Progressive banks-cognizant that independence is at stake-are investing feverishly to build revenue momentum. Having the firepower to acquire is at issue. They realize that today's stock prices are driven by mid-teens earnings per share (EPS) growth that has been underpinned by sources other than top-line growth. Many of these factors are not sustainable.

Core deposit categories are flat or declining, adjusting for bank acquisitions of thrifts. Meanwhile, underlying revenue growth is languishing at three to five percent. Even worse, analysis shows that the majority of new sales are unprofitable in some core businesses, and gross revenue losses, predominately through attrition of profitable customers, are running at 20-plus percent per year, according to First Manhattan Consulting Group (FMCG). Improvements in marketing competency are obviously critical.

Building new models

Customer-level databases are essential building blocks in the effort to become marketing driven, but the appetite for customer insights to make decisions is only partially satiated even with household-level analysis of behavior and profitability. Directly listening to customers is required for many decisions. This method is key to uncovering how needs, attitudes and preferences drive the observed behaviors that, in turn, drive profits.

Demanding clients that had created comprehensive databases and knew of the skews within their customer base spurred FMCG to develop a hybrid research approach called Customer Knowledge Listening (CKL).

Early adopters of this approach discovered that their ability to integrate research findings with database insights can make a critical difference. In traditional research, there is a tendency for "representative sample" surveys to inadvertently over-sample unprofitable customers. The result: the bank is overreacting to their needs and attitudes instead of the institution's most valuable households.

As such, marketers tend to think that most customers are dominated by price considerations and conclude that high-profit customers are irrational or asleep. This viewpoint leads to price promotions, rather than competition based on other more effective forms of providing value to customers.

A related problem is not thinking through in advance how different insights may be needed for different groups of customers. Defining a product's features that will reduce the losses of unprofitable, multi- product usage households with heavy transaction volumes requires different questioning than figuring out how to maximize retention of highly profitable single-product households. "One size fits all" research typically does not probe deep enough into each subgroup and may be aggregating results to produce conclusions that do not relate to either group.

CKL integrates the insights of sophisticated database analysis with the flexibility and speed of adaptable telephone dialoguing to provide both instant feedback and the projectability of quantitative market research.

Retail banks employing this market research hybrid have realized breakthrough improvements-response and conversion rates four to 10 times higher, and 20 to 40 percent savings through lower acquisition costs.

A CKL program typically starts with a database analysis that raises opportunities or leads to the formation of a hypothesis about how to segment customers and add value. Then the effort integrates behavioral and profitability observations derived from a database with insights from highly structured customer dialogues conducted over the telephone. CKL typically uses the bank's customer service representatives, armed with advanced scripting and data capture technology, to conduct structured telephone calls. The objective is first to discover how each segment's needs, attitudes, and preferences converge to drive the current set of behaviors. Alternative options can then be presented to segments with common needs and attitudes.

The central advantage of CKL over traditional methods is its continuous, iterative nature. Each night, telephone responses are matched against database segments to refine the segment definitions, dialogues and offers.

The approach makes preliminary insights available within weeks or even days of starting, as opposed to the months required for conventional methods.

This technique has demonstrated success in a broad range of situations: defining segments useful for product package design; understanding the impact of the root cause of an individual's credit crisis, their non-income financial resources (e.g., equity and savings) and their attitude toward financial products to support credit risk and bankruptcy segmentation; developing sales leads for brokers and insurance agents and underestimating the causes of and potential remedies for deposit attrition.

FMCG was asked by a major bank to analyze its deposit attrition and develop tailored responses. Management already knew that across-the-board rate hikes were economically untenable. Traditional research persistently attributed deposit losses to customer defection driven by either poor service or customer appetite for stock market returns.

The CKL process began with an account-level tracking of thousands of customers who, 18 months previously, held large deposit balances. This tracking database revealed that the bank was losing 25 to 30 percent of these "lush" balances every 12 months. Customer defection turned out to be a minor factor in deposit loss: 80 percent of the balances lost were reductions in average balances held (diminishment), not outright closure of accounts or relationships.

peer-driven learning

The CKL team then developed 10 behavior segments based on account type, rate of diminishment, etc. Hypotheses were then developed about what was happening to the money withdrawn and why. Execution of tailored scripts revealed very different rationales/uses by segment. Approximately 50 percent of the funds, for example, were spent on long- and short-term needs. No deposit rate hike could or would stem this outflow. Other customers were misplaced in their current product and, ironically, sought the appropriate product across the street instead of within the bank.

Within six to eight weeks, the bank had developed specific interventions by customer segment based on analysis of their recent behavior. "Wasted" rate hikes were eliminated, special service/appreciation calls were made and customers were moved to appropriate packages. Bottom line: millions of profit dollars saved and waste avoided.

New York-based FMCG evp Seamus McMahon, vp Chris Kuenne and senior engagement manager Bruce Weiner can be contacted at 212-557-0500.

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