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8/6/2019 Retail Business Strategy
http://slidepdf.com/reader/full/retail-business-strategy 1/21
WHITE PAPER | 2005
Getting it Right:
Turning Customer Value into CompetitiveAdvantage in Retail Banking
8/6/2019 Retail Business Strategy
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3
The only value your company will ever create is the value
that comes from customers–the ones you have now and
the ones you have in the future. To remain competitive,
you must figure out how to keep your customers longer,
grow them into bigger customers, make them more
profitable and serve them more efficiently.
This is the new mantra of modern-day business, and it
has profound implications for how retail banks compete
and win.Traditionally, customer strategy in retail banking
has been “product-out” rather than “customer-in.” Most
banks are more interested in the value they can get from
customers rather than the benefits they can create for
customers. They focus on cross-selling more and more
products and services, rather than meeting customer
needs more effectively and comprehensively.
That’s why we’re excited about this white paper by SAS
and Peppers & Rogers Group. It meets these challenges
head on, detailing the next evolution of customer-based
business strategies within retail banking.These strategies
are backed up by practical advice for acquiring,growing
and retaining the most profitable customers now and in
the future.
For more than a decade we’ve been helping compa-
nies get the most value from their customers. We hope
this paper helps you in that endeavor.
by
Don Peppers and
Martha Rogers, Ph.D.,
Founding Partners,
Peppers & Rogers Group
Generating growth in retail banking is challenging.
Profitable growth through mergers is inhibited by a
decreasing number of opportunities and increasing price
premiums. Establishing a competitive advantage
through improved service quality is becoming more
difficult, as service and customer satisfaction steadily
improve across the industry. Product innovations are
short-lived,and most are considered commodities. Faced
with these trends,banking executives are searching for a
sustainable competitive advantage that will fuel organic
customer growth.
I believe that now, more than ever, customer
knowledge provides the path to profitable organic
growth in retail banking. I believe the key to creating a
sustainable competitive advantage lies in a bank’s ability
to harness critical customer insights, which only that
bank has about the customer, and then to act on that
knowledge in ways that create intimacy with the
customers that matter most.
This research paper offers fresh insight into how retail
banks can use customer knowledge as the rudder to
guide the investment of limited resources–both dollars
and people–toward actions that add profitability. In this
paper,experts from SAS and the Peppers & Rogers Group
illuminate the importance of measuring the results of
these investments at the customer level. Following their
precepts will create a learning organism that continuous-
ly improves outcomes,which will create a more loyal and
profitable customer franchise for your bank.
For nearly 30 years, SAS has been giving retail banks
around the world The Power to Know.
byDr. Jim Goodnight,
CEO,
SAS
©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.
Foreword: Fueling the Customer Growth Engine
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CONTENTS
Introduction: Business as Unusual ....5
Leadership in Question..........................6
Getting it Right ........................................7
Refocus Your Strategy ............................7
Retool Your Mechanics........................10
Realign Your Organization ................14
Where Do You Stand? ..........................18
Conclusion: Now is the Time ............20
©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved.Peppers & Rogers Group is a division of Carlson Marketing Group.4
Jeff Gilleland, Financial Services Industry Strategist ,SAS
Jeff Gilleland has over 25 years of
experience in building profitable
customer franchises for Fortune 500
companies. He has held senior
marketing positions within the
financial services and consumer pack-
aged-goods industries. Before joiningSAS in 2002, Gilleland drove the development of
legacy Wachovia’s CRM strategy, which is regarded as a “best
practice” in the financial services industry. Applying his
experience in “1to1” and “classical” marketing, he offers an
informed view on how to build organizational capabilities
that enable knowledge-based strategies to increase customer
affinity and profitability.
For more information contact Jeff Gilleland at [email protected]
Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking
Featured ExpertsMichael Lengel, Principal ,Peppers & Rogers Group
Michael Lengel has over 15 years of
experience consulting to some of the
world’s finest management teams. He
has advised clients in a diverse
set of vertical markets, including
financial services, consumer, retail,
hospitality, transportation, and indus-trial sectors. Before joining Peppers & Rogers Group, Lengel
was an officer-level consultant with Monitor Group, a premier
strategy firm, and head of strategy for CMGI Solutions, the
professional services division of the world’s largest Internet
venture, incubating and operating company.
For more information contact Michael Lengel at [email protected]
ContributorsRandy Betancourt, Director , Financial Services Solution
Center, SAS
Gary Cokins, Strategist , World Wide Marketing, SAS
Philippe Meyer, Director , Financial Services, SAS Europe,
Middle East & Africa
Geert Massa, Director , Financial Services, SAS International
Pavan Shidhaye, Product Manager , Business Intelligence Solutions,SAS
Scott Lochridge, Managing Partner , Peppers & Rogers Group
Jaci Allen, Senior Consultant , Peppers & Rogers Group
Deborah Brault, Consultant , Carlson Marketing Group
Taylor Duersch, Director , Decision Science Services,
Carlson Marketing Group
Christopher Helm, Executive Editor, Marketing and Client Deliverables,
Peppers & Rogers Group
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5
Introduction: Business as Unusual
The financial services industry is the recognized leader in customer relationship building. Retail banks in
particular are praised as pioneers in deploying best-in-class strategy and technology to develop
profitable relationships with customers. Much of this progress is built on gaining insight into customer value.
According to a new research study by SAS and Peppers & Rogers Group titled Measuring Customer Value in
Retail Banking, on average, retail banks have spent over six years developing and utilizing customer value
metrics. Given this experience, most retail banks report a high degree of confidence in the accuracy of their
customer value models and the insights they produce.1
But just behind this veneer of success lie persistent
challenges. Retail banks have long known that growing
customer loyalty, customer profitability and share-of-wallet
are keys to competitive advantage. While this has not
changed, many banks remain challenged to incorporate
customer value strategies into a product-driven business
model.As a result,achieving a competitive advantage from
customer value has remained elusive for many retail banks.
According to SAS and Peppers & Rogers Group, just 34% of
banks say that customer value insight currently brings an
advantage over their competitors.Where have banks gone
wrong? More importantly, how can they get it right?
