZ Privacy Policy
is available at www.anz.com.
7. Helping you understand our communications
We will write all letters, brochures, ATM messages and other notices in plain language.
In all our communications we will help you understand what they mean for you.
8. Swift resolution of complaints
If we make a mistake, we will put it right. We will respond to your complaint within 48 hours and let you know who is responsible for managing your case. Our Customer Liaison Unit will work with you to resolve your case quickly and within a maximum of 10 working days. When this is not possible, we will contact you within 10 working days to let you know how much longer the matter should take to resolve.
The next stage of the ANZ campaign was a customer care programme aimed at making
new customers feel valued and improving retention rates. Members of a central team
made courtesy calls to new customers within two to three weeks of account purchases.
During the courtesy call, the team member would enquire if the customer had been
happy with the account opening process and attempt to resolve any problems that had
been encountered. Feedback was then issued to the branch where the account was
opened. Thirteen months after the campaign was launched the bank has experienced a
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9% increase in customer retention. While exact figures are not currently available, the
ANZ bank expects the revenue impact from the campaign to be substantial. Unlike many
of their competitors who operate on the misguided assumption that successful CRM is
solely dependent on state-of-the-art IT systems, the ANZ case illustrates that a
commitment to customer care and the fulfilment of the brand promise can have a
positive impact on satisfaction and retention.
Researching service quality
It is generally acknowledged that one of the main reasons for the poor performance of
service firms is the lack of awareness about customer expectations. The absence of well-
defined tangible cues makes this understanding more difficult than it would be in the
case of goods. This problem can be resolved through the use of marketing research that
elicits information about customers’ expectations and perceptions of services.
The first step in this process is for service organisations to ask the following key
questions:
What do customers consider the important features of the service to be?
What level of these features do they expect?
How do customers perceive service delivery?
Some of the most useful methods for researching customers’ expectations and
perceptions are examined below. These research methods are most effective when they
are:
Varied: in order to achieve a comprehensive insight into a problem a variety of research
methods should be used.
Ongoing: the expectations and perceptions of customers are constantly changing, as is
the nature of the service offer provided by companies and their competitors. It is
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therefore important that a service research process is administered on a continuous basis
so that any changes can be picked up quickly and acted upon if necessary.
Undertaken with staff: the closeness of staff to customers within the services sector
makes it important that they are asked about problems and possible improvements as
well as their personal motivations and requirements.
Research objectives
Defining the problem and research objectives is the first step in designing services
marketing research and is without doubt the most critical. Does the company want to
know how customers perceive the service provided by the company, what customer
requirements are, how customers will respond to a new service introduction, or what
customers will want five years from now? Each of these research questions requires a
different research objective.
The most common research objectives in financial services
The following are the most common research objectives in financial services:
To identify dissatisfied customers, so that service recovery can be attempted;
to discover customer requirements or expectations of service;
to monitor and track service performance;
to assess overall company performance compared with competition;
to assess gaps between customer expectations and perception;
to gauge effectiveness of changes in service delivery;
to appraise the service performance of individuals and teams for evaluation,
recognition and rewards;
to determine customer expectations for a new service;
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to monitor changing customer expectations in an industry;
to forecast future expectations of customersxiv.
Research methods
Some of the most useful methods of research are outlined below.
Regular customer surveys
Customers frequently receive surveys from service providers asking for their opinion
about the level of service provided. The methods used for the surveys, however, are not
always effective. Typical applications include being asked to fill in a questionnaire after
purchasing a service. Recipients are usually asked to relate any complaints that they may
have about the services provided along with suggestions for improvements. The results
of these surveys are not always accurate as the respondents frequently give hurried and
ill-considered responses. More rigorous methods are discussed below.
Customer panels
These are used to provide a continuous source of information on customer expectations.
Groups of customers, who are frequent users, are brought together by a company on a
regular basis to study their opinions about the quality of service provided. On other
occasions they may be employed to monitor the introduction of a new or revised service
- for example, a panel could be brought together by a building society following the
successful introduction of a website format.
This research method offers organisations a means of anticipating problems and an early
warning system for emerging problems. The value of this research is directly related to
how well the panel represents the rest of the consumers. Careful selection should be
undertaken to ensure the panel matches the social, demographic and economic profile of
the consumers being analysed.
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Transaction analysis
This involves tracking the satisfaction of individuals during recent transactions to enable
management to judge current performance, particularly customers' satisfaction with the
contact personnel as well as their overall satisfaction with the service.
The research method normally involves issuing a questionnaire to individual customers
immediately after a transaction has been completed. Building societies, for example,
invite customers who have just used their mortgage services to express their views on
the service received via a structured questionnaire. An additional benefit of this research
is its capability to associate service quality performance with individual staff members
and link it to reward systems.
Mystery customers
In this form of research, companies hire outside research organisations to send people
into service establishments and experience the service as if they were customers. This
enables managers to monitor the quality of staff performance when they are delivering
the service. A major difficulty in ensuring service quality is overcoming the non-
performance of staff in complying with service guidelines. Customers often complain
about services when staff are unable or unwilling to perform the service at the desired
level. An important function of mystery customer or mystery shopper surveys, therefore,
is to monitor the extent to which specified quality standards are being met by staff.
The mystery customers are trained assessors who visit the organisation, pretend to be a
customer and then prepare a report on how well or badly the service personnel did their
job. When applied correctly, this can provide a powerful technique for revealing how
customers perceive the service.
xiv (SOURCE ZEITHAML V and BITNER M, Services Marketing, McGraw Hill, 2nd edition, 2000, page 109)
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To understand the eCustomer we can use online versions of the traditional marketing
research techniques described above, but more rapidly and cheaply than before. The
strengths and weaknesses of online research methods are summarised in Table 4.5.
Table 4.5: A comparison of different online metric collection methods Techniques Strengths Weaknesses Server based Directly records customer Not based around marketing outcomes such as logfile of site behaviour on site plus sales and leads. activity origins of referral Size – data can be lengthy Does not record satisfaction Low cost Undercounting and overcounting Requires careful interpretation Browser based Greater accuracy than Relatively expensive site activity data server based analysis Similar weakness to server based method apart Counts all users from accuracy Limited demographic information Panels activity Provides competitor Depends on extrapolation from limited sample and demographic comparisons that may not be representative data Gives demographic profiling Avoids undercounting and overcounting Outcome data e.g. Records marketing Difficulty of integrating data with other methods enquiries, outcomes of data collection when collected manually or in customer service, other information systems emails Online Can record customer Difficulty of recruiting respondents who Questionnaires satisfaction and profiles complete accurately customers are Relatively cheap to create Sample bias – tend to be advocates or disgruntled prompted randomly and analyse customers who complete every nth customer or by email Online focus Relatively cheap to create Difficult to moderate and co-ordinate Groups No visual cues from respondents synchronous recording Mystery shoppers Structured tests give detailed Relatively expensive Example shoppers feedback Sample must be representative Are recruited to Tests can be integrated with Evaluate the site other channels such as email e.g. and phone www.mysteryshopper.com
Source: PR Smith and Dave Chaffey, ‘E Marketing Excellence’ 2002, page 124 Business Insights
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The SERVQUAL methodology
The importance of quality as a determinant of the success of a service has led to
comprehensive programmes to measure quality. Pre-eminent among these is
SERVQUAL, a methodology based on the premise that customers can evaluate a firm’s
service quality by comparing their perceptions of its service with their expectations.
