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: sarah.dougan@btInternet.com

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.

32

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.

33

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

38

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.

40

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

41

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

42

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

48

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.

49

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.

51

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

52

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;

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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

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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

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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

105

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

109

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