Written for senior executives, “Getting It Right: Turning
Customer Value into Competitive Advantage in Retail Banking” is a white paper designed to infuse new
thinking into existing strategies for measuring and acting on customer value in retail banking. Drawn from the
combined thought leadership of SAS and Peppers & Rogers Group, the white paper is full of practical,
real-world advice on how retail banks can increase profitability from customer value insight without a
business model overhaul. Whether it is refocusing strategy, retooling the mechanics of measurement or
realigning the organization around customers, this paper is a problem-solving guide on how retail banks can
turn customer value insight into competitive advantage.
IN BRIEF
This white paper is a practical guide for senior
decision makers in retail banking. It provides
straightforward advice on:
• Unlocking your customers’potential value to
drive organic growth
• Identifying which tactical steps to take first
to make your customer strategy pay off
• Boosting profitability from customer value
insight without a business model overhaul
Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking
WHITE PAPER 2005
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©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.6
At first glance, retail banks appear to have solved the complex
processes of measuring and acting on customer value.By under-
standing which customers are most valuable to the enterprise
(and which are not), banks can enhance a range of marketing,
sales and service activities.The anticipated
results are loyal customer relationships that
increase profit,growth and differentiation.
“The logic remains sound,and it makes
even more sense as M&A activity slows
down,” says Jeff Gilleland, Financial
Services Industry Strategist, SAS.“When a
bank uses customer value insight to
market, support and sell products to the
right customers, it fuels organic growth
and gains a competitive edge.” Research
shows that retail banking executives agree. Nearly half of
all respondents to the SAS and Peppers & Rogers Group
study believe that customer value knowledge drives success at
their organization.
But there’s a catch. “Many retail banks have yet to see these
benefits,” says Gilleland. Consider these facts: Retail banking
customers are typically the least loyal among the financial
services industry. Forrester reports that just 7% of consumers
own three or more types of products with
their checking account provider; and only
30% of the average bank’s customers will
consider it for future deposit or credit
product purchases.2
The result is that
competitive advantage from profitable
customer relationships has not materialized
for many banks. According to the SAS and
Peppers & Rogers Group study,only 34% of
respondents believe customer value insight
currently provides a competitive advantage.
This state of under-performance will not improve until retail
banks adjust how they strategize around, measure and act on
customer value knowledge. Competitive advantage–and all of
the higher profit that comes with it–will stay out of reach.
Leadership in Question
“The logic remains sound...When
a bank uses customer value
insight to market, support and
sell products to the right cus-
tomers, it fuels organic growthand gains a competitive edge.”
—Jeff Gilleland,Financial Services
Industry Strategist, SAS
Low Degree12%
Yes34%
No33%
Uncertain33%
High Degree44%
Moderate Degree44%
Making Customer Value Add Up
The confidence of banks in customer value to drive success is well placed. Competitive advantage from
customer value, however, has yet to materialize for many banks.Closing that gap will drive rich reward.
Source: Measuring Customer Value in Retail Banking by SAS and Peppers & Rogers Group
Most Banks Believe Customer
Value Drives Success
Banks Split on Whether Customer Value
Offers Competitive Advantage
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It is up to the banks to engineer a turnaround. “An overhaul
of the retail banking business model is not practical or
necessary,” says Michael Lengel, Principal, Peppers & Rogers
Group. “But banks must improve in several areas when it
comes to strategizing around, measuring and acting on
customer value.” What follows is a current assessment of
where retail banks often go wrong followed by actionable
advice on how to “get it right.”The best practices are designed
to help banks achieve the profit and competitive advantage
that customer relationships offer.
1 REFOCUS YOUR STRATEGY
Current StateOrganic growth by attracting and retaining loyal customers is
the top business concern among bank CEOs, claims Gartner
G2.3 “As merger activity declines, banks are more focused than
ever on organic growth as the key to improving shareholder
value,” says Gilleland. “For the banks engaged in mergers,
higher acquisition price premiums have increased the need to
retain and grow the customer franchises of acquired banks in
order to make the mergers pay-off.” Banks rely on customer
relationship building to achieve these goals, but success has
proven hard to come by.What stands in the way?
At the strategy level,retail banks are focused on “product-out”
rather than “customer-in”. Rather than asking: What value can
we provide to customers,banks spend a lot more time trying to
squeeze more value from customers.This approach reinforces a
product-driven business model where separate lines-of-
business–mortgages, credit cards, etc. –work independently to
secure revenue. “If your strategic focus is to sell as many
products as possible, customers get swamped by irrelevant
marketing and sales offers and they’re subjected to poor
experiences,”says Gilleland.“It’s very difficult to acquire,grow or
retain profitable customers in that kind of environment.”
How banks destroy profitability
The strategy to “sell as many products as possible” results in
tactical moves that can actually destroy
profitability. Cross-selling is a case in point.
A common assumption among retail
banks is that cross-selling leads to greater
share-of-wallet, loyalty and profit; but the
numbers say otherwise. In fact, early work
by First Manhattan Consulting Group
revealed that 75% of cross-sold accounts in
retail banking are not profitable–or 3 out
of every 4 cross-sells.4
Here’s why: Customers are not equal.
Despite their best efforts to understand
customer value and potential, banks wasteresources by marketing and selling
products to customers or prospects that
are not likely to become more profitable.
Aggressive cross-selling may boost the
number of accounts per household over
a given time period, but customer
7
Getting it Right
8.95
Mean scores
Most
important
Moderately
important
8.39
8.02
7.93
7.86
7.82
7.8
7.67
7.66
7.62
Attracting and retaining loyal customers
Increasing market share
Balancing short-term goals with long-term strategy
Improving productivity
Responding to regulatory changes
Attracting and retaining skilled workers
Building a responsive, flexible organization
Using technology for competitive advantage
Managing risk on an enterprise
Focusing on core competencies
Bank CEOs Business Concerns
Retail bank CEOs rank securing organic growth by attracting and
retaining loyal customers as top priority, finds Gartner.