What to measure
The question of what to measure will vary from one industry to another; but the factors
outlined below apply to most organisations in the service sectors.
Reliability refers to the ability to perform the promised service dependably and
accurately. It is regarded as the most important determinant of service quality. It is
especially important for services such as transport, banks, building societies, insurance
companies, delivery services and trades such as plumbing and car repair.
Responsiveness refers to the willingness to help customers and deliver prompt service.
It is particularly prevalent where customers have requests, complaints, problems or
questions.
Assurance refers to the employees’ knowledge, courtesy and ability to inspire trust. It is
important for the customers of health, financial and legal services.
Empathy refers to the caring, individualised attention the service provides its
customers.
Tangible refers to the appearance of physical facilities, equipment, personnel and
communication materials. These can be used to create a favourable image of the
organisation in the mind of the customer. Tangibles are important when the customer’s
physical presence at a service is necessary for consumption to occur e.g. hair salon,
night club, hotel.
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In an in-depth survey into Internet banking services in the United States, two academics
from New Mexico State University modified the SERVQUAL research tool to
determine levels of customer satisfaction with Internet banks.xv
Their research objectives were as follows:
To identify customer perceptions of the key dimensions of Internet banking service
quality;
to identify which quality dimensions were most important for customer satisfaction
and/or dissatisfaction;
to compare and contrast sources of customer satisfaction with traditional and
Internet banks;
to make recommendations for improving the customers’ perceived Internet banking
service quality and, in turn, their satisfaction.
As part of the research, the authors decided to examine the content of business review
websites that ask online customers to post their experiences on their websites’ bulletin
board systems (BBS). The customers who have volunteered to provide such reviews are
most likely to have had extremely satisfying/dissatisfying experiences. The customers
who have had average or tolerable products/services from online businesses are likely to
find little or no incentive to make such comments. Therefore the stories of extremely
satisfying or dissatisfying experiences posted on the BBS could serve as ‘critical
incidents’ that determine the nature of the customer’s experience and attitude towards
the company.
xv Minjoon Jun and Shaohan Cai, ‘The Key Determinants of Internet Banking Service Quality: a Content Analysis’ published in International Journal of Bank Marketing, 19/7 2001 pages 276-291
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The authors collected the critical incidents regarding Internet banking service quality
from the website of Gomez Advisors (www.Gomez.com) which is one of the leading
online consulting firms. The website contains a BBS for customers to express their
views and experiences of Internet banks in the United States. The authors accessed
Gomez.com from February 10, 2000 at 7pm to February 11, 2000 at 12am. A total of
704 individual comments on the 49 Internet banks in the United States were collected.
Of the 49 banks referred to by the customers, eight firms are Internet only banks and the
remaining 41 firms are traditional banks that offer Internet banking service.
The authors’ content analysis of the critical incidents revealed that ‘service quality’ in
the context of Internet banking comprises a total of 17 service quality dimensions that
can be classified into three broad categories: customer service quality; online systems
quality and banking service products quality. The quality dimensions are illustrated in
the Appendix, Table 7.6.
How to measure
Customers are asked to complete a number of statements relating to their expectations
of a service and a perceptions section consisting of a matching set of company specific
statements about service delivery. They are asked to score on each instance, on a scale
from 1 (strongly disagree) to 7 (strongly agree), whether or not they agree with each
statement.
In addition, the survey asks for respondents’ evaluation of the relative importance they
attach to each dimension of service quality or the relative importance of different
customer groups. The results of the survey reveal whether customer expectations are
being met or not.
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The figures in the Appendix at the end of this report (Table 7.6 to Table 7.16) illustrate
how SERVQUAL could be applied to an online bank.
The results from this survey can be used in the following ways:
To indicate aspects of service where the service is weak or poor;
to monitor service quality over time;
to compare performance with that of competitors;
to measure customer satisfaction with the industry generally.
It is easier to achieve customer satisfaction when service providers decide upon a target
quality of service level that is then communicated to employees and customers. This
allows employees to know what is expected of them and tells customers what they can
expect.
The methodology highlights the difficulties in ensuring a high quality of service for all
customers in all situations. It identifies five gaps where there may be a shortfall between
expectation of service level and perceptions of actual service delivery.
Gap 1: between consumer expectations and management perceptions. Management
may think they know what consumers want and proceed to deliver this when the
consumers may want something quite different.
Gap 2: between management perception and service quality. Management may not
set quality specifications or may not set them clearly. Alternatively, management may set
clear quality specifications that are unachievable.
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Gap 3: between service quality specifications and service delivery. Unforeseen
problems or poor management can lead to a service provider failing to meet service
quality specifications. This may be due to human error or mechanical breakdown.
Gap 4: between service delivery and external communications. There may be
dissatisfaction with the service due to exaggerated claims in the service advertisements.
Gap 5: between perceived service and expected service.xvi This gap occurs as a result
of one or more of the previous gaps. The way in which customers perceive actual
service delivery does not match their initial expectations.
The prescriptions for closing the service gaps are summarised below.
Gap 1 prescription: learn what the customers expect
Develop a clearer understanding of customer expectations through research,
complaint analysis and other forms of marketing research;
increase interactions between managers and customers to develop a better
understanding;
improve upward communication from contact personnel to management and reduce
the number of levels between the two;
turn information into action.
Gap 2 prescription: establish the right service quality standards
xvi (SOURCE: ZEITHAML V, BERRY L and PARASURAMAN A, 'Communication and Control Processes in the Delivery of Service Processes', Journal of Marketing, Vol 52, April 1988, pp 36 - 58)
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Ensure that top management display continuing commitment to quality from the
customers' points of view;
train managers in the skills needed to lead employees to deliver quality service;
clarify to employees which tasks have the biggest impact on quality and should
receive the highest priority;
reward managers and employees for attaining quality goals.
Gap 3 prescription: ensure that service performance meets standards
Clarify employee roles;
match employees to jobs by selecting for the abilities and skills needed to perform
each job well;
provide employees with appropriate training to perform tasks;
train employees in interpersonal skills, especially when dealing with customers under
difficult situations;
eliminate role conflict among employees by involving them in the process of setting
standards;
train employees in priority setting and time management;
tie employee compensation to delivery of quality service;
build teamwork so that employees work well together and use team rewards as
incentives.
Gap 4 prescription: ensure that delivery matches promises
Seek inputs from operations when new advertising programmes are being created;
develop advertising that features real employees doing their jobs;
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allow service providers to preview advertisements before customers see them;
ensure that advertising content accurately reflects those service characteristics that
are most important to customers in their encounters with the organisation;
identify and explain uncontrollable reasons for shortcomings in service
performance.xvii
The following questionnaire offers organisations a means of generating consumer
profiles and feedback about their experience of using online services.
