Announcing projectADVOCACY

“I’m mad as hell, and I’m not going to take it anymore.”

— Howard Beale in the movie Network (1976)

Do you ever wonder why customers say they’ll refer a firm to their family or friends? I’m sure the answer differs across industries, but in retail financial services it’s because they believe that the firms they’re willing to refer are doing what’s right for them, and not the firm’s bottom line at their expense.

In other words, customer advocacy isn’t about “customers advocating for the firm” — it’s about the firm advocating for their customers. Unlike the NPS definition, I define customer advocacy as:

The perception on the part of the customer that the firm does what’s right for the customer, and not the firm’s bottom line at the expense of the customer.”

When you realize this — and consider that effective management measurement techniques strive to understand the root cause of desired and undesired effects — then you begin to understand why NPS is a flawed technique.

And that’s why I’m mad as hell. As for not going to take it anymore, that’s where projectADVOCACY comes in.

In my role as a senior analyst Aite Group, I’m teaming up with Neville Billimoria from Mission Federal Credit Union and Paul Schwartz of CONGRUITY to launch a multi-credit union study to measure the degree to which credit union members perceive that their credit union looks out for their best interests.

Why launch this effort to measure member advocacy and compete with NPS? Because our definition of customer (or member) advocacy:

1. Is a better predictor of growth and loyalty.
Research that I’ve done in the past (and continued on at Forrester Research) has shown that the strongest predictor of the likelihood of consumers to do more business with their financial providers is the extent to which consumers believe those firms are advocates for the customer or credit union member. Likelihood to refer — while correlated with growth (in at least some studies) — isn’t the root cause of growth and loyalty. Credit union executives owe it to themselves — and their CU’s members — to understand the true drivers of growth and loyalty.

2. Is more actionable. To make NPS actionable, even its most ardent adopters admit you can’t ask just the one “likelihood to refer” question. But what other questions should be asked? No one agrees, and there is no theory or research to support an answer to that. But my research has shown customer advocacy (as I’ve defined it) does have operational, customer support, and marketing underpinnings that guide managers to ask the right questions to understand why a customer believes the firm is a customer advocate. Understanding these operational, support, and marketing dimensions — and which ones are most important to which members — helps execs take the right steps to improving their customers’ advocacy perceptions. That’s something NPS can’t say.

3. Enables a two-way perspective. In addition to surveying credit union members about the extent to which they believe their CUs are member advocates, we’ll be surveying CU executives, as well. We’ll ask them which of the advocacy dimensions they believe are most important to their members, and what they believe their members’ perceptions are of how well the CU delivers on those dimensions. What we”ll help CU executives understand is how well their own management team is aligned with each other and with their members. And again, that’s something NPS can’t do — you can’t ask the management team to simply predict the percentage of promoters or detractors.

4. Is more comparable across firms. Sure, when you ask the NPS question, that score is comparable across firms. But when the other questions asked vary, comparability is lost. Not only will projectADVOCACY compensate for this NPS weakness, but by capturing demographic information from CU members who are surveyed, we’ll be able to provide yet another level of comparability across participating credit unions.

5. Requires less investment. Net Promoter Syndrome Sufferers love to tell me that it doesn’t cost anything to implement the NPS methodology. The consultants and software vendors that have sprung up to support the methodology laugh all the way to the bank (or credit union) when they hear that. Participating in the projectADVOCACY initiative won’t be free — but no CU will be asked to invest more than $900 to participate.

6. Is just as simple. Please don’t tell me that NPS is superior to everything else because it’s so simple. Simple isn’t better. And even if it was, NPS isn’t any simpler than asking CU members if their credit union does what’s right for them or what’s right for the CU’s bottom line at the expense of its members.

A number of smart credit unions have already signed up to participate.

For more information about the study and the benefits or participating either go to the projectADVOCACY web site or email me at rshevlin at aitegroup dot com. Let me know if you want a copy of the study’s premise document or if you’d like to get on the phone to talk about the study.

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CNBC Discovers Customer Loyalty

A recent segment on CNBC posed the question: Is there something investors should consider beyond the numbers? The suggested answer: Customer loyalty. As if it were a new concept.