Source: Gartner
Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking
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©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.8
household profitability goes down because many of the
newly sold products are not used profitably.
For example,a customer may purchase a new line-of-credit
in order to eliminate fees on other accounts. If the customer
never uses the line-of-credit, overall profitability is decreased
when the cost of selling and maintaining the unused line-of-
credit is factored in. In other cases, cross-sells only manage to
entice current customers to shift their dollars away from one
banking product to another, a profit killer known as
disintermediation. For example, a customer may revolve a
high balance on her credit card and her bank may proactively
sell her a secured home-equity line-of-credit, thereby shifting
the same dollars from a higher margin credit card to a lower
margin home-equity line. Disintermediation also can occur in
deposit and investment products. A customer that consistent-
ly maintains a high balance in her non-interest checking
account, for example, may be sold a certificate-of-deposit or
money-market account.
Under a product-driven strategy, these cross-sells would be
considered effective: a line-of-credit, home-equity line-of-
credit, CD or money-market account was opened; but
profitability (the true gauge of success) did not increase.5
These facts help to explain why banks actually lose money on
up to 50% of their customers.4
Getting it Right To get profitability on track, retail banks must refocus their
strategy from the customer-in rather than product-out.
Customers are the scarcest resource in business, even scarcer
than capital.“The only value your company will ever create is
the value that comes from customers-the ones you have now
and the ones you will have in the future,” state Don Peppers
and Martha Rogers, Ph.D. in their most recent book, Return On
Customer sm.“To remain competitive, you must figure out how
to keep your customers longer, grow them into bigger
customers, make them more profitable and serve them more
efficiently.” Over time, enterprise value goes up because the
company is maximizing its Return on Customersm. 6
Profitable Sales25%
UnprofitableSales75%
Random Cross-Sells
Destroy Profit
Banks Lose Money on
Up to 50% of Their Customers
Is Your Strategy Destroying Profit?
Cross-selling to build share of wallet revenue remains a strategic priority in retail banking.
But unless a bank is cross-selling to the right customers, it could be destroying profit.
Source: First Manhattan Consulting Group,SAS
-$1000
-$500
0
$500
$1,000
$1,500 1
2
3
4
5
67
8
9
10
HouseholdProfit/Yr.
Average Bank
Retail Customer Profitabiliy by Decile
$1,100
($580)
($230)($130)($70)($50)($10)
$40$100
$300
ProfitDeciles
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Value and needs point the way
Refocusing your strategy depends on two factors.The first is a
better understanding of customer value.“Value tells you where
to focus,” explains Lengel. It tells you which customers bring
the highest value today
(retain), which customers
offer the highest value
tomorrow (grow) and the
core attributes to look for in
prospects (acquire). Value
also tells you where to focus
your resources (employees,
marketing spend, etc.)
so banks won’t engage in
profit-eroding cross-sells or
waste precious time and money acquiring,retaining and grow-
ing the wrong customers.
The second factor is customer needs. “If value tells you
where to focus,needs tells you how to win,”says Lengel.Needs
insight is all about relevancy. It tackles the question:What will
motivate customers to strengthen their relationships with me
to drive profit? The answer may be to scale back cross-sell
offers to specific types of customers or to limit marketing
communications to a high-value customer’s preferred channel.
Get to the household level
Whether taking out a home loan for a new addition or setting
up a college savings plan, most of the critical financial deci-
sions are made by a household and not an individual. A bank’s
strategic focus, therefore, must also aggregate down to the
household level. To be sure, information on individual cus-
tomers will always be the building blocks (a credit score, for
example, will always be an individually assigned attribute).
Likewise, any insight into the value and needs of individualcustomers relies on these building blocks.But the blocks must
combine to create accurate views of individual households as
the unit to target and regulate marketing, sales and service
treatment strategies. This will drive a much more balanced
strategy focused on selling as many products as profitable, not
as many as possible. Both customer and company win.
Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking
WHITE PAPER 2005
9
“The only value your company
will ever create is the value
that comes from customers –
the ones you have now and
the ones you will have in
the future.”
—Don Peppers and Martha Rogers, Ph.D.
Approving a credit card,paying out a loan,re-upping an
insurance policy–all of them come with risk.“Risk is an
unavoidable component of retail banking,” says Geert
Massa, Director,Financial Services, SAS International.“To
eliminate risk entirely, a bank would have to close its
doors, but it can improve upon how it manages and
minimizes that risk.”
Every bank spends handsome sums to stay current
with regulation and offset risk. What Massa wants to
know is, why not force all that spending into double
duty? “If you are going to spend money to be compliant
on regulation and risk, then why not turn it around and
also use it for being more intelligent about the
customer?” asks Massa.“Reducing risk and complying
with regulation are nothing more than getting smart
about customers, and a lot of banks miss out on the
opportunity to kill both birds with one stone.”
Take for example the Basel II Capital Accord,an inter-
national risk regulation compelling internationally
active banks to identify, to measure and to report
operational risk more effectively. Banks make more
money when they distribute their capital to customers
that have a higher probability of paying back a loan,
staying current with an insurance policy,and so on.“The
more you know about an individual customer, the bet-
ter decision you’ll make about whether or not that
customer is worth the risk in the first place,”says Massa.
“Better customer intelligence up front gives the bank
much more control over all the risk parameters
involved. And if you have all of the risk parameters
under control, then you also are compliant under Basel
II.The bank is working smarter,not harder.”
The “Customer Intelligent”
Response to Risk
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2 RETOOL YOUR MECHANICS
Current State The second step is retooling your mechanics. It comes down
to three areas: costs, potential customer value and customer
needs. When banks miss the mark on these three areas, they
end up placing customers into the wrong value buckets.
This ripples out to sub-optimal managerial decisions, the
misallocation of marketing and sales resources and the
familiar outcomes of lower profits, slower growth and no
competitive advantage.
Costs
Simply stated, customer profitability is the difference between
revenue earned and costs incurred during a specified time
period. Any measurement of customer value, therefore,
depends on an accurate view of both revenue and costs.
Virtually all banks track and assign sources of revenue (interest,
margin spread, fees, balance size, etc.) to individual customers.