Internet customer questionnaire
Consumer profile - Please tell us something about you:
C1 Age:
1 Less than 18 years
2 18 to 20 years
3 21to 30 years
4 31 to 45 years
5 46 to 60 years
xvii Adapted from chapters 4,5,6,7 of ZEITHAML V, PARASURAMAN A and BERRY L, Delivering Quality Service: Building Customer Perceptions and Expectations, New York: The Free Press, 1990)
100
6 More than 61 years of age
C2 Are you male or female?
1 Male
2 Female
C3 What is your main occupation?
1 Student
2 Manual worker
3 Office worker
4 Professional
5 Home duties
6 Unemployed
7 Retired
C4 What is the highest level of education you have achieved?
1 Did not complete secondary school
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2 Completed secondary school
3 Completed trade qualifications
4 Completed university
C5 Where do you live?
1 In a major city
2 In a city
3 In a town or village
4 In the country
C6 What is your approximate income?
1 Less than £10,000
2 £10 – £20,000
3 £20,000 - £30,000
4 £30,000 - £40,000e
5 £40,000 - £50,000
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6 Over £50,000
C7 How often do you use the Internet?
1 Every day
2 At least three times each week
3 At least once each week
4 At least once each month
5 Less than once each month
C8 Do you mostly access the Internet from:
1 Home
2 Friend's home
3 School, college or university
4 Your work place
5 Public building, e.g. library
6 Commercial service, e.g. Internet café
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Internet purchase profile
P1 How many times have your previously purchased over the Internet?
1 Never
2 1 time
3 2-5 times
4 6-10 times
5 More than 11 times
P2 When was the first time your purchased over the Internet?
1 Now
2 This week
3 This month
4 In last year
5 More than 1 year ago
P3 Prior to this purchase, when was the last time you purchased over the Internet?
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1 This week
2 This month
3 In last year
4 More than 1 year ago
5 Never
P4 What types of products or services have you purchased over the Internet?
(tick as many as you have purchased)
1 Computer products
2 Books
3 Travel
4 Music
5 Groceries
6 Flowers
7 Clothes
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8 Tickets
9 Building products
10 Toys/gifts
11 Banking
12 Financial services/insurance
13 Others [please specify]:
P5 Are your purchases over the Internet for:
1 Your own use
2 Your work
3 Both
Internet purchases from this
site
S1 How did you come to this site?
1 Search engine
2 Someone told me
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3 Prior knowledge of company
4 Advertisement on another website
5 Link from another website
6 This is the website my firm uses for these types of purchases
S2 How many times did you visit this site before you decided to purchase?
1 1 time
2 2-3 times
3 4-9 times
4 More than 10 times
S3 What was your intention when you visited this site?
1 General interest in browsing
2 Comparing prices
3 Purchase a product
4 Process financial transaction
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S4 How many days from your first visit to the first purchase at this site?
1 Same day
2 2-5 days
3 6-10 days
4 More than 11 days
S5 How many times have you previously purchased from this site?
1 Never
2 1 time
3 2-5 times
4 6-10 times
5 More than 11 times
Experiences
E1 What was the single most important factor in deciding to make a purchase from
this site?
1 Convenience - being able to buy at any time of day
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2 Range of products
3 Availability of products
4 Price
5 Total cost of purchase
6 Ease of use of the site
7 Level of service provided
8 Provisions for security and privacy
9 Trusted name of the firm
10 Other [please specify]:
E2 What was the second most important factor in deciding to make a purchase from
this site?
1 Convenience - being able to buy at any time of day
2 Range of products
3 Availability of products
4 Price
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5 Total cost of purchase
6 Ease of use of the site
7 Level of service provided
8 Provisions for security and privacy
9 Trusted name of the firm
10 Other [please specify]:
E3 What was the greatest barrier or obstacle you had to overcome to make this
purchase?
1 Finding the site
2 Finding your way around the site
3 Completing the purchase procedures
4 Concern about security/privacy
5 Uncertainty about products/services
6 Uncertainty about total cost of purchase
7 Concern about delivery
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8 Other [please specify]:
E4 What was the next largest barrier or obstacle you had to overcome to make this
purchase?
1 Finding the site
2 Finding your way around the site
3 Completing the purchase procedures
4 Concern about security/privacy
5 Uncertainty about products/services
6 Uncertainty about total cost of purchase
7 Concern about delivery
8 Other [please specify]:
9 No other barriers or obstacles
E5 How easy was it to make a purchase from this site?
1 Very easy
2 Easy
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3 Neither easy nor difficult
4 Difficult
5 Very difficult
Outcomes
O1 How satisfied are you with using the Internet for purchases?
1 Very satisfied
2 Satisfied
3 Neither
4 Dissatisfied
5 Very dissatisfied
O2 How satisfied are you with using this site for purchases?
1 Very satisfied
2 Satisfied
3 Neither
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4 Dissatisfied
5 Very dissatisfied
O3 Would you purchase similar products or services from this site in future?
1 Definitely
2 Possibly
3 Probably not
4 Definitely not
O4 Would you purchase similar products or services from other sites in future?
1 Definitely
2 Possibly
3 Probably not
4 Definitely not
O5 Would you recommend this site to a friend who wanted to purchase?
1 Definitely
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2 Possibly
3 Probably not
4 Definitely not
O6 Do you have any suggestions on how the site could be improved?
[Check as many as you consider necessary]
1 Range of products
2 Availability of products
3 Price
4 Total cost of purchase
5 Ease of use of the site
6 Levels of service provided
7 Provisions for security and privacy
8 Finding the site
9 Finding your way around the site
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10 Completing the purchase procedures
11 More details about products/services
12 More details about how to contact staff
13 Speed of loading
14 Other [please specify]:
Thank you for taking the time to help us improve our services.
Source: S.R. Elliot, UNSW, Sydney Australia, 1999
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Chapter 5
The Implications of eCommerce for CRM
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Chapter 5 The Implications of eCommerce for CRM
Summary
For many complex purchases, many consumers prefer face-to-face contact with staff rather than electronic channels.
‘Phishing’ refers to a form of criminal activity that involves the use of fraudulent emails and websites that are designed to fool recipients into divulging personal financial data such as credit card numbers, account usernames and passwords. The results of these scams is that consumers suffer credit card fraud, identity theft and financial loss. Messagelabs, an anti-virus company, has reported a surge in phishing emails over the past 12 months. In August 2003, Messagelabs intercepted just 14 phishing emails; it now stops about 250,000 a month.
Providers of online services will increasingly face technical difficulties in adapting information to small mobile phone or palmtop screens, and enabling transactions to be carried out from wireless devices.
There is a belief within the financial services organisations studied for this report that eCommerce enables product information to be far more accessible and many transactions to be carried out remotely through self-service. Potentially, this changes the value and the role of existing distribution routes such as branch networks for banks and intermediaries and sales forces for insurance companies.
Introduction
A review of press coverage on financial services and eCommerce reveals that there is
plenty of activity happening in both banking and insurance sectors. Companies with
existing sites have been extending the services offered, for example, Abbey National
Mortgage Management Service, Lloyds TSB Wealth Management site and HSBC
Business Banking. They are also looking to extend the service from PC into interactive
TV and mobile telephony (for example Barclays, Nationwide Building Society and
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Abbey National have been testing interactive banking on television). In addition, major
companies previously with a limited web presence have recently launched new
initiatives, notably Norwich Union and Royal & Sun Alliance with its More Than brand.