The discussion with three customer loyalty “experts” (in quotes because one guy was from a firm that help telcos/IT firms develop qualified new sales and new market opportunities”, and the other two were from Wall Street investment houses) contained a few questionable comments and perpetuates some common misconceptions about customer loyalty. According to the experts:

“Most companies spend millions of dollars on sales and marketing but very little money on retaining the customers they just sold to.”

My take: Ah, the old myth about the cost of acquisition versus the cost of retention. Apparently, the costs that firms incur to provide customer service to existing customers don’t count as retentionetaining them. And direct marketing efforts to cross-sell customers don’t count. And from a B2B perspective, the costs associated with providing account management must not qualify. The notion that firms spend little on retention is flat-out wrong.

“While customer loyalty is important, it’s no substitute for strong operational performance.”

My take: First off, this misses the point that for some firms/brands, it’s strong operational performance that earned the loyalty in the first place. But second, if a brand has strong loyalty, shouldn’t that compensate for less than stellar operational performance? I think what the expert was trying to say was that loyalty wasn’t a substitute for strong financial performance. In other words, it doesn’t matter if you have raving fans — just make your quarterly numbers.

“In tough times, price matters. To maintain a brand, firms have to spend an enormous amount of money.”

My take: If a customer’s loyalty is that susceptible to economic conditions, it’s got to make you wonder how strong the loyalty is. For example, if a “loyal” Starbucks customer switches from Starbucks to Dunkin’ Donuts for her daily caffeine fix during a downturn, then how loyal was she to Starbucks in the first place? If, on the other hand, she only buys coffee every other day — but still buys it from Starbucks — then the loyalty is still strong, even though total sales volume is down.

The problem with Wall Street’s view of customer loyalty is that it confuses:

1) Customer loyalty with brand affinity. When asked which firms have strong customer loyalty, all of the experts agreed on Apple. No doubt that many Apple customers are vocal supporters of the firm. But there are a lot of firms out whose customers don’t buy from anybody else. Strong brand affinity may breed loyal behavior, but you can still have loyalty without the strong brand affinity.

2) Retention with share of wallet. Firms that sell products or services with low purchase frequency often fall prey to this misconception. Just because a bank customer isn’t motivated enough to go searching for a new checking account provider, it doesn’t mean he’s loyal to his bank. Likewise, if he stays with his bank for his checking account, but parks all his investments with other firms, then how loyal is he to the bank? Not very.

3) Ad spend with marketing spend.
This isn’t just a Wall Street issue, it’s a Madison Avenue issue, as well. There are way too many people who seem to forget that advertising is under the marketing umbrella — and not the other way around. There are a lot of marketing investments that firms make beyond advertising. But go tell that to the advertising people.

4) The means with the ends. Apple isn’t great because it has raving fans. It’s great because it’s great at product design, which attracts customers who appreciate and value product design. This is, perhaps, a not-so-subtle point, but one that many firms miss. Instead of saying “let’s go improve our customer loyalty” firms should be saying “let’s be great at something that customers will value and therefore be loyal to us.”

Anyway, thanks to Paul Schwartz for the heads up on the CNBC segment, and I’m really looking forward to the cable channel’s next great discovery.

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Moments Of Truth

My sympathies go out to Elana at Forrester who had her wallet stolen recently. She recounts her experience on her blog.

Her prescriptions to financial services firms are right on. Here’s what I’d add:

Financial services firms must identify the moments of truth.”

Customer loyalty to financial firms is driven by the stories customers tell themselves (not just the “authentic” stories marketers tell customers). These stories are born out of the high-emotion interactions that customers have with their financial providers — what McKinsey refers to as “moments of truth.”

What the firms Elana dealt with failed to recognize was that reporting a lost or stolen card is a highly emotional situation. One that warrants special treatment.

If any of them had immediately put her through to a human who said “I will personally handle your situation, and help you through this”, she would have glowed about its service. She’d believe that that firm was truly different. Most importantly, it would become a “story a loyal customer tells”.

But none of the firms did this. They didn’t recognize a moment of truth.

Identifying the moments of truth isn’t rocket science. Market research can help you determine which interactions have a higher emotional impact than others. Simple common sense can help, too. Which is probably why Elana said that becoming customer-centric isn’t THAT hard.