Enough transparency exists between a customer and the
products she uses to come up with a reliable revenue figure.
Unfortunately the same transparency does not apply to
costs, and many banks struggle to get a clear picture of the
cost-to-serve for different customers. Most banks have an idea
of which channels are being used by customers on an
aggregate basis; and they may calculate the average
cost-per-transaction by channel and then apply it to all
customers when measuring value.
However, many banks do not incorporate the actual cost-to-
serve individual customers in their customer value metric.In the
SAS and Peppers & Rogers Group study, only 50% of banks
reported that they account for individual,non-product, cost-to-
serve in their customer value metric. Among those that do,
many report that it is difficult to develop a complete view of allcustomer costs because the data is not available. Without an
accurate view of customer-level costs, a distorted
understanding of customer value results. A customer thought
to be high-value, for instance, may actually be much less
valuable because his cost-to-serve far exceeds the average.
A lack of understanding of costs-drivers at the customer level
prohibits the bank from taking action that might improve
individual household profitability.“Sometimes the easiest way
to improve the profitability of a customer is not to sell him
another product, but rather to encourage a change in the
customer’s behavior,” says Gilleland.“For example, a customer
may be using the bank’s call center for routine account queries
that can be migrated to less costly automated channels. By
focusing exclusively on the revenue side of a customer’s
relationship, banks often miss opportunities to improve
customer value by reducing the costs-to-serve a customer.”
Potential value
There are three layers of customer value: Current Value (what a
customer is worth today based on historical data); Lifetime
Value or LTV (which is an extrapolation of the customer’s
current state);and Potential Value (which is a projection of what
a customer could be worth if the bank grows the relationship). 7
Most banks go as far as measuring LTV. At a high level, the
process may involve time series projections, RFM-type models
and plugging in the value of the variables for a customer
(balance history, product ownership history, propensity to
attrite at a product or household level,propensity to pre-pay or
default on a loan, etc.).
What’s missing here (aside from a robust cost-to-serve view)
is any understanding of potential value, which is where the real
opportunity for higher profitability lies.To understand why, let’s
examine how banks use LTV in place of potential value
and its negative downstream
impacts on profitability. With
LTV estimates in-hand, banks
start by sorting customers
from high to low LTV and
placing them into deciles.
They then ask the question:
“What if I could move a customer currently in the second decile
up into the first? ““The uplift is easy to calculate, but how to make it happen (or
even if it can happen) is not clear at all,”says Lengel.“You have
no idea if that customer’s value can be grown in the first place,
where that growth is going to come from,or the steps you need
to take to get there. Only a potential value analysis supported
by customer needs insight can tell you that.” Adds Gilleland,
“While some banks use demographic data (e.g. household
income,investable assets,etc.) as a surrogate for potential value,
©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.10
As recognized leaders in cus-
tomer relationship building, re
banking executives must once
again redefine the playing field
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demographic data can only give insight into a customer’s
capacity to grow. It lacks a customer’s propensity to grow with
your bank and it doesn’t tell the bank what action to take in
order to profitably grow the customer’s relationship.”
Customer needs
Knowing which existing customers are high-value and
high-growth is only half the battle. The
bank must also meet their needs in order
to retain or grow that value.Needs insight
tells the bank why an individual customer
purchases a product. Banks do not do a
good job making timely and relevant
offers based on the needs of their cus-
tomers.According to Forrester, only 5% of
consumers say their banks have “tailored products and
solutions to fit my needs.” This makes profit, loyalty and
competitive advantage hard to come by.8
Getting it RightCosts
To improve cost mechanics, start broad and drill down.“The
goal is to gain an accurate view of costs, not a precise one,”
says Lengel.This may require a bank to make trade offs when
calculating costs,but as long as they are accurate,then better
business decisions can be made based on that accuracy.
Begin by quantifying the overall level of individual channel
usage by various types of customers. Which channels are
customers using now? Next determine the average cost per
customer interaction/transaction by individual channel.
Finally, measure resource and work activity costs by channel:
How much does it actually cost the bank for high-value
“Customer A”to conduct an interaction over the Web? At the
branch? “The best way to get an accurate view of cost-to-serve is Activity Based Costing (ABC),” says Pavan Shidhaye,
Product Manager, Business Intelligence Solutions, SAS. ABC
accounts for the volume of the bank’s activities per customer
and the consumed resource costs that result.
A customer value score based on an accurate balance of
customer revenue (cash generated by the customer) minus
the cost to serve (the customer-generated costs) is extreme-
ly valuable to the CMO. Charged with increasing organic
growth, the CMO carefully tracks how marketing initiatives
that elicit the desired customer behavior and drive profit.
When a customer value score is balanced accurately between
the revenue and cost-to-serve factors, it will reflect the
customer’s behavior and not the bank’s behavior.
Why is this important? Let’s say a relationship manager
calls a high-value customer due to a recent “transaction trig-
ger” (e.g., a large deposit).During the call,
the customer also purchases an Equity
Bank Line that may not generate revenue
for 6 months. The call costs $50. If the
bank decides to factor in the cost of the
call to the customer value score, then the
score will automatically drop, despite the
fact that the customer just purchased
more from the bank. But if an accurately balanced customer
value score is embedded in the business model, then a
marketer can make more profitable decisions and deliver
customer treatments–call center queuing, campaigns, fee
waivers, etc. –that reward positive customer behavior.
Potential value
Retail banks that do not have an understanding of the
potential value of their customers leave substantial profit on
the table. Potential value goes beyond LTV by answering the
question: How much more of a customer’s business could the
bank capture if the bank could change the customer’s
behavior in the future? “Potential value insight identifies which
customers have the capacity to deliver more profit as well as
the size of that latent profitability,” says Gilleland.The bank can
project profitability based on the current set of products the
customer has now and those he is likely to buy in the future,as
well as the volume of those transactions. Existing resources, or
intelligently adjusted resource capacity levels can now befocused on those customers able to deliver the highest possible
profit.This is the first, all-important step to sparking the desired
customer behavior that drives Return on Customer and
enterprise value.