Customer numbers through the Internet have been growing: Barclays claims 1.7 million,
Lloyds TSB - 1.2 million, and Egg - 1.72 million. However, the start-up investment can
also be considerable; Norwich Union quotes a cost of £250 million for building and
marketing its sitexviii.
How far will eCommerce alter the nature of these businesses as it evolves and develops?
The Internet has been predicted to change business quite fundamentally. The continued
growth and globalisation of electronic marketing has been described as the single biggest
opportunity and threat facing almost every industry, laying the foundation for a new
industrial order because it will change the relationship between producers and
consumers.
Some commentators have argued that in the new Internet age, companies can no longer
rely on the traditional bricks and mortar mode, and managers need to rethink and
reshape their business strategies. This notion may be premature. Data from the research
firm, MORI, shows that many customers prefer face-to-face contact with staff. The
reasons are outlined in Figure 5.10.
xviii ‘The Implications of eCommerce Strategy: UK case studies’ by Tim Hughes, published in CRM in Financial Services, 2002
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Figure 5.10: Reasons for customer preference for face-to-face contact
68
35
13
12
11
10
5
3
0 10 20 30 40 50 60 70 80
Personal/one to one contact
Know who I am dealing with
Like to see things in black and white
Need advice
Trust/advice
Good relationship with current provider
Not treated as a number
Don't like the phone
Source: MORI 2002 Base: All who prefer arranging financial products face-to-face Business Insights
The research also shows that certain products may be more appropriate for selling in a
branch network due to the complexity of the purchase. These products are shown
below.
Figure 5.11: Complex products sell in the branch
66
63
56
54
54
51
43
32
30
18
17
22
21
21
25
20
28
23
14
9
15
12
20
23
18
26
24
38
54
69
0 20 40 60 80 100
Personal pension (250)
Mortgages (456)
Current account (298)
Life assurance (324)
Savings account (542)
Personal loan (183)
Investments (360)
Credit card (269)
Home insurance (498)
Motor insurance (763)
Face to face Combination Remote Source: MORI 2002 Business Insights
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How should financial firms respond?
In response to consumer preference for expensive in-person or telephone customer
service, financial firms will need to ascertain which customers are ready to use online
self-service in order to develop the most appropriate channel strategy and deploy service
staff when it really matters.
For an example of a firm that has created an innovative method of integrating the
‘personal touch’ with their eCommerce activities, please visit the website of the
Newcastle Building Society at www.newcastle.co.uk where the ‘Ask Avril’ facility
enables customers of the Offset Mortgage product to raise questions with a member of
staff. A more advanced version of this function can be found at the Republic Bank and
Trust company www.republicbank.com where customers can enter live chat rooms with
bank personnel.
Figure 5.12: Newcastle Building Society’s virtual customer service assistant
Source: Company website Business Insights
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The impact that new technology may have on traditional financial service companies is
multifaceted. The most dramatic change has been the rise of online banking. For
example it is estimated that there will be as many as 84 million online banking customers
in Europe alone by 2007, up from 23 million in 2000. xix
This trend, which applies on a global scale, indicates that banks and other financial
services providers will need to adapt very quickly to new demands in the sector.
At its most basic, there are a number of technical challenges that finance firms will
encounter in providing online banking. Much of the estimated growth in this area is
connected to an expansion in mobile devices such as cellphones and personal digital
assistants (PDAs).
Providers of online services will increasingly face technical difficulties in adapting
information to small mobile phone or palmtop screens, and enabling transactions to be
carried out from wireless devices.
There have also been changes to the competitive landscape. Sometimes these challenges
have come from major names in related areas, such as insurance companies, who are
making a foray only a little way away from their core business. In other cases, as with
the entry of supermarkets into the financial services market, the challenges have come
from organisations without a traditional financial services profile. The result for the
consumer is the same--increased competition, with downward pressure on prices and the
onus placed on providers to come up with services that meet or create a demand.
Under these new competitive conditions, the value of having an established, trusted
brand is increasingly important. The rise of supermarket banking shows that this brand
does not necessarily have to be traditionally associated with financial services--there is
xix Andy Stern, “The Multi- channel Challenge, Bank Marketing International, July 2003.
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some flexibility permitted, it seems, by consumers, who are prepared to accept new
propositions from companies to whom they are already loyal.
The supermarket example also shows, though, how important the idea of the "one-stop
shop" is for retail banking, as for other forms of service provision.
The challenge for financial service providers, then (and particularly those that already
have an established "brand") is to be able to offer a full range of well integrated,
"bundled" services, available through all of the different channels that customers find
convenient.
Those firms that succeed in the new landscape will need to invest in IT and software
that will deliver multi-channel compatibility and integration. For example, there are a
number of software packages available, which help integrate the electronic capabilities
of the Internet and eBusiness within the operations of typical call centres, which for
many financial services providers have been a mainstay of customer care for some time.
Regardless of whether the customer's initial query has come via voice, fax or email,
applications exist to help call centre staff monitor what that customer has been doing
across a range of other channels - their online transactions as well as their physical visits
to a branch. These applications can track and manage every interaction between
customer and staff. By building up a picture across the various channels available, of
requests that may have been handled by employees spread across centres in remote
locations, firms are able to provide improved customer care, and offer individually-
tailored services.
From an IT standpoint, it seems that banks, insurers and brokerages are also starting to
give renewed attention to their physical branches, as they come to realise that there will
still be an important place for face-to-face transactions in the high-tech world. Here too,
though, there are an increasing number of applications-based solutions available, to help
make the teller/ customer relationship work better. In June 2003, Siebel Systems and
IBM launched in Europe a bank teller application for customer relationship
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management, the Siebel Branch Teller. This gives bank tellers highly personalised
information about customers while they are talking to them, showing all the customer's
interactions with the organisation as a whole.
eCommerce has also changed the basic cost dimensions of business. For example, it has
been estimated that the cost-income ratio for banks using the Internet as the dominant
delivery method is 15%, compared with 55-60% for branch and 35-40% for telephone
delivery.xx The distribution structure may also have to change as the need to own a
branch network or have a sales force is no longer a barrier to entry. The challenges this
creates extend beyond the complications presented by new technology: companies may
have to restructure and introduce cultural change in order to develop a multi-channel
approach. Culturally they may have to change ways of thinking within their businesses
to cope with competitors with different brand values. Previous research of banks found
that 57% of respondents believed that cultural or resource limitations were restricting
the development of eCommercexxi.
In the example below, we consider how Barclays responded to staff who were reluctant
to adopt eCommerce channels for their sales activities.
Example: internal marketing at Barclays
Barclays Capital began using eCommerce systems in 1999xxii. When senior managers
within the Group investigated the reasons the returns from the eCommerce initiatives
were disappointing, they discovered that some of the traders believed that if significant
parts of their job became automated, they would no longer have a role. Consequently,
eCommerce business was not being sold on to clients.
xx ‘The Implications of eCommerce Strategy: UK case studies’ by Tim Hughes, published in CRM in Financial Services, 2002 xxi ‘The Implications of eCommerce for Strategy: UK case studies’ by Tim Hughes, published in CRM in Financial Services, 2002 xxii The Marketing Society Awards, 2002, Internal Marketing, published in Marketing June 23 2004.