Update: For further discussion on this, see this post on Analytical Engine.

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Wanna Know Why Consumers Don’t Trust Banks?

Then read this post from a fellow blogger. I don’t, for a second, believe that this is an isolated example.

If the firm in question — and I don’t care who it is, and I’m not going to mention it by name — had been forthcoming with the details, one of two scenarios would likely have happened. The woman would either have:

  1. Said “no” and not applied for the mortgage.
  2. Been astounded at how the firm educated her about the terms of the loan, sent in her application and closed on the loan faster than she would have otherwise, and not initiated an unneeded service interaction.

My bet is on scenario two.

This is a great example of a firm that missed an opportunity to create a story that loyal customers tell. Of course, it does depend on the type of customer you want. If you want those who never read the terms and conditions of contracts, and that you’ll likely make your profits from through penalties and fees, then maybe what the firm in the example did was the right thing.

But if you want customers who are going to require new financial services and products for years to come, then being less transparent is not a good strategy.

The firm’s rate and branding efforts helped get the woman in the door. But it missed an opportunity to close the sale — and potentially gain a loyal customer — by not differentiating the customer experience.

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Banks Will Get To Relationship-Based Pricing Through Loyalty Programs

Forrester Research recently published a report asserting that banks must implement price optimization techniques — dynamically pricing new products and services based on a customer’s profitability — in order to remain competitive. The report claims that successful implementation will require banks to: 1) reorganize to break down internal LOB and channel silos; 2) appoint a customer executive; and 3) develop a center of excellence.

My take: Let me take you back to reality.

1) Don’t hold your breath waiting for banks to reorganize in the near future. There’s no question that banks’ product-centric organizational structures inhibit customer-centric decisions from getting made. But the time, cost, politics, and degree of upheaval required to completely move away from this approach in the short-term — absent cataclysmic factors like impending bankruptcy — means this won’t happen in too many firms too quickly.

2) I’ve said it before: Appointing a chief-fill-in-the-blank-officer doesn’t solve anything. What budget will s/he have? From whose budget will this new one come from? What authority will s/he have to make changes? Are existing LOB and channel execs going to just roll over and play dead? Even if a bank re-organized and appointed a customer executive, existing customer data would still be housed in multiple databases and systems. Implementing relationship-based pricing will still be a nightmare to execute.

3) Banks already have these centers of excellence — they’re called risk management groups. Granted, they usually determine pricing for a single product line or LOB, but the competency already exists. The problem isn’t computing a relationship-based price — it’s dealing with the profit margin concessions one business unit must take because of the relationship a customer has with another LOB.Why should I give this guy a break on a mortgage rate just because he has $5k in a savings account with you?

Banks serious about implementing relationship-based pricing will turn to loyalty programs like the ones many credit card providers and retailers already have in place. The Aite Group believes that financial firms will more than double their spending on non-card reward programs over the next five years.

Loyalty programs — like Citibank and Banco Popular have successfully implemented — accomplish two important objectives. First, they create the technology capabilities required to overcome the customer data issues caused by LOB silos. And second, they give banks a mechanism — think of it as a clearinghouse for transfer costs — to deal with the profit margin concessions that LOBs must make when discounting prices, rates, and fees.

The alternative isn’t reorganizing departments. It’s breaking apart the big banks completely. Letting each business unit maximize its own profitability based on the customers that are best for that unit. Explicit recognition that while Ron Shevlin might be a good customer for the retail bank (because he’s willing to leave $25k parked in a low yield savings account), he’s a lousy customer for the mortgage or credit card LOB.

As long as banks continue to put on their “we’re an integrated, one-stop financial shop” happy face, they’ll to have to overcome the technology and organizational barriers that exist. Loyalty programs are one way to do that.

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Stop Investing In Customer Retention

Target Marketing reported recently that marketers plan to shift their 2007 media budgets from customer acquisition to customer retention, relative to what they did in 2006.

If this is true for bank marketers, it’s a troubling statistic for two reasons.