“The mechanics of potential value are not as mysterious as
they appear,” says Shidhaye. It’s based on several data points,
including current balances and spreads, fees and risk factors
such as the probability to attrite or default.” Based on the
Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking
WHITE PAPER 2005
11
Retail banks that do not have an
understanding of the potential
value of their customers leave
substantial profit on the table.
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results, a look-alike model is created to uncover which
customers offer the greatest opportunity and how to capture it.
For instance, a set of moderate-value customers may share
many behavioral and attitudinal characteristics of your high-
value customers. The question is why these moderate-value
customers have not made the jump to high-value status? “The
answer lies in how the bank is treating that customer,” says
Lengel.“It is not providing the right message or offer at the right
time to trigger improvement in the right business drivers.This is
why an understanding of customer needs is so important.”
©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.12
Expense accounting at a retail bank is typically reported
by a “general ledger accounting system.” Financial state-
ments are generated with chart-of-account expense
lines representing the departmental expense of labor,
supplies, facilities and infrastructure, among others. The
problem with this approach is it only displays what was
spent but not for who and why that money was spent.
That is, it displays expenses forresources but not the costs of the
business processes and ultimate-
ly the products, service lines,
channels and customers that
each uniquely consumes. In
short, the expense data in the
general ledger expense account format is structurally
deficient to causally trace and assign (not broadly-
average allocate) the resources expenses into the
calculated costs of work activities belonging to theprocesses and ultimately into customers costs.And with-
out an accurate cost-to-serve view at the customer level
with visibility into all cost elements, a bank will always
have a sub-optimal understanding of customer value.
“The solution is to adopt an Activity Based Costing
(ABC) measurement strategy in which customers are
viewed as ‘consuming’ work activities that in turn draw
on the organizational resources,” advises Gary Cokins,
Strategist, World Wide Marketing, SAS. Like its
namesake, ABC is a practical approach that begins by
focusing on the work activities required to serve the
customer-opening a new account, completing a funds
transfer, updating a statement, and so forth. ABC next
traces the costs of these work activities, including
through channels if appropriate, into customers based
on the quantity or volume of their demands.
In basic terms, for each work activity, ABC computes a
unit cost rate by distributing direct expenses (e.g.,
salaries) in proportion to theamount of employee time spent on
that activity, adding associated
indirect expenses (e.g., charge back
for square footage occupied by
employees), and dividing the total
by the activity cost driver–the
number of activity transaction events (e.g., number of
funds transfers) performed during the period under
consideration. By multiplying the activity unit cost rate
by the quantity for each activity initiated by a customerand next summing all the activity costs for each
customer, a retail bank arrives at a much more accurate
calculation of the cost-to-serve that customer. “Unlike
traditional financial accounting in which the focus is
external regulatory reporting, ABC stresses internal
decision making,”says Cokins.“It provides greater accu-
racy of customer costs and transparency of the business
process elements of those costs. The results are a much
stronger grasp of customer value, how customer
behavior impacts profitability and what potential
actions can improve profitability.”
The Dollars and Sense of Activity Based Costing
Unlike traditional financial
accounting in which the
focus is external regulatory
reporting, ABC stresses
internal decision making.
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Customer needs
Getting needs right means uncovering customers’
preferences (e.g.“Please send me new offers only via email”),
goals (e.g.“I want to retire at 55”), or desires (e.g.“But can I retire
even sooner?”).These clues point to what motivates a customer
to buy at different points along the customer lifecycle. They
help sales and marketing teams make the right offer to the
right customer at the right time,and across the right channels.
According to the First Manhattan Consulting Group, by better
matching the “why” behind consumer purchases with the
“what,”retail banks can improve effectiveness by more than five
times over traditional purchase propensity models alone.9
The granular level of insight (not to mention the stronger
results) makes needs insight superior to product propensity
models or standard marketing research tactics such as focus
groups.To illustrate the point:Two high-growth customers may
be in the market for an identical insurance policy. Their needs,
however, are very different: One wants the policy to minimize
estate taxes,the other to ensure that a home mortgage is paid
no matter what.This is a customer-level distinction a marketer
or sales team must know to be effective.But it cannot be found
by relying on broad behavioral or demographic trends of a
product propensity model. The same is true for a focus group.
Knowing that a certain percentage of the customer base has a
need is quite different from being able to specifically identify
which customers actually have that need.
Rolling it up
The process of retooling your mechanics results in a
prioritized set of customer groups backed by a fully-scored
database and value model. These are the customer-level tools
the bank needs to begin assembling the household views that
drive customer-facing activities across marketing, sales and
service. A bank is ready to increase customer value,profitability
and competitive edge by managing households as
financial assets.
Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking
WHITE PAPER 2005
13
I N S I G H T
Actual and future potent ial cont ribut ion Insight into cus tomer needs, att itudes ,
behaviors and perceptions
Value
Conceptual
Framework
Needs
Where to Allocate Resources How to Win
R E S U L T
Coordinated enterprise-wide integrated marketing and customer experience management
Changed Behavior Impact
A C T I O N
Treatment strategies and organization
Customer Portfolio Management
Value => Needs => Profit
A combination of customer value insight and customer needs insight is required to
develop the treatment strategies that drive more profitable customer behavior.
Source: Peppers & Rogers Group
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3 REALIGN YOUR ORGANIZATION
Current StateEven when armed with fresh customer insight, banks will fall
short if this knowledge does not become a central part of the
bank’s everyday work activities and priorities. Where are
banks dropping the organizational ball?
It starts with managing the customer experience.From rela-
tionship managers and call center representatives to segment
managers and ATM machines, the bank must deliver a positive
and consistent experience to high-value and high-growth cus-
tomers. In doing so, the entire organization works together to
increase customer value, loyalty and profit. However, most
banks are not ready to take this step. According to the SAS and
Peppers & Rogers Group study, over 80% of participating
banks organize around product groups or lines-of-business.
But why should a call center rep care about the customer
experience if he is judged only on call
volume? Why should a segment manag-
er in credit cards care about increasing
total customer value across multiple
products if she’s rewarded on the
number of credit cards sold and portfolio
balances per quarter?
