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Extracting ROI From The Engaged Customer A Portfolio Management Approach to CRM Keith Shields Laura Benard Jen Boyer Chief Analytics Officer Client Services Director Marketing Strategy Manager Magnify Analytic Solutions Magnify Analytic Solutions Ford Motor Company 10/28/2014

Magnify DMA presentation 2014

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Extracting ROI From The Engaged Customer

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Page 1: Magnify DMA presentation 2014

Extracting ROI From The Engaged Customer

A Portfolio Management Approach to CRM

Keith Shields Laura Benard Jen BoyerChief Analytics Officer Client Services Director Marketing Strategy Manager

Magnify Analytic Solutions Magnify Analytic Solutions Ford Motor Company

10/28/2014

Page 2: Magnify DMA presentation 2014

Q. How related are the following two topics?

Consumer Loan Management

CRM MarketingVS.

1

Page 3: Magnify DMA presentation 2014

Q. How related are the following two topics?

a. Not At All Related

Consumer Loan Management

CRM MarketingVS.

2

Page 4: Magnify DMA presentation 2014

Q. How related are the following two topics?

b. Somewhat Related

Consumer Loan Management

CRM MarketingVS.

3

Page 5: Magnify DMA presentation 2014

Q. How related are the following two topics?

c. Very Related

Consumer Loan Management

CRM MarketingVS.

4

Page 6: Magnify DMA presentation 2014

Both Consumer Loan Managers and CRM Managers…

Start with a portfolio of customers

Have access to enormous amounts of customer data

Can manage their portfolio using predictive analytics

Both are responsible for the long term value of their assets

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Page 7: Magnify DMA presentation 2014

Big Data and new tools are quickly changing this landscape

We can apply learnings from the Consumer Loan Industry to manage our customer portfolios…

Why is this an important discussion for us?

Spending on Marketing Analytics is expected to increase 72% over the next 3 years*

Only 32% of marketing projects use analytics

Most companies do not have the right talent to fully leverage Marketing Analytics

*2014 February; The CMO Survey.org Highlights and Insights

“…77% of marketers surveyed believe data on customer purchase histories can improve marketing ROI, yet only 21% actually use it. Likewise, 88% believe behavioral data can do the same, but only 20% use it”

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Page 8: Magnify DMA presentation 2014

CONCEPTUAL NONSENSE FROM THE SCIENTIST…

Page 9: Magnify DMA presentation 2014

Defining “Portfolio Management”

A portfolio of consumer loans, not securities.

• Portfolio Management, loosely, is the application of a set of analytically-driven collections and servicing techniques aimed at forecasting and maximizing a loan portfolio’s cash flows.

• Quantifying credit risk and predicting future payment is at the heart of portfolio management.

• Credit Risk and CRM seemingly dominate the Big Data landscape. Next slide…

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Page 10: Magnify DMA presentation 2014

“Big Data” infects the CRM and Credit Risk disciplines more than almost any other…

Why the pervasive interest in Big Data?• Largely to satisfy CRM and credit risk needs…

Data: Information Week Analytics, Business Intelligence and Information Management Survey of 417 business technology professionals at companies using or planning to deploy data analytics, BI or statistical analysis software, October 2012

CREDIT RISK NEEDS

CRM NEEDS

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Page 11: Magnify DMA presentation 2014

(Re)Defining CRM

A portfolio of customers, not loans.

• Portfolio Management CRM, loosely, is the application of a set of analytically-driven collections and servicing marketing techniques aimed at forecasting and maximizing a loan portfolio’s customers’ cash flowspurchases.

• Quantifying credit defection risk and predicting future paymentpurchases is at the heart of portfolio management CRM.

• Incidentally, the Wikipedia definition of CRM is:

• CRM is a system for managing a company’s interactions with current and future

customers. It involves using technology to organize, automate and synchronize sales,

marketing, customer service, and technical support.

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Page 12: Magnify DMA presentation 2014

Portfolio Management and CRM…

From an Analytics perspective, these are the same. The only difference lies in the target variable and predictors.

• PD = 1 / (1+e-z), where z = A + Bx1 + Cx2 + Dx3 + …

• Portfolio Management: • PD = Probability of DEFAULT• x1 = credit score, x2 = days past due, x3 = loan to value ratio, etc…

• CRM: • PD = Probability of DEFECTION• x1 = prior purchases, x2 = months since last purchase, x3 =

unfavorable tweets, etc…

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Page 13: Magnify DMA presentation 2014

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• Auto Pre-Approval

• Merchant Cash Advance and Small Business Loans

• Pier-to-Pier lending

• Student loan servicing

• Business Rules Engines

Others have recognized and leveraged the overlap…

Page 14: Magnify DMA presentation 2014

The Portfolio Management Paradigm

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CASH FLOWS$A1

Customer makes partial payment

$A2

Loan impaired, collections calls

ensue

Customer pays off rewritten balance

Time

t=0t=1 t=3

Customer’s loan is rewritten for empirically-derived optimal amount

• The value of this “bond” (loan) is $A1/(1+i)1 + $A2/(1+i)3

• This paradigm applies equally to CRM. The portfolios managed by CRM professionals are the customer bases of the companies they serve.

Managing a loan portfolio requires that we turn impaired (high credit risk) loans into cash-flowing bonds…

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Page 15: Magnify DMA presentation 2014

Adopting the PM paradigm for CRM…

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An engaged customer is a bond. The effectiveness of our CRM strategies determines the yield of that bond.