First of all, media spending isn’t going to impact banks’ retention rates one single iota. Many banks report 15% to 20% annual attrition among their deposit accounts. Yet the percentage of consumers who intend to switch banks, by closing out accounts, is in the low single digits (Source: Forrester Research). The reasons for this discrepancy aren’t surprising: People move, get married, get new jobs — and, oh yeah, banks screw up from time to time. No amount of media spend is going to fix that.

But there’s another reason. When marketers say they’re refocusing on retention, I think what they’re really alluding to is cross-selling existing customers. But many of these efforts are doomed to fail as well.

Many bank marketers cite research from the BAI published that showed that bank customers were most likely to purchase additional products with their bank within six months of opening their initial account. If that’s true, then trying to sell more products to the vast majority of customers who have more than a year of tenure with the bank is destined to produce a disappointing ROI.

So what should marketers do?

Invest in customer engagement.

Many marketers consider engagement to be a buzzword. But engagement is a valid concept, if you use the term to describe the extent to which your customers interact with you in meaningful, emotional ways. Not just by checking their balances every day, but by relying on you for advice and guidance on how to manage their financial lives and make smart financial decisions.

The payoff is in increased purchase intention. Using market research data, I found that customers who are engaged with their bank are twice as likely to purchase more products from their bank in the near future than customers who aren’t engaged (click here to see how I defined engagement).

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While the ROI may not be immediate, an investment in engagement is better than an investment in retention. The key to future profitability isn’t in simply keeping customers — it’s from deepening their relationships. And engagement is a necessary pre-condition for that to happen.

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Managing Customer Expectations

I wrote a few weeks ago that the one question to ask customers is: “What are your expectations of us and how well are we meeting those expectations?”

Well, here’s a little more fodder for that discussion. In the March issue of the Journal of Consumer Research, researchers found that:

People take notice when they feel worse than they thought they would, but—oddly—not when they feel better than expected. The message for marketers is that too much hype can hurt a company when people realize that their expectations haven’t been met.”

The article noted that people make predictions about how they’ll feel in the future, but often predict wrong. The researchers coined the term “affective misforecasting” to describe the gap between anticipated and actual feelings. The authors concluded that marketers shouldn’t overhype their products.

My take: You probably think I’m going to say “Told ya so! You have to understand your customers’ expectations.” But I won’t — I’m above that.

Instead, I want to refer you to a discussion on the Open Source CU site. Trey quoted from the blog of a credit union customer, who really ripped into his credit union regarding some errors they made with his account, and the firm’s subsequent handling of the problem.

I’d like to suggest something counter-intuitive: That this bad “review” was actually good for the credit union. And that, in general, bad reviews (of your firm or your product) could actually be good for your marketing efforts.

I’ve mentioned before that I’m a Cranky — I just want the firms I do business with to NOT make mistakes, be easy to deal with, and to stay out of my face.

But not all consumers are like me (you don’t all have to say “thank god” at once). Some consumers — especially in the world of financial services consumers — want help making the decisions they have to make. Even for seemingly simple products like checking and savings accounts.

What these consumers need — and want and value — is objective advice, guidance, and information to help them make their decisions. But when all they see and hear are the positive raves of the “net promoters” and the hype from the firms themselves, two things happen:

1) They’re expectations are artificially raised, and
2) They don’t get the pros and cons they need to help them make an informed decision

For a certain segment of financial services consumers, the most important job that marketing has is not to communicate the superiority of its firm’s products and services. It’s to help its customers and prospects make the right decision for them. And to set and manage their expectations appropriately.

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Loyalty Programs’ Impact On Online Sales — Part 2

John Dawson commented on the last post, wondering if the greater online sales activity on the part of loyalty program members was due more to their underlying demographics than to their program membership.

While more affluent consumers are more active online, even within income bands, loyalty members are more likely to have shopped online this past holiday season than non-loyalty program members.

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So why would this be the case? My theory:

1) Loyalty members are more engaged with the firms whose loyalty programs they’re enrolled in. And as a result, they interact with those firms more often, and in more channels.

2) Firms right-channel their loyalty members’ behavior. Through frequent communications, retailers with reward programs communicate more often with program members, call attention to online capabilities, and steer program members online.

(And btw, 1 to 1 magazine’s claim that right channeling “got its start through the thinking of Scott Neslin, a Dartmouth professor” is wrong — Cathy Graeber and I first wrote about right-channeling in 2002).