Such organizational misalignments
create poor customer experiences with
real financial impacts. According to a
2003 McKinsey survey, these “moments
of truth” directly affect customers’ bal-
ance levels, and with them the banks’ pockets. For example,
mass-market customers who had a negative experience–
such as an unexpected fee or unresolved service call–kept
4% less with the bank than mass-market customers who had
a positive experience, such as a smooth transfer of funds.Even more telling, mass-affluent customers (those with more
than $100,000 in assets) were twice as punitive–a vital point
because mass-affluent customers generate 13 times more
profit than their mass-market counterparts.10
Talking technology
At most banks, technology does not stand in the way of
aligning the organization around customers. “Technology
has matured to the point where it can collect and distribute
the customer intelligence needed to keep employees
focused on building customer value,” says Randy Betancourt,
Director, Financial Services Solution Center, SAS. When break-
down does occur, it is because technology is not tied to a
focused strategy of acquiring,retaining and growing the right
customers.“Technology can’t do its job if the lines-of-business
are working independently with their own solutions and busi-
ness rules,”says Betancourt.
Getting it Right“Realignment around customers has to be a practical
exercise,” says Lengel. “It’s about balancing a product-driven
environment with manageable steps to make better use of
customer insight.”
As stated before, it starts with the customer experience. A
retail bank cannot provide a best-in-class
experience to every customer, nor should
it. But it can take time to “stand in the
shoes” of its high-value and high-growth
customers. By mapping the experiences
of customers across channels and at each
stage of the customer lifecycle, the bank
gets a clearer picture of where the gaps in
execution are taking place. It can then
identify which organizational capabilities
it must improve upon to close the gaps,
including people, processes, infrastruc-
ture and culture. The final step is to prioritize the needed
capabilities and draw action plans for achieving results in a
manageable time frame.
Metrics are used to track progress. Focus is again vital.
Improving performance is not about what you can measurebut rather what you should measure. A practical approach is
to rely on two metrics: a “profitability” metric that tracks
changes in customer value and an “attitudinal” metric that
tracks customers’ needs and satisfaction. When taken
together, they act as leading indicators of how well the bank
is delivering superior customer experiences to the right
customers and whether it’s moving the profitability needle in
©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.14
“Technology should take a
customer value score out of
a closed-door room full of
experts and serve it up tocustomer-facing employees
in a way that makes sense.”
—Randy Betancourt,Director, Financial Services
Solution Center, SAS
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the right direction. Based on their results, banks can direct
their future actions toward the highest profit.
Here’s how they work: Assume Customer A and Customer B
start at the same value level and are equally profitable. Over
time, the profitability metric may show that customer A’s
value has gone up 10% whereas customer B’s has stayed flat.
It’s easy to assume that Customer A is responding to a better
customer experience whereas Customer B isn’t.But when the
profitability metric is supported by an attitudinal, needs-
based metric a different picture results.In actuality, Customer
B has improved his deposits because a relationship manager
recently moved him to lower margin products better suited
to his needs–an important fact the bank gains through its
attitudinal metric. In other words, though Customer B’s prof-
itability has not gone up, his satisfaction level has. More
importantly, the bank has increased its share-of-wallet with
Customer B,all due to a positive customer experience tracked
by sharp metrics. The payoffs are more profit and
stronger loyalty.
Don’t forget to own it
Ownership is another important piece of the puzzle. It must
happen at the management level and the customer-facing
level. “Once you have accurate customer value scores and
tracking mechanisms in hand, managers–most often from
marketing–set the strategy, processes and policies for
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The Customer-Centric Business Model: PROCESS VIEW
Applying customer value to the retail banking business model should be a continuous loop of
learning and results. Shown below are the business process steps needed to get it done.
• Profit & Potential Scores• Product Purchase & Attrition Scores• Attitudinal “Needs”• Demographics & Risk Scores
1. Customer Information
• Growth Plans• Service Rules for Treatment• Pricing & Product Bundling• Behavior Migration
3. Develop Segment Strategies
• Out-Bound Multi-Channel• In-Bound Service Rules• In-Bound Product Suggestions• Contact History
4. Engage High-Potential Customers
• Refine Segmentation Schemas• Refine Product Algorithms• Update Value Scores
6. Feedback Learning
• Multi-Channel Results Analysis• Customer Value Tracking
5. Analyze Contact Results
• Schema Based OnProfit, Potential & “Needs”
• Create Customer Portfolios
2. Segment Customers
PROCESS VIEW
Retain
Profit
Potential
Retain &
Grow
Reduce
Cost
Invest &
Grow
0 1 2 3 4 5
Source: SAS
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increasing that value and managing the customer experience,”
says Gilleland. “It’s then up to customer-facing teams to
coordinate to implement management’s strategic intent and
directives.”The bank is now in a position to incent, reward and
assess performance based on changes in customer value.
Rather than traditional, volume-based benchmarks such as
“how many mortgages did you sell this quarter,” banks ask
“how much has the profitability of the customers changed
under your watch?”
Technology makes insight actionable
Organizational realignment around customer value cannot
happen without technology, a fact that retail banking execu-
tives are well aware of.“Technology’s role is to integrate data,
processes and people to gain a single view of customers,”
says Philippe Meyer, Director, Financial Services, SAS Europe,
Middle East & Africa.“The best approach is to deploy a suite
of solutions that deliver banking-specific analytics based on
rigorous data management.”A single technology platform is
the organizational backbone for rolling out business rules on
how to identify and treat high-value and high-growth
customers.