15

CASH FLOWS$A1

Customer comes in for service

$A2

Customer signs up for rewards program

Customer purchases a new vehicle

Time

t=0t=1 t=3

Customer visits company website

• The value of this “bond” (customer) is $A1/(1+i)1 + $A2/(1+i)3

• Customer Lifetime Value (CLV) models help quantify the value of customer behaviors and CRM tactics. The success of CRM can be measured by the extent to which CLV increases, irrespective of test-control results.

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Page 16: Magnify DMA presentation 2014

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Marketers already recognize the need to view their customer base as a portfolio…

12%

14%

19%

19%

24%

35%

42%

42%

45%

53%

71%

0% 10% 20% 30% 40% 50% 60% 70% 80%

In-store / agent exchanges

Analyting is better than what we…

Order history

Finance / customer payment data

Sales executive insights

Third-party demographic data

Social media data

User survey and preference data

Customer service feedback

Online customer profile

Predictive analytics around lifetime…

Types of Data that Marketers Worldwide Would Like to Add to Their Customer Data Profile

(1Q2013)Source: CMO Council and SAS

% of respondents

• 71% of marketers want “predictive analytics around lifetime value” added to their customer data profiles…

• Lifetime value models are nothing more than a forecast of cash flows at the customer level…

• Survival analysis, vintage-level monitoring, and other popular PM disciplines are a must…

Page 17: Magnify DMA presentation 2014

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But CRM trails Credit Risk / Portfolio Management in the adoption of Big Data…why?

• Regulation

• Accountability is “fuzzy”

• Metrics are inexact and not directly reflective of behavior.

• Secondary markets

• What would CRM analytics look like if marketers were forced to buy, sell, and “value” their customer portfolios?

• Metrics are inexact and not directly reflective of behavior.

“…77% of marketers surveyed believe data on customer purchase histories can improve marketing ROI, yet only 21% actually use it. Likewise, 88% believe behavioral data can do the same, but only 20% use it”

Page 18: Magnify DMA presentation 2014

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• Take a longitudinal view of the customer. This is the only way to get an accurate outlook and valuation. Implies a need for a CLV model…

• CLV = p(sale at time 1)*E($ profit from sale) / (1 + d)1 +

p(sale at time 2)*E($ profit from sale) / (1 + d)2 +

p(sale at time 3)*E($ profit from sale) / (1 + d)3 + …

• Engagement is measured longitudinally; enticement is measured cross-sectionally.

• Quantify the impact of “mix shift” on outcomes of interest.

• Establish “regulatory-like” rigor around model validation.

• Understand that the two share not only a brain, but also a nervous system. Next slide…

What PM practices will help our CRM?

Page 19: Magnify DMA presentation 2014

ENOUGH CONCEPTUAL NONSENSE FROM THE SCIENTIST. NOW SOME PRACTICAL STUFF THE MARKETER…

Page 20: Magnify DMA presentation 2014

Does This Change the Way We Practice CRM?

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We think so, especially in the following areas:

Measuring Success

Metrics should be more bottom-line oriented and exact

Shift from basing success solely on campaign performance to understanding performance of the portfolio

Predicting Outcomes

Predictions should go beyond the “next transaction”

All available data should be leveraged to proactively manage customers throughout the lifecycle to desired business objectives

Influencing BehaviorCRM becomes our “sand box” for going beyond understanding just correlations; to understanding causation as a way to change customer behavior

Page 21: Magnify DMA presentation 2014

Predicting Outcomes

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Transaction vs. Portfolio Management approach to predicting outcomes….

Short-Term: Optimizing campaign performance to campaign objectives

% In-Market

Longer-Term: Enables management of entire portfolio to business objectives (i.e. increasing CLV)

Segment Size

Op

po

rtu

nit

y

Page 22: Magnify DMA presentation 2014

Influencing Behavior

Test and learn approach will determine how we influence and change the long term

health of our customer portfolio…

Monitor drivers across the portfolio…

Design treatments, messaging and investment based on customer value, individual customer drivers and predicted outcome

Every CRM treatment should be analytically driven…ensuring that every CRM dollar spent is working to move the customer into a more valuable state

Understand Drivers of Desired

Outcomes

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Page 23: Magnify DMA presentation 2014

Measuring Success

Strategic

Operational

Tactical

Portfolio HealthWhat is the value of my customer portfolio?What is the mix and risk of my customer portfolio?

Dashboard and Diagnostics Which champion vs. challenger campaign performs best?Which actions influence customer outcomes both positive and negative?

Performance and ForecastingDo I understand both rear-ward and forward-looking performance?What is the aggregate impact of our CRM initiatives on improving sales?

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Page 24: Magnify DMA presentation 2014

Thus Ends the Prepared Remarks…

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• Understand that the job of CRM is to extract repeat sales and revenue from the portfolio of customers. The best way to do this is make sure that customers remain engaged over a long period of time.

• If a customer is a bond, then improving engagement, in effect, increases the life of the bond.

• CRM groups should measure themselves with this standard in mind.

• Keeping customers in their “most valuable state” is a matter of advanced analytics and strong marketing tactics…both of which are done with an eye towards engagement.

• The disciplines applied routinely to the management of loan portfolios are equally applied to CRM. Champion / Challenger tests are simply one tool in a larger toolbox.

• Thank you for your time and attention.

Page 25: Magnify DMA presentation 2014

“JUDGE A MAN BY HIS QUESTIONS RATHER THAN HIS ANSWERS.” --VOLTAIRE