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Uncovering implicit customer needs for explicit product positioning:

Growing Prudential Annuities’ Variable Annuity Sales

Jac HerschlerSVP and Head of Business Strategy, Prudential Annuities

V. KumarLenny Chair Professor

Denish ShahAssistant Professor

Copyright © Dr. V. Kumar

3Q 2009 Asset Rankings($ millions)

1) Source: VARDS 3Q’09 report. Advisor-sold, excludes group/retirement plan contracts.

3Q09

Variable AnnuityVariable AnnuityAssets Under ManagementAssets Under Management(1)(1)

$36,023

$46,554

$47,935

$51,387

$52,166

$54,518

$56,586

$74,554

$83,324

$86,115

AEGON

ING

Pacific Life

Hancock

Ameriprise

Lincoln

AXA

Prudential

Hartford

MetLife

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Prudential is one of the leading providers ofVariable Annuities

Withdrawal-Based Lifetime Income Guarantees Now the “Norm”

Prudential Financial:

Assets undermanagement: $641 Billion(09/30/09)

Approx. 41,000 employeesin 37 countries (Dec, 2008)

Businesses: LifeInsurance, Annuities,Retirement-relatedServices, Mutual Funds,Investment Management,Real Estate Services


Variable Annuities(VA) : Popular retirement investmentproduct.

A VA is a combination of an insurance contract and afinancial investment.

Market flooded with VA products

Over 1000 VA products from 100+ companies

Project Background

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Offers protection against certain riskssuch as longevity risk & sequence risk

Earns a monetary return


Project Team Composition

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ProjectExecution

Marketing Communications

June Amori Tom Winer

Marketing Research

Lee Haydon

Academic Researchers

Dr. V Kumar Dr. Denish Shah

Business Strategy

Jacob M Herschler

Corporate Communications/Legal

Lisa Bennett


Research Motivation

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KEY OBJECTIVE Grow Prudential’s VA business

POTENTIALOPPORTUNITY

Behavioral Risk* not effectivelycommunicated by competitor firms

KEY CHALLENGE How to leverage the concept ofBehavioral Risk?

*Risk of emotionally driven behavior adversely affecting one’s investment decisions.

KEY SEGMENT Investors in the Retirement Red Zone®


Leveraging the concept of Behavioral Risk

POTENTIALPROBLEMS

Risk theories getcomplicated

Executed at aggregatecustomer level

Easy to replicate bycompetitors

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Buy this VA. It willalso protect you fromBehavioral risk.

Conventional Marketing Approach

Financial Planner Investor

Proposed Approach:

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A Framework forUncovering Implicit Needs for

Customized Product Positioning



Blending Marketing Theory, Research & Science

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Marketing Theory& Research

MarketingScience

Key Stages of theFramework

Uncovering theimplicit needs

Quantifying theimplicit needs

Implementingcustomized product

positioning

Apply Multivariate techniquefor uncovering & optimizingthe number of dimensions

Research latentneeds for the

product/service

Specify and estimate asuitable statistical

measurement model

Develop a suitableScale

Adopt customizedmarketing andsales approach

Apply a scientific method formeasuring the financialimpact of the strategy

PHASE 1

PHASE 2

PHASE 3

Focus GroupLiterature ScanMarket Survey

ScaleDevelopment

Adapt proactivemarket orientation

theory

Exploratory FactorAnalysis,

Varimax Rotation

Hierarchical BayesianMeasurement

Model

Econometric ModelForecasting Model

Bayesian Estimation

Blending Marketing Theory, Research & Science

9

Marketing Theory& Research

MarketingScience

Key Stages of theFramework

Uncovering theimplicit needs

Quantifying theimplicit needs

Implementingcustomized product

positioning


PHASE 1

PHASE 2

PHASE 3


PHASE 1:Uncovering Implicit Needs

What emotions* influence investors’retirement investment decisions?

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* For the purpose of this study, emotions broadly refer to affect, feelings, attitudes and behavioral tendencies that potentially contribute to behavioral risk in the Retirement Red Zone®


Questionnaire Design

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Preliminary Questionnaire 11 constructs

33 measurement items

200 Investors

Final Questionnaire 5 constructs

14 measurement items

1008 Investors

Study administered online from:Nov. 23, 2006 to Dec. 3, 2006Fear

Regret

Myopia

Optimism

Pessimism

Obsessiveness

Aggressiveness

Anxiety

Susceptibility

Impatience

Complacency

Fear

Regret

Inertia(Obsessiveness + Complacency)

Aggressiveness

Susceptibility

EstablishCONSTRUCT

VALIDITY


PHASE 2:Quantifying Implicit Needs

To what extent are the relevant emotionsprevalent in investors?

Copyright © Dr. V. Kumar 12


Quantifying Implicit Needs

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Hierarchical Bayesian Measurement Model Individual emotions are specified as latent factors

Model Results are employed to compute theRetirement Emotion Quotient (REQ) as the weightedsum of factor scores of each respondent.


