EMEA Banking Practice

Driving intelligent growth with

Customer Value Maximization
How banks should go beyond CRM
1
EMEA Banking Practice
Driving intelligent growth with Customer Value Maximization
Following the intense uncertainty ushered in by the recent financial crisis, many bankers
are confronting huge future ambiguity about markets, risk, and demand. The questions
that will shape the future of banking appear, in many regions of the world, to hinge
around macroeconomics and regulation. A large part of the new normal to which
the banks are returning is the dilemma of how to deliver further growth when demand
appears to be stagnant or even declining. Is there any way to fuel revenues and profits
despite the aftermath of the downturn? There are certainly better ways in the retail
market segment at least than focusing on new client acquisition, where economics
show that acquisition costs often exceed more than one years client profitability. To
borrow a catchphrase: the answer lies within.
Despite the vagaries of external circumstances, banks still have vast largely untapped
potential at their fingertips: their existing customer base. Banks can enhance their
revenues while maximizing the value of this base using next-generation one-to-one
banking similar to the customer lifecycle management approach now being applied
by leading telcos. In-depth analysis of each customers profile and preferences using
state-of-the-art data mining techniques an approach we have termed Customer Value
Maximization (CVM) can yield very positive results surprisingly fast. Banks have seen
with this methodology a shift from fewer than two products per client to over six. Others
have been able to increase profitability in their retail branch network by some 20 percent
by combining tailormade pricing and cross-selling initiatives. CVM does, however,
require a fundamental shift in frontline mindset and capabilities. This article begins by
examining the differences between banks traditional marketing approaches and CVM,
then looks at the various stages in the CVM journey, and closes with a new one-stop
shop solution for ramping up the process swiftly.
The benefits of using CVM
CVM is a proven methodology that goes far beyond basic CRM capabilities, allowing
retail banks to identify and capture full potential from their existing customers, with imme-
diate impact on their bottomline (Exhibit 1). A well-devised CVM program will make highly
differentiated offers with varying product attributes to customer microsegments, rather
than broadcasting the same product-based offering to all customers. Instead of static,
backward-oriented segmentation, leading-edge techniques use predictive, self-adjusting
models to define the best next offer for each customer. This in-depth analysis based on
multiterabyte data can identify future potential by customer far more valuable than a
pure focus on current customer revenues. This data, if skillfully applied, can yield over 100
microtargeted campaigns a year with hit rates of 20 percent and above, compared to the
usual handful of broadly targeted campaigns with rates of only 3 to 5 percent.
Banks that are able to capture and sustain CVM potential achieve best-in-class perfor-
mance, incorporating lifetime value as a key indicator for customer targeting when priori-
tizing and identifying opportunities across all customer segments and levers. Their
targeted campaigns use value-based segmentation and propensity models, and imple-
ment highly coherent operating models across channels and functions.
This approach is being applied within banks across widespread geographies. Canadian
and Spanish banks are among the most advanced, consistently achieving a step change
in the effectiveness of their commercial actions, allowing them to capture initial profit
growth of at least 10 to 15 percent.
Driving intelligent growth with
Customer Value Maximization
How banks should go beyond CRM
2
EMEA Banking Practice
Driving intelligent growth with Customer Value Maximization

Capital One reaping the rewards of full-fledged CVM
Capital One is one of the best-practice examples in the industry. Its co-founders call
it an information-based marketing company, not a credit card issuer. The company
has been following this philosophy for many years, using individual customer value as
a key indicator for its commercial initiatives. It uses customer value in its segmentation
process, for example, as well as its behavioral indicators, offering open data access
to its front line with a uniform and holistic view of its customer data. Capital One was
also one of the first players in the industry to conduct offer prioritization based on
expected increase in customer value (across value drivers), using propensity models for
cross-selling to maximize the value of customers it had acquired. It also analyzes client
purchase patterns and dates to infer its risk and propensity to buy specific products. As
a result, it is able to target tailored customer offers (over 3,000 credit card variations) to
over 100,000 segments. It also conducts highly flexible test-and-learn campaigns at a
rate of more than 65,000 tests a year. These efforts are given top-priority support by the
organization via elements such as a unique relational database management system,
specific customer acquisition targets for employees at all levels, and an extra bonus to
staff who sell higher-yielding products.