“At a practical level, technology should take a customer
value score out of a closed-door room full of experts and
©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.16
• Data Warehouse• Analytics & Data Mining• Credit Scoring• Activity-Based-Costing
1. Customer Information
• Campaign Management• Marketing Optimization• Multi-Channel Synchronization
3. Develop Segment Strategies
• Lead Management System• Multi-Channel Lead Delivery• Behavior Triggers• Contact History Management
4. Engage High-Potential Customers
• Rapid Model Deployment• Reporting & Web Distribution
6. Feedback Learning
• Multi-Channel Results Tracking• Customer Value Tracking• Measurement & Reporting
5. Analyze Contact Results
• Portfolio Management:Creation, Migration & Tracking
2. Segment Customers
TECHNOLOGY VIEW
Retain
Profit
Potential
Retain &
Grow
Reduce
Cost
Invest &
Grow
0 1 2 3 4 5
The Customer-Centric Business Model: TECHNOLOGY VIEW
Applying customer value to the retail banking business model should be a continuous loop of
learning and results. Shown below are technology capabilities needed to get it done.
Source: SAS
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serve it up to customer-facing employees in a way that
makes sense,” adds Randy Betancourt, Director, Financial
Services Solution Center, SAS. A customer’s total holdings
with a bank don’t mean much to a service rep on the front
lines. But if the rep’s screen showed that a high-growth
customer’s current value
score is 26 and the goal
is to raise it to 28
by cross-selling a mort-
gage refinance at a
special rate for that
customer, the rep has a
clear focus and a real-
time treatment strategy
in hand.The rep can take
an important step
toward what Gartner
calls “the next significant
CRM strategy” in banking, “Dynamic Relationship Pricing.”
When backed by customer value knowledge, customer-
facing employees can use technology to dynamically price
offers in real time to deliver the highest profit.11
Close the learning loop
Customer data and customer value scores do not stand still.
A common practice among banks is to recalculate customer
value scores on a regular basis (usually monthly) to track
changes. This is an important outcome, but it is not the only
outcome. “It’s just as important to close the learning loop,”
says Gilleland. “If a customer shows all of the attributes of a
high-value customer but his value score has not moved up
over the course of a couple of quarters, you have to ask why.”
It could be that although the customer’s propensity to spend
more money with the bank is high, his capacity to spendmore is actually much less than the bank thought at first.
New insights must always be factored back into the value
calculations, algorithms, segmentation schemes, forecast
assumptions, outbound and inbound marketing
communications, etc., to make sure the bank can act fast on
its ongoing knowledge. Otherwise, the bank will fall into the
same unprofitable behaviors.
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1. Invest retention efforts in high-value/
low-potential households
Locking in the loyalty of high-value customers
who already use a broad range of products and
services is vital. But also recognize that their
growth potential is low.Pushing more products
to this group damages long-term profitability.
2. Remember that customer value is half
the battle
Customer value insight tells you where to focus,
but customer needs insight tells you how to win.
3. Invest sales efforts in households with
the capacity and propensity to grow
Assemble customer knowledge (behavioral and
attitudinal) to gain insights on how to better
serve and grow relationships, create action plans
and align sales, marketing,and services resources
around the action plans.
4. Ensure that insight equals profit
Retool cross-sell models to target customers that
will buy and use a product profitably.Cross-sells
only pay off if they improve household profitabil-
ity or the Lifetime Value of a customer through
stronger retention.
5. Don’t confuse customer value withcustomer affinity
Understanding the important differences
between customer value and customer affinity
at a customer level leads a retail bank to the
right decisions that improve profitability and
competitive advantage.
Top Takeaways
“An overhaul of the retail
banking business model is
not practical or necessary.
But banks must improve in
several areas when it comes to
strategizing around,measuring
and acting on customer value.”
—Michael Lengel,Principal,
Peppers & Rogers Group
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©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.18
Where Do You Stand? Turning customer value into competitive
advantage in retail banking is an evolu-
tionary process.The journey begins by
plotting where the organization stands
today and where it should be tomorrow.
Below is the SAS Information Evolution
Model, a tool designed specifically for
this purpose.The model has five stages:
Operate,Consolidate, Integrate, Optimize
and Innovate. For each stage, two issuesare addressed: The maturity of the
customer value metric and how/where
is it being applied to the business.
Stage 1: OperateMETRIC – Individuals control the data, and there are no enterprise standards
for consolidating or analyzing information. Insight into customer value is at the
customer level,and is not used outside of a single line-of-business.The metric is based
solely on revenue.
BUSINESS APPLICATION – The metric resides in marketing with a few “information
mavericks” that use it to measure the success of outbound campaigns. It does not
yet play a role in helping the bank to capitalize on inbound communications with
customers,specifically customer service.
Stage 2: Consolidate
METRIC – A single department (usually marketing) takes initial steps to consolidatethe information of individual customers from some (not all) of the lines-of-business.
The consolidated information helps marketing take the metric deeper, from the
individual customer level to the household level. It also allows marketing to factor in
some (not all) service costs when calculating the metric, thereby going beyond just a
revenue view.
BUSINESS APPLICATION – Marketing begins to draw up department standards for
applying and updating the metric based on the success of campaigns,e.g.one set of
tools or common rules for managing data.Marketing also begins to track changes in
customer value over time.Thus the bank is doing smarter marketing but it has yet to
evolve to smarter customer management based on accurate value insight.
Stage 3: IntegrateMETRIC – Information across the lines-of-business and multiple produ
is factored into the metric. Calculation reflects revenue minus the tracea
service costs and direct marketing costs (see sidebar,“The Dollars and Sens
Activity Based Costing”).The bank establishes some enterprise standards
how the metric should be applied to different lines-of-business, lend
credibility to the metric throughout the organization.
BUSINESS APPLICATION – Marketing heads up segmentation efforts a
takes the first cut at developing customer treatment strategies.The findi
help bring the customer value metric to sales and service departmen
which take early steps to apply the metric to customer-facing activities (
fee-waiver decisioning). However, the metric still does not play a central
in creating a consistent customer experience across channels and product
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Getting it Right: Turning Customer Value into Competitive Advantage in Retail Banking
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Stage 5: InnovateMETRIC – The metric (potential value in particular) is consistently
updated to account for changes in customer contact history.
BUSINESS APPLICATION – The bank engages in dynamic
relationship pricing and bundling. Incentives and performance
are based on changes in customer value. A closed-loop of learning
is created to drive ongoing improvement. The metric becomes a
basis for communicating enterprise value to Wall Street.