Interpreting the REQ Score

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REQ Score Percentile

18 99

22 95

25 90

26 85

27 80

29 75

30 70

31 65

32 60

33 55

REQ Score Percentile

34 50

35 45

36 40

38 35

39 30

41 25

42 20

44 15

46 10

48 5

52 1

This means that 40% of the U.S. population in theRetirement Red Zone have a higher degree of emotions

when the REQ Score is 36

MINIMUMEMOTIONS

MAXIMUMEMOTIONS


Analyzing the drivers of the REQ score

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Two respondents with the same REQ Score (= 36) but different mix of emotions

Fear Regret Aggressiveness Inertia Susceptibility

Fred


Martha

94%

Percentage Individual Emotion Score (PIES) – indicates which emotionsdominate within each individual

For Martha: PIES Inertia == = 50%Score on Inertia

Maximum score possible on Inertia 816


PHASE 3: Implementation

How did Prudential leverage the knowledge ofimplicit needs of the customers for customized

product positioning?



How was the EQ Tool implemented? (cont.)

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EQ Tool was packaged as an electronic tool resident on a secure server.It was remotely accessible to Prudential's 60,000 FPs across the United States

SURVEY(Electronic

Format)

REQScore +

PIES

FP* Guides for ScoreInterpretation &

Product positioning

EQ TOOL KIT

* Financial Planner

Screen-shot of the Online EQ Tool’s Introductory Screen


Screen-shots of the EQ Tool Report




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Five FP Guides (corresponding to the five dominant emotions) weregenerated to explain how to interpret the results of the EQ Tool and tie thoseresults to sales efforts


Recall Fred’s Profile



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How did Prudential marketthe EQ Tool?

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Launch was accompanied by: A research report summarizing the findings of

EQ research Title: “Behavioral Risk in the Retirement Red

Zone” Training seminars for FPs to understand

behavioral risk and its implications for investors 100+ Seminars attended by about 2000 Financial

Planners Technical support

E-marketing team Traveling website experts for on-site support

Press Releases/Webinar


EQ Tool Launch Video / Webinar

How was the EQ Tool implemented in the marketplace?



Impact of EQ Tool


Measuring the impact of EQ Tool byemploying empirical models with

Bayesian estimation

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ModelPrudential’s

VA Sales

Firm specific Factors

Industry specific Factors

Macroeconomic Factors


AdvertisementNumber of ProductsUnemployment Rate

S&P 500

Forecasting Model

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Model Calibration Time: 35 months (Time before EQ Tool launch)

Estimation Approach: Bayesian

MAPE = 6%

VA sales= f


Forecasting Model (cont.)

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EQ Tool Impact=Difference in VA Sales (Actual-Predicted) during the prediction period

EQ Tool Impact = $455 to $480 million (Based on repetitive draws of the parameter estimates)

Model Prediction Time: 13 months (Time after EQ Tool launch)


Impact on Potential Customers/Investors

The EQ Tool enabled the investors to learn about theirown behavioral tendencies and made them morereceptive to Prudential’s VA products

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BEFORE USING THE EQ TOOL AFTER USING THE EQ TOOL

60%felt that they did NOT

exhibit any Behavioral Risk

75%desired protection

against Behavioral Risk


Impact on Financial Planners

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“……This is an invaluable tool for field agents as weparticipate in those important conversations about a

customer's plans for the future……..."

“The EQ tool proved successful ……… new, unique anduser-friendly ways to help investor's understand the

psychology of investing……. helpful and engaging wayto bring the concept of behavioral finance to life.”

Francis MarantalField Sales Associate

Elaine ChenManager of Agency Training, Northern California Agency


Impact on Financial Planners (cont.)

“…Emotions can causeconsumers to react tomarket uncertainty inways that could harmtheir portfolio.”

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Distributor’sOwn Marketing

Effort

Impact on Prudential Customer-centric product positioning and differentiation

Sales presentations now differentiated for each customer

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This VA product willprotect you from

vulnerabilities due toFear & Inertia

Prudential’s FP Martha

Fear = 94%Regret = 17%

Aggressiveness=0%Inertia=50%

Susceptibility=0%


Impact of EQ Tool onPrudential’s Business Practice

32Copyright © Dr. V. Kumar

Before EQ Tool Launch After EQ Tool Launch

Product Positioning Aggregate level Individual customer level

Market Orientation Responsive Proactive

Sales & MarketingApproach

Satisfy expressed needsSatisfy latent or unarticulatedneeds

Average QuarterlySales GrowthPerformance

Outperformedcompetition by 11%

Outperformed competition by19%

Incremental Sales LiftDue to EQ Tool n.a. Greater than $450 Million (13

months from launch)


($ millions)

1) Source: VARDS 3Q’09 report. Advisor-sold, excludesgroup/retirement plan contracts.

3Q09

3Q09 Advisor-Sold3Q09 Advisor-SoldVariable Annuity SalesVariable Annuity Sales(1)(1)

$795

$841

$860

$981

$1,083

$1,426

$1,826

$2,909

$3,231

$5,828

AXA

Pacific Life

AEGON

Nationwide

SunLife

Ameriprise

Lincoln Financial

Jackson National

MetLife

Prudential

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Long Term Impact

2009 Boomer Market Advisormagazine’s “Reader’s Choice”

Award:

5th consecutive year for having the#1 living benefit “that best addressesthe income and longevity issuesclients face.”

“The company’s Retirement RedZone® marketing and educationcampaign, in particular, getskudos for explaining therelationship between emotionsand investment decision-making.”

# 5 # 1


Looking Forward…..

EQ Index

Work with for the 40-year old cohort

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THANK YOU!


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