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Barclays solution was to educate the internal audience about the benefits of the
eCommerce offering so that new income could be generated.
The campaign idea, Barclays Capital eCommerce 'Activates bigger thinking', grew from
the insight from a bond trader who told the company: 'The most successful traders are
those who take time to think.'
The strategy involved targeting a combination of sales force, traders, investment bankers
and relationship managers with communications and training about the benefits of the
eCommerce sales channels.
The office itself was used as the communications medium, fulfilled through desk-drop
material, the intranet, presentations and seminars. Media placement was decided upon
by tracking employee movement throughout the office, be it in the lift, at the canteen,
their desks, the water cooler, the restrooms or the vending machines.
Originally planned to run for a single day, the good feedback ensured that the campaign
ran for a week, and was subsequently implemented across all other Barclays Capital
offices across the world.
The results of the campaign's success showed that 87% of the target audience read the
brochure, while 88% attended follow-up seminars. Furthermore, 84% said that they now
had a clear understanding of the eCommerce offering. This understanding has ensured
that teams are putting forward revised sales plans reflecting the importance of
eCommerce to the bank's business, with some doubling their original targets.
The impact of the Barclays Capital campaign was beyond expectations, and delivered
levels of effectiveness that would never have been achieved through a desk-drop
brochure alone.
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The strategy, delivered within the original budget, addressed the scepticism of the
audience by creating a thorough and detailed campaign that reassured staff about the
benefits of selling through the eCommerce channels.
The following section is based on a series of interviews with managers from financial
services firms. The interviews evaluate the ways in which marketing principles and
practice have been applied to eCommerce strategies. In particular, the interviews
examine the following: the ways in which organisational structures support eCommerce
activities; the role of senior management is guiding the strategy for eCommerce and the
ways in which firms have tackled the issue of ‘who owns the customer”.
How different companies are approaching eBusiness
The reluctant approach of a life insurance company
While recognising the potential significance of eCommerce, this company had not really
taken steps to address the issue of how eCommerce could integrate with the rest of the
operation. Senior managers admitted to having insufficient hands-on experience of using
the Internet and were unsure how this development could be used most effectively for
their business. Ownership of eCommerce within the organisation had been problematic.
Initially, the marketing function had been responsible for driving strategy and
implementation. However, this had been moved away from the marketing function,
which purely retained responsibility for the website design. Each individual division was
given responsibility for driving eCommerce within its area on the basis that this would
widen the responsibility for taking eCommerce forward across the organisation. The
result had been a complete lack of strategic or coordinated management of eCommerce
and after a short period formal strategic responsibility for eCommerce had been
centralised again to a corporate development function. At the time of the interviews for
the case study, this organisation had not advanced beyond the provision of a basic
website and was in the process of trying to decide the best way forward in electronic
servicing of its primary market – the IFA sector.
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The integrated approach of a national retail banking operation
This organisation has had a presence on the Internet for several years, but it was only at
the end of 1999 that it had really taken the decision to follow an eCommerce strategy
that had been instigated by the Chief Executive. The process was accelerated by
eliminating layers of committees and replacing them with a team of just two other senior
managers: the IT Director and the newly appointed Director of Retail Services. The
strategy for eCommerce seemed to be clear and widely understood. Internet terminals
had been provided in many branches and the Internet accounts were designed to
promote self-service by customers and reducing the number of over-the-counter
transactions. This integrated approach contrasts sharply with those organisations that
have put the majority of their development resources into setting up stand-alone Internet
banking operations. Resources had been mobilised quickly and effectively and significant
efforts had been made in internal communications to ensure staff did not feel threatened
by the changes. However, there was a feeling that there was still a long way to go if the
organisation is to evolve sufficiently to gain the benefits of shifting the burden of
administration work to the customer and re-orientating staff to other more profitable
customer-orientated activities. In particular, it was recognised that to maintain the
momentum, ownership and involvement were required across the organisation. Reaping
the full benefits of a business transformation would only be achieved through a sustained
effort over a long time.
The focus for change in an international insurance company
This international company had been through many changes in recent years as a result of
a number of acquisitions by the parent company, resulting in the need to merge with
other operations. The businesses have been run along distribution channel lines, with
each distribution channel claiming ‘ownership’ of its customers. eCommerce was
described as an agent of change within this organisation and it was recognised that low-
cost distribution would be increasingly important in the future. The absence of a unified
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consensus about the strategy for eCommerce was accompanied by internal conflict for
development resources. The success of eCommerce in this organisation has been
hampered by significant cultural and practical barriers.
The stand-alone Internet bank
In this case the parent bank had set up a separate Internet operation with a distinct
brand. The decision to take this route had been taken following a strategic review by the
new chief executive. The separate Internet bank created a new brand as a means of
targeting a younger group of customers on a national basis. Links with the parent
organisation meant that it could call upon the parent company’s skills and resources
without necessarily being constrained to operate within the same systems or culture.
Quite deliberately the Internet bank had been set up with its own distinct culture and
ways of operating. There was a flat managerial structure and a culture in which all
individuals were encouraged to take on extra responsibilities and take initiative with new
projects, often extending their range of competencies. The Internet bank was situated in
one office and a lot of emphasis had been put on staff working together to improve
customer service. Customer feedback was fed into one operational unit that was
responsible for highlighting areas for service improvement. This contrasts with the
parent bank’s operation, where management hierarchies predominated, communication
lines were long and service improvements could be very difficult to implement. The
management of growth would appear to be a major challenge for the Internet bank. The
current compact structure encourages a high degree of involvement and loyalty amongst
employees. Will it be possible to maintain and foster this culture and manage growth
without creating new management hierarchies?
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Key factors in developing effective strategies for eCommerce
The role of senior management
One theme that is apparent in these case studies is the role of senior management
leadership in setting a strategy and securing the focus and resources to implement it
successfully within the organisation. In the retail banking organisation and the Internet
bank the chief executives acted decisively to define the companies’ approaches to
eCommerce and set this activity as a priority above other activities.
Capabilities required in a changing environment
The nature of the decisions on eCommerce strategy being made in the case studies
depended on the view taken by management on how the organisations could benefit
from the use of eCommerce. In this there was a degree of anticipation of the
characteristics of the future market and a consideration of the resource capabilities and
options open to the organisations. The aspect of strategy relating to the way that
corporate resources are used and allocated introduces the issue of what has become
known as the resource based view (RBV). This perspective takes the view that
successful strategy is mainly about the effective development and utilisation of corporate
resources. Interestingly, in this view, the greater the rate of change in the environment,
the more the organisation must rely on internal resources and capabilities in taking
strategic directions. An RBV perspective on eCommerce would stress the importance of
its potential to change the nature of one of the core assets of the financial services
organisations involved; that is the distribution system.