Banks' profits can be fueled in a downturn by maximizing
the value of their customer base
that helps identify and capture the full
potential of a bank's customer base
3
3 2
5
11 100
119
Profit
year 2
Cus-
tomer
churn
Prod-
uct
churn
30
Re-
newal
Cross-
sell
30
Up-
sell
Acti-
vation
Win-
back
New
cus-
tomers
17
Profit
year 1
Value creation along value drivers
Typical impact is 10 to 15% on profits (6 to 8%
on revenues), with a significant share captured
in 4 to 6 months, thus self-funding the program
CVM is a proven methodology ...
Understand customer base:
identify the most profitable cus-
tomers as well as the "revenue
chains"; segment your commer-
cial initiatives
Go after opportunities along all
value levers (acquisition, cross-
selling, retention), especially
beyond the obvious ones (e.g.,
volume churn)
Increase the ROI of commercial
initiatives and increase their
effectiveness
Exhibit 1
3
EMEA Banking Practice
Driving intelligent growth with Customer Value Maximization
CVM in three steps
For effective CVM, it is vital that a bank first understands its customer base: it needs
to identify its most profitable customers as well as its value drains, segmenting its
commercial initiatives accordingly. It should pursue defined opportunities along all value
levers acquisition, cross-selling, and retention with a focus beyond the obvious, as
will become clear in the examples below. Finally, it needs to apply rigorous execution.
The heightened effectiveness of this microcampaigning and the ensuing commercial
initiatives can result in hit rates of over 20 percent, with returns of over 400 percent. Of
course, CVM implications are much broader than only personalized commercial offers.
Typically, they influence other commercial areas that could include pricing, new product
development, dedicated save-desks, or sales force incentives.
Step 1: Develop customer profiles. Creating a multichannel, multidimensional view
of the customer by leveraging advanced banking infrastructure and data is the first
step in the CVM journey. Lifetime perspective and potential should be incorporated
as a key indicator when quantifying customer value. It is also vital to use customer
value in the segmentation process, combined with behavioral indicators, and to offer
this uniform, holistic customer profile view to the front line. Some banks abandon
the initiative at this first stage or struggle to overcome some initial challenges like
lack of information, multiple data sources, or different frontline culture. It is extremely
important to focus on pragmatic solutions in customer value definition that could be
further adjusted along the process (Exhibit 2).


Annual
profit
EUR m Segment
1
1
12
14
Transactors
Investors
Mortgage
holders
Other
Savers -15
Product penetration
Percent
Deep dive into individual customer value and profiling
to understand segments and drivers of value
Mort-
gage
9
11
2
14
100
8
Current
account
100
84
100
90
100
85
Sav-
ings
20
100
21
44
17
21
Card
81
29
15
36
82
32
Mutual
fund
19
19
17
34
20
59
Direct
invest-
ment
21
18
16
39
17
72
Insur-
ance
25
12
6
14
67
8
Credit
12
2
2
6
13
8
AUM/
customer
EUR
49,401
85,313
54,596
827
36,171
132,581
Number
of prod-
ucts
6.5
8.0
4.0
8.3
7.0
7.4
Profit/
cus-
tomer
EUR
2,825
117
-730
86
171
415
Number of
customers
Thousands
5
9
18
14
30
TOP 30% CUSTOMERS BY AUM
SOUTH EUROPEAN
BANK EXAMPLE
CUSTOMER PROFILE DEVELOPMENT
Average
Key insights
At least five distinct behavioral customer segments exist each with a distinct pattern
of product holding and usage
A large segment of savers primarily hold unprofitable savings and deposit products
Still significant potential to further drive product penetration across all customer
segments, particularly for highly profitable mortgage and card products
Exhibit 2
4
EMEA Banking Practice
Driving intelligent growth with Customer Value Maximization
Step 2: Create and prioritize a heat map. For identifying and prioritizing opportunities
banks need to look across all commercial levers (acquisition, customer develop-
ment, and retention) and across all customer segments. Reality is typically different,
however. Our recent interviews with 20 leading European banks revealed that only
15 percent of them were measuring impact of attrition on their results, with attrition
including not only lost customers, but also product and volume churn. This prioritiza-
tion exercise has both strategic and operational implications.
The first substep is to generate a heat map with large potential pools by seg-
ment/product/commercial lever. This helps banks identify areas of high impor-
tance, regardless of the scenario or strategy option, as well as those areas
relevant to a specific strategic option. Different segments and levers will be used
as a priority depending on the strategic goal the bank wishes to achieve: strategy
should be a combination of segment and commercial lever focus (Exhibit 3).
The second substep is to identify specific commercial opportunities from the
heat map by segment and to assess the relative value/importance of all key
levers (acquisition, development, retention) across all main segments (retail
mass, affluent; SMEs micro, small, medium), prioritizing commercial activities
for a given year. This will mean defining areas of focus and deprioritizing others.
At very advanced banks, annual commercial budgeting is verified bottom up
taking into account the additional growth target for each individual client or client
segment, and then adding up the results to achieve a figure for the entire net-
work (Exhibit 4).
Heat map analysis can be used to identify high-level CVM
opportunities by macrosegment
Key value
opportunities
CEE BANK EXAMPLE
HEAT MAP CREATION
Heat map model output scenario 1
EUR millions, annualized
Total
R
e
t
a
i
l
S
M
E
s
Mass
Affluent
Acquisition Development Retention
Subtotal
SOHO/Micro
Small
Medium
Subtotal
Segments
Key CVM value drivers
New cus-
tomers
97
110
237
30
40
140
24
33
Win-
back
39
4
33
37
0
0
2
2
Activa-
tion
123
40
23
63
21
16
23
60
Up-
selling
157
36
30
27
63
15
49
94
Cross-
selling
120
20
231
52
16
140
23
91
Renew-
als
4
0
1
1
0
0
3
3
Product
churn
196
25
30
101
126
22
18
70
Customer
churn
22
7
6
13
1
0
8
9
Total
1,009
262
321
583
166
96
164
426
Exhibit 3
5
EMEA Banking Practice
Driving intelligent growth with Customer Value Maximization
Step 3: Execute effectively across the organization. For impact on the bottom line,
defining bank priorities needs to be followed by developing specific commercial
initiatives and precise execution via the channels. Banks need to effectively manage
a bipolar world: with sophisticated analyses in the back office, being translated into
simple offers and processes for customer and frontline staff. Hence banks need
to work on accurately matching customers to attractive offers and significantly