Stage 4: OptimizeMETRIC – Accounts for revenue minus traceable costs (ABC) and
minus direct marketing costs.The bank has a handle on the current
value,LTV and potential value of customers while incorporating the
“risk”scores.This insight is rolled up to provide accurate views at the
household level.
BUSINESS APPLICATION – The enterprise is working together
to manage customer relationships. Marketing, sales and service
coordinate around customer value scores and contact manage-
ment based treatment strategies to deliver consistent customer
experiences. The profitability metric and the attitudinal/needs
metric are used to track progress. Marketing and sales capacity
is “optimized” with modeling techniques to maximize short-term
and long-term profit.
Source: SAS
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©2005 SAS Institute Inc.and Carlson Marketing Group.All rights reserved. Peppers & Rogers Group is a division of Carlson Marketing Group.20
Conclusion: Now is the TimeRetail banking executives are absolutely on target. Their
confidence that customer value insight drives success in retail
banking is well placed. Measuring and acting on customer
value is proven to deliver higher profitability, organic growth
and competitive advantage. But the why behind customer
value is not the problem.It is the how that gets overlooked.
The result is that most banks have not captured the
substantial benefits from more loyal and profitable customer
relationships. At least not yet.
As recognized leaders in customer relationship building,retail
banking executives must once again redefine the playing field.
Incremental improvements to the existing business model are
the key. By refocusing customer strategy, retooling measure-
ment mechanics, and taking steps to realign the organization
around customers,banks will unlock the vast profit potential of
the customer asset. They will acquire, grow and retain the cus-
tomers that will drive the greatest amount of profit today and in
the future. Lasting competitive advantage is not far behind.
1 The findings of the SAS and Peppers & Rogers Group study,
“Measuring Customer Value in Retail Banking,” are taken from
surveys of 48 executives from 18 retail banks conducted in
October and November,2004.
2 Forrester,“Earning the Loyalty of Banking Customers,”
September 2004. It is important to note here that customer
loyalty in retail banking is defined as increasing future prod-
uct purchases from existing customers,and not just keeping
accounts open. Just because a customer chooses not to attrite
does not mean she is loyal to the bank.
3 GartnerG2,“Bank CEOs Rate Business and Technology
Concerns,”August 2004.
4 First Manhattan Consulting Group.
5 Ibid.In some cases,notes Gilleland,disintermediation is the
right thing to do in order to improve customer satisfaction,
share-of-wallet,and retention. At times,it does make sense
for some customers to shift their dollars from one product
to another. But more often than not, the desired payoffs do
not result.
6 Don Peppers and Martha Rogers, Ph.D.,Return on Customer:
Creating Maximum Value from Your Scarcest Resource,
Currency/DoubleDay,2005. Return on Customersm and ROCsm
are registered service marks of Peppers & Rogers Group,
a division of Carlson Marketing Group.
7 Terminology around customer value can vary.Current value
also is commonly referred to as actual value, for example, and
potential value also is referred to as future value.
8 Forrester,“Earning the Loyalty of Banking Customers,”
September 2004.
9 First Manhattan Consulting Group,“Cross-Sell: How to Achieve
a ‘Three-Way Win’,” 2004.
10McKinsey Quarterly,“Better Customer Service in Banks,”2005,Number 1.
11 Gartner,“Dynamic Relationship Pricing to be Banking’s Next
CRM Strategy,”June 2005.
Footnotes
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Measuring Customer Value
in Retail Banking
A Joint SAS andPeppers & Rogers Group Study
Measuring Customer Value in Retail Banking takes an in-depth look at
how retail banks are measuring and
applying customer value. Published by
SAS and Peppers & Rogers Group, the findings from this
report were gathered from surveys of 48 executives from 18 retail banks
ranging in asset size from $12 billion to $1.3 trillion.The surveys were conducted in October and
November, 2004. Participants included Senior Vice Presidents, Vice Presidents, Directors and
Managers from Marketing, Finance, Analytics, Customer Service and Product Management.
Participants were asked for their feedback on three, core topics:The management and applicationof customer value metrics in retail banking; the process of measuring customer value;and the orga-
nizational impact.
Some Highlights
The survey indicates that customer value metrics are becoming embedded
in retail banking business models for decision making:
• A full 100% of retail banks participating in the study are measuring
customer value to some degree
• Banks reported a high degree of confidence with their customer value metrics –
the average accuracy rating was 7.6 on a 10 point scale• More than three-quarters of respondents (78%) use customer value in strategic planning
• More than two-thirds of respondents (67%) said that senior managers use
customer value in decision making
All answers to survey questions were recorded and codified. Multiple responses from individual banks were aggregated.
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Peppers & Rogers Group is a management consulting
firm, recognized as the world’s leading authority on
customer-based business strategy. Founded in 1993
by Don Peppers and Martha Rogers Ph.D., the firm is
dedicated to helping companies maximize the value
of their business by maximizing the value of their
customer base. Our work is focused on driving
bottom-line results from the delivery and implemen-
tation of customer initiatives. The goal: develop and
execute customer strategies that create immediate
return on investment and long-term customer value.
In this way, we help clients optimize their most
valuable asset: their customer base.
Led by 1to1® Magazine, Peppers & Rogers Group
maintains a significant voice in the marketplace
through its 1to1® Media properties. These print,
electronic and custom publications explore the best
practices, trends and developments in customer
strategy, demonstrating how customer-based
initiatives are driving bottom-line impact.
More information is available at: www.1to1.com
About Peppers & Rogers Group
SAS is the market leader in providing a new genera-
tion of business intelligence software and services
that create true enterprise intelligence. SAS
solutions are used at 40,000 sites – including 96 of the top 100 companies on the FORTUNE Global
500® – to develop more profitable relationships with
customers and suppliers; to enable better, more
accurate and informed decisions; and to drive
organizations forward. SAS is the only vendor that
completely integrates leading data warehousing,
analytics and traditional BI applications to create
intelligence from massive amounts of data. Fornearly three decades, SAS has been giving
customers around the world The Power to Know®.
To learn more visit: www.sas.com
About SAS