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Loyalty Programs: Another Key To Retailers’ Online Success

According to Larry Freed, CEO of ForeSee Results, there were three drivers of retailers’ online success this past holiday season: 1) free shipping; 2) product reviews; and 3) promotional emails.

He missed one: Rewards programs.

According to research that Epsilon has done on the influences of consumers’ holiday season purchases, consumers that are members of retailers’ loyalty programs were not only unusually loyal to those firms, but were avid shoppers on their Web sites.

Some of the relevant data points:

  • 57% of loyalty program members said that program membership influenced which firms they purchased from. And among those with income greater than $50k, half said that they used their loyalty cards frequently or with every purchase.
  • 84% of the loyalty program members of the electronic firms we asked about purchased from those firms this past holiday season. Other types of retailers, like department stores and booksellers, saw impressive loyalty from their reward program members, as well.
  • 32% of consumers who belong to three or more retailers’ reward programs shopped at all of the firms whose program they’re enrolled in.
  • 63% of the consumers that belong to rewards programs shopped online this past holiday season. In contrast, of the consumers that don’t belong to any loyalty programs, just 35% shopped online.

One last point for retailers to keep in mind: While many of these valuable customers purchased online, direct mail was cited as a bigger influence on where they shopped than interactive media like banner ads on Web sites.

I’ll be publishing a white paper on this research shortly, and will update this post when it’s available on the Epsilon site.

Update: Get the white paper here.

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You Should Only Hope For Frequent Contact With Your Customers

As part of a special section on “Building A Better Customer Experience,” American Banker re-published an article (pw req’d) yesterday that reported the extent to which consumers viewed financial firms as acting in the customer’s best interest (in contrast to acting in the interests of its own bottom line). A quote from the managing director of a New York-based consulting firm, explaining why banks scored lower than other types of FIs, caught my eye:

Most people interact with their banks more often than they do with an insurer or a brokerage, so there is more opportunity for error. People have more frequent contact and more types of contact with their bank, so things like hours and fees seem onerous.”

My take: Frequent contact with customers is a blessing, not a curse.

A few years ago, I was speaking at a conference about the impact of online banking on customer loyalty, and I presented the results of a study that Bank of America did that showed that — all else being equal (e.g, demographics, tenure with the bank, starting balances) — over time, online bill pay customers grew balances and number of products owned faster than other customers.

I wondered out loud why that would be — after all, what was it about paying bills online that made someone more loyal to his or her bank?

I found that there are (at least) two possible answers. The first has to do with consumers’ motivations and expectations. For some consumers, the strength of the relationship they have with their bank is predominantly driven by factors relating to convenience. As a result, the convenience that they experience by paying bills online strengthens their emotional connection to their bank.

But the second explanation — the one most relevant to this post — came from someone sitting in on my presentation that day. Neal Burns, a University of Texas at Austin professor of advertising, told me that according to research he’s done, “repeated, positive interactions with a brand strengthen a customer’s connection to that brand.”

Insurers get few chances to create that positive impression — but when they do, they’re usually good opportunities, since insurance claims are typically high emotion interactions. Brokerages — particularly discount brokerages — may get that chance even less frequently, especially if they don’t have an advisory relationship with the customer.

Banks should be thankful for the frequency of contact they have with their customers. That their scores in the survey are lower than other FIs isn’t because of “opportunity for error”. It’s better attributed to:

  • Organizational conflict. The product-centric nature of most banks creates conflicting goals and incentives that make it difficult for those firms to always act in a customer’s best interest. Can we really expect a mortgage specialist to tell a checking account customer that he might get a better deal on a loan by going across the street?
  • A focus on the wrong experiences. I don’t mean to downplay the importance of customer service interactions, but I believe that the scores reported in American Banker reflect the dissatisfaction and missed expectations that consumers have with their sales experiences. It’s in these interactions where they receive product recommendations that they perceive to be best for the bank and not for them, and where their expectations of what it’s like to do business with the bank are established. Expectations that, in some cases, are not lived up to.

Banks that build trust with their customers earn forgiveness when (and if) they do make a mistake. Having the opportunity to build that trust through frequent interactions is a bank’s advantage — not handicap.

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