As outlined earlier, there is a belief within the financial services organisations studied for
this report that eCommerce enables product information to be far more accessible and
many transactions to be carried out remotely through self service. Potentially, this
changes the value and the role of existing distribution routes such as branch networks
for banks and intermediaries and sales forces for insurance companies. The nature of an
important element of the marketing mix is changing and the ability of financial service
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organisations to compete will depend, in part, on the capability of the firm to build a
strong competitive position in the new situation. Achieving success in this would seem
to require an ability to anticipate or even encourage the development of new customer
behaviour together with the capability of the company to deliver to the customer’s new
agenda.
Critical success factors
The critical success factors in exploiting eBusiness to enhance customer management
include:
Value proposition – the products and services offered must provide a compelling value
proposition for the target audience;
Trusted brand – interacting with a computer is highly impersonal, so Internet users will
need far more than the contents of a website in which to place their trust;
Seamless multi-channel customer management – firms must not only be able to offer
services across branches, the Web, email, mobile and other channels, they must also be
able to offer seamless access with high standards of service quality;
Website quality – there are many components of quality in a website, for example,
resilience, ease of navigation, availability of information and security. All must be of a
high standard if the value proposition is to be delivered.
Culture, language, geography – despite the global nature of the worldwide web, the
reality is that geography and ethnicity create huge differences in culture and language.
Successful eBusinesses, such as Amazon, have offered their UK and U.S. audiences
different websites in recognition of the marked differences in language and culture
between the two countries.
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In previous sections we have examined the reasons why eCommerce presents attractive
propositions to firms and customers alike. It would be foolish, however, to ignore the
growing threat of criminal activity on eCommerce as this can undermine consumer trust
in electronic delivery channels. We now consider the nature of the criminal threat and
suggest ways in which firms can protect their customers.
The threat of criminal activity on eCommerce
‘Phishing’ refers to a form of criminal activity that involves the use of fraudulent emails
and websites that are designed to fool recipients into divulging personal financial data
such as credit card numbers, account usernames and passwords. The result of these
scams is that consumers suffer credit card fraud, identity theft and financial loss. The
emails purport to be official bank requests asking customers to confirm their online
banking details either by email or by entering them into a website.
The emails are becoming more sophisticated. Early versions were relatively easy to spot
as fakes. These days they often carry a bank logo and a website link. If you click on the
link, you seem to go through to the bank's genuine website. If you are asked to enter
your Pin number or password in full, this is proof that it is not genuine - banks only ever
ask for certain digits for verification purposes.
Messagelabs, an anti-virus company, has reported a surge in phishing emails over the
past 12 months. In August 2003, Messagelabs intercepted just 14 phishing emails; it
now stops about 250,000 a month.xxiii About 13 million people bank online and Internet
fraud cost the banking industry more than £45 million in 2003.
The National Hi-Tech Crime Unit and Association of Payment Clearing Services
(Apacs) issued a joint warning about another trick. Criminals send emails containing
details of a fictitious order for computer goods and thank the recipient for a non-
xxiii “Alert over Risks of e-banking”, Clare Francis, Sunday Times, August 22, 2004.
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existent order. The email also displays the apparent cost that will be charged to the
recipient's credit card and contains a link to a web address so that the order can be
viewed.
Those unfortunate recipients, who are duped into visiting the site with unprotected
computers, can then have their data attacked by a Trojan virus. Each time the customer
uses the computer to log on to his or her online bank, the Trojan captures keystrokes
that can record secret passwords and Pins.
While the banks have re-enforced their own security to combat fraud, many customers
remain vulnerable. Dave Martin at Logica CMG, an IT company, said: “The banks'
systems are pretty secure, which is why fraudsters are targeting customers - they are the
weakest link”.
The banks alert customers to the risk of fraud by posting messages on their websites and
cash machines. A spokesman for Halifax said: "Online banking is safe - the bank's
website is totally secure. However, hackers rely on holes in the security of your own
computer. It is therefore essential to ensure that you install a personal firewall and have
an up-to-date anti- virus and security system. Any customer who is a victim of online
fraud is protected by our online guarantee. If they have not broken the terms and
conditions of their account, any financial loss will be refunded."
Under the terms of the banking code, customers must not write down their Pin or
divulge it to anyone. If they do, banks may refuse to cover any fraudulent use.
The problems associated with criminal activity extend beyond money. Many victims of
fraud have to wait lengthy periods before the problem is resolved. Moreover, the
criminals may still be active during the waiting period.
Criminals also use techniques to obtain credit-card details. A common practice is for
criminals to target customers who book restaurant tables by telephone and pay by credit
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card. Fraudsters can obtain the telephone details and card number through a corrupt
member of the restaurant staff.
A few days later customers receive a call, apparently from the card firm, claiming there
is a problem with a payment made in the restaurant. The criminal is convincing because
he or she has the customer’s details. All that is needed from the customer is further
verification such as the security code on the card, address, or date of birth.
Counterfeiting is one of the most common types of card fraud. The victim’s card is
"skimmed" using a special machine that downloads the information on the card so that a
replica can be made. Skimming often occurs in restaurants, petrol stations and shops.
Debit cards can be cloned at cash machines. The fraudsters attach a skimming device to
the card entry slot in the machine and hide a mini camera, overlooking the Pin entry pad.
The criminals cannot only replicate the card, they can also find out the Pin, enabling
them to use it to withdraw cash.
Chip-and-Pin cards are designed to combat this type of fraud. Customer details are held
on a chip rather than a magnetic strip, making cards harder to copy. "Card-not-present"
transactions, where a criminal uses customer credit-card details to make a purchase over
the phone or Internet, are now the costliest type of fraud. Gangs can hack into the
databases of retailers and obtain the credit-card numbers of all the people who have
bought something using a card. In some cases, they are then able to hack into the card
issuer's database as well. They can get hold of thousands of credit-card numbers at a
time, and sell them on to criminal gangs for £1 a number.
The fraudsters then look for websites that will enable them to use the cards without
further verification. In some instances fraudulent credit cards have been used to place
online bets. Fraudsters pay any winnings into a separate account.
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Anita Williams at Barclaycard said: "Criminals place a bet on every horse in the race
using different cards to make sure they back the winner. The industry is looking at
changing the law so that winnings could only be paid back on to the card, which would
ensure there was no benefit to the fraudster."
Ways to help customers protect themselves against fraud
Firms can reassure their customers by reminding them of the following security issues:
Installing up-to-date virus checkers;
downloading the free Windows Update patches from microsoft.com, which should
cover any holes in Internet security;
installing a firewall;
if customers receive a phone call from someone claiming to be from your bank, PIN
numbers and passwords should never be revealed in full.
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Chapter 6
Avoiding the Pitfalls of CRM
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Chapter 6 Avoiding the Pitfalls in CRM
Summary
The rewards of CRM will not be realised unless firms avoid the four common mistakes associated with the adoption of CRM systems.
According to a survey of 451 senior executives conducted across 60 countries in 2001, one in every five users reported that their CRM initiatives not only had failed to deliver profitable growth but had also damaged long-standing customer relationships.
Fidelity exemplifies best practice in CRM because it set strategic goals first and developed technology around its new business strategies.
Installing CRM before creating a customer-focused organisation is a dangerous pitfall. If a company wants to develop better relationships with its more profitable customers, it needs to revamp the key business processes that relate to customers starting from account enquiries to after sales service.
There is a point at which communication with customers can turn into harassment. You may want to forge more relationships with affluent customers, but do they want them with you? Attempts to build relationships with disinterested customers can quickly backfire, as you may be perceived as a pest.
Introduction
The promise of customer relationship management is captivating, but in practice it can
be perilous. When it works, CRM allows companies to gather customer data swiftly,
identify the most valuable customers over time, and increase customer loyalty by
providing customised products and services. It also reduces the costs of serving these
customers and makes it easier to acquire similar customers in the future. When CRM
fails, however, (which is often) it can result in nothing more than an expensive mistake.
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In this chapter the potential pitfalls associated with CRM are considered and suggestions
of ways in which these can be avoided are included.
Research by the Gartner group, a research and advisory firm, revealed the sobering
statistic that 55% of CRM projects fail to produce results. Furthermore, according to
Bain’s 2001 survey of management tools, which tracks corporate use of and satisfaction
with management techniques, CRM ranked in the bottom three for satisfaction out of 25
popular tools. In fact, according to a survey of 451 senior executives conducted across
60 countries in 2001, one in every five users reported that their CRM initiatives not only
had failed to deliver profitable growth but had also damaged long-standing customer
relationships.
CRM is a valuable and effective tool; but it will only pay its way if the following pitfalls
are avoided.
Peril 1: Implementing CRM before creating a customer strategy
Any new management tool can be seductive, but software that promises to make a
perennial problem go away is usually non-existent. Many CRM products do just that,
claiming they will automate the delicate and sometimes mysterious process of repelling
low margin customers and luring those in high margin categories. CRM can only achieve
this after a traditional customer acquisition and retention strategy has been conceived
and implemented.
Effective CRM depends on accurate segmentation analysis and realistic marketing goals.
Many senior managers consider CRM as a substitute for a marketing strategy and then
compound the problem by allowing software sales staff to drive their approach to
customer management.
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Example: Fidelity Investmentsxxiv
Fidelity Investments, a mutual fund company based in Boston with $797 billion in assets
under management, integrated marketing with sales delivery to provide better, more
timely leads and generate more cross-sales in its personal investment business. Its
success record confirms the view that deriving value from CRM requires more than
technology. Rather, it requires a fundamental change to corporate processes so that
business goals receive priority over management of bits and bytes.
In 2002, Fidelity recognised that in a sluggish economy, private investors want flexibility
and would seek it elsewhere if the firm did not make its variety of products readily
accessible in a centralised sales environment. With 87 investor centres, five live-
representative call centres, the Internet, email and voice response systems, Fidelity had
ample channels for marketing and product distribution. Yet increased customer activity
through the proliferation of channels made coordination of sales efforts and management
of communications more difficult.
Fidelity aimed to increase wallet share among its existing customers while delivering a
higher return on investment in its multiple channels. Marketing typically generated
500,000 leads per month. These were recorded and routed manually. Getting leads to
the sales team took weeks. By then, the customer's interest had waned and salespeople
often chose not to follow up, knowing that the delay in internal transmission of the leads
had weakened them and would make a sale tougher to close.
With the implementation of a MarketSoft CRM-aided strategy, Fidelity's marketing
department gained the ability to append information to customer files automatically,
giving salespeople more intelligence and efficiency with which to push a sale. As of
January, 50% to 60% of the process was automated. Fidelity has now set a goal to
automate more than 80% of customer data and cross-sales opportunities.
xxiv “Small Players Show the Way”, Kelly Shermach, Retail Banker International, May 30 2003
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Marketing continues to segment customers based on their lifestages, too, and urges sales
representatives to tout certain products based on this segmentation. The mutual fund
group has found that marketing, customer service and sales staff take more
responsibility for leads that are more timely and relevant to customers. Fidelity has tied
compensation to its CRM objectives by developing cross-sell targets and incentives.
Fidelity exemplifies best practice in the financial services industry because it set strategic
goals first and developed technology around its new business strategies.
Peril 2: Rolling out CRM before changing your organisation to match
Installing CRM before creating a customer-focused organisation is a dangerous pitfall. If
a company wants to develop better relationships with its more profitable customers, it
needs to revamp the key business processes that relate to customers starting from
account enquiries to after sales service. The CRM programme must be consistent with
job descriptions, performance appraisals, compensation systems, training and
recruitment. It is also important to evaluate existing departmental, product and
geographic structures. The misguided belief that CRM only affects customer-facing
processes means that managers often overlook the need for changes in internal
structures and systems before investing in CRM technology.
Peril 3: Assuming that more CRM technology is better
Customer relationships can be managed in many ways that do not necessarily require
huge investments in technology. The recruitment of professional and courteous staff will
often be much more effective than state of the art technology.
Peril 4: Stalking, not wooing customers
There is a point at which communication with customers can turn into harassment. You
may want to forge more relationships with affluent customers, but do they want them
with you? Attempts to build relationships with disinterested customers can quickly
backfire, as you may be perceived as a pest.
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In 1996 the Dallas Morning News woke up to the harsh reality that its telemarketing
campaign was annoying customers instead of winning them over. Increasing numbers of
customers were slamming the phone down and circulation gains were slowing. Even the
paper’s circulation director admitted that the only positive thing about the campaign was
that it was inexpensive. He shifted CRM resources away from calling every potential
customer to a programme aimed at enhancing the attractiveness of the offer.
The new campaign entailed a direct mail campaign targeting 12 customer segments that
had been assessed for growth potential. The company also focused on retention, calling
existing customers to check on satisfaction and to offer them the convenience of
automatic payments. By the summer of 2001, the company was projecting that only
33% of its new customers would be acquired by telemarketing – the industry average –
as compared with 56% in 1996. Moreover, retention rates from direct mail were running
at 62% versus 40% for customers who had signed on after a telephone call, a clear
justification for the mailings. Above all, the new approach fit the image the newspaper
wished to project: that of being a household partner, not a pest.
Figure 6.13 and Figure 6.14 highlight the imperatives of CRM and how they relate to
technology.
139
Figure 6.13: The imperatives of CRM
You’ve
identified your
most valuable
customers.
You’ve
calculated
your share of
their wallet for
your goods
and services.
You’ve studied
what products
or services
your customers
need and will
need
tomorrow.
You’ve
surveyed what
products or
services your
competitors
offer today and
will offer
tomorrow.
You’ve spotted
what products
or services you
should be
offering
You’ve
researched the
bestway to
deliver your
services to
customers,
including
alliances you
need to strike,
the
technologies
you need and
the service
capabilities
you need to
develop.
You know
what tools your
employees
need to foster
customer
relationships.
You’ve
identified the
HR systems
you need to
institute in
order to boost
employee
loyalty.
You’ve
learned why
customers
defect and how
to win them
back.
You’ve
analysed what
your
competitors
are doing to
win your high
value
customers.
Your managers
monitor
customer
defection
metrics
Source: Rigby, Reichheld and Schefter, Harvard Business Review, 2002 Business Insights
140
Figure 6.14: The imperatives of CRM, continued
CRM technology can help….
Analyse
customer
revenue and
cost data to
identify
current and
future high
value
customers.
Target your
direct
marketing
efforts better.
Capture
relevant
product and
service
behaviour data.
Create new
distribution
channels.
Develop new
pricing models.
Build
communities
Process
transactions
faster.
Provide better
information to
the front line.
Manage
logistics and
the supply
chain more
efficiently.
Catalyse
collaborative
commerce
Align
incentives and
metrics.
Deploy
knowledge
management
systems.
Track
customer
defection and
retention
levels.
Track
customer
satisfaction
levels.
Source: Rigby, Reichheld and Schefter, Harvard Business Review, 2002 Business Insights
141
Chapter 7 Appendix
Example
Please complete Part A by indicating your expectations of banks in general. Then
complete part B indicating your perceptions of this bank in particular. Please answer on
a scale from 1(strongly disagree with the statement) to 7 (strongly agree).
Part A
Directions: please complete the following questionnaire pertaining to service quality. If
you feel the features in each statement are essential to your judgement of the bank,
please circle 7. However if you feel the features are of little importance, please circle
number 1.
142
Table 7.6: Dimensions of Internet banking service quality
Seventeen dimensions of Internet banking service quality
Banking service product quality (1 dimension)
1 Product variety/diverse features Prodct range Product features
Customer service quality (10 dimensions) 1 Reliability Correct service Keep service promise Accurate records Keep promise as advertised
6 Access Availability for help ATM access Phone access E-mail access Account access when abroad
2 Responsiveness Prompt service Quickly solve problems Convenient service
7 Communication Clear answer Informing customer of important information Availability of status of transactions
3 Competence Ability to solve problems Knowledge to answer questions
8 Understanding the customer Personal attention
4 Courtesy Address complaints in a friendly manner Consistently courteous
9 Collaboration External collaboration Internal collaboration
5 Credibility Confidence in the bank’s service Good reputation
10 Continuous improvement of: online systems banking products customer services
Online systems quality (6 dimensions) 1 Contents Information on products and services online
4 Timeliness Up-to-date information
2 Accuracy Accurate online transactions Errors in interface Errors in conents
5 Aesthetics Attractiveness of the website
3 Ease of use Compatibility User friendly Easy log-in Speed of responses Accessibility of the website Functions that customers need Easy navigation
6 Security Privacy Information transaction safety
Source: Author research and analysis Business Insights
143
Table 7.7: Expectations of an excellent online bank, Part A
Strongly
Disagree………………………Strongly
agree
Reliability
An excellent Internet bank performs its
promised service dependably and
accurately.
1…….2……3…….4…….5……6……7
Responsiveness
An excellent Internet bank deals with my
telephone requests promptly
An excellent bank will respond to e-mail
enquiries promptly.
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Competence
Staff at an excellent Internet bank have the
skills and competence to perform the
service.
1…….2……3…….4…….5……6……7
Courtesy
An excellent Internet bank sends e-mails
that are polite in tone and content
1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights
144
Table 7.8: Expectations of an excellent online bank, Part A, continued
Credibility
The behaviour of staff at an excellent bank
will instil confidence in customers
All information that is issued from the bank
is honest
Call centre staff at an excellent bank are
well informed about the products and
services available
The service delivered by an online bank is
consistent with what is promised in
advertisements.
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Access
An excellent on-line bank provides a
service that is easy to access
The website of an excellent bank is always
easy to download.
I never have to wait in a queue if I have to
contact a telephone help line with an
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights
145
Table 7.9: Expectations of an excellent online bank, Part A, continued
Communication
Communication is clear and easy to
understand
An excellent bank keeps its customers
informed with information that is relevant
to their needs.
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Understanding the customer
An excellent bank will provide the services
I require
The staff of an excellent bank will
understand the specific needs of their
customers
An excellent bank treats its customers
fairly
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Continuous improvement 1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights
146
Table 7.10: Expectations of an excellent online bank, Part A, continued
Continuous improvement
An excellent bank is keen to act upon
customer suggestions for improving its:
online services
banking products
customer services
An excellent bank always acknowledges
customer suggestions for service
improvement.
1…… .2… …3…….4… ….5…… 6… …7
1…… .2… …3…….4… ….5…… 6… …7
1…… .2… …3…….4… ….5…… 6… …7
1…… .2… …3…….4… ….5…… 6… …7
1…… .2… …3…….4… ….5…… 6… …7
Contents
The web-site of an excellent bank contains
the information that customers require
1…… .2… …3…….4… ….5…… 6… …7
Source: Author research and analysis Business Insights
147
Table 7.11: Expectations of an excellent online bank, Part B
Strongly
disagree………………………Strongly
agree
Reliability
My Internet bank performs its promised
service dependably and accurately.
1…….2……3…….4…….5……6……7
Responsiveness
My Internet bank deals with my telephone
requests promptly
My bank responds to e-mail enquiries
promptly.
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Competence
Staff at my bank have the skills and
competence to perform the service.
1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights
148
Table 7.12: Expectations of an excellent online bank, Part B, continued
Courtesy
My Internet bank sends e-mails that are
polite in tone and content
The staff at my Internet bank are always
courteous towards me
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Credibility
The behaviour of staff at my bank instil
confidence in customers
All information that is issued from the bank
is honest
Call centre staff at my bank are well
informed about the products and services
available
The service delivered by my bank is
consistent with what is promised in
advertisements.
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights
149
Table 7.13: Expectations of an excellent online bank, Part B, continued
Access
My Internet bank provides a service that is
easy to access
The website of my bank is always easy to
download.
I never have to wait in a queue if I have to
contact a telephone help line with an
enquiry.
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Communication
Communication is clear and easy to
understand
My bank keeps its customers informed
with information that is relevant to their
needs.
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights
150
Table 7.14: Expectations of an excellent online bank, Part B, continued
Understanding the customer
My bank provides provides the services I
require
The staff at my bank understand the
specific needs of their customers
My bank treats its customers fairly
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Continuous improvement
My bank is keen to act upon customer
suggestions for improving its:
online services
banking products
customer services
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights
151
Table 7.15: Expectations of an excellent online bank, Part B, continued
Contents
The website of my bank contains the
information that I require.
1…….2……3…….4…….5……6……7
Accuracy
My bank performs the service correctly the
first time.
When I have a problem my bank shows a
genuine interest in solving it eg an error in
a statement.
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Ease of use
The web-site of my bank is easy to use.
My bank ensures that staff are always
available to help customers.
1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights
152
Table 7.16: Expectations of an excellent online bank, Part B, continued
Timeliness
The web-site is always kept up-to-date with
information that customers will find useful
1…….2……3…….4…….5……6……7
Aesthetics
My bank has a visually appealing web-site
My bank’s website is easy to navigate
1…….2……3…….4…….5……6……7
Security
I feel safe when making transactions with
my online bank.
My bank respects the need for customer
confidentiality and does its best to protect
1…….2……3…….4…….5……6……7
1…….2……3…….4…….5……6……7
Source: Author research and analysis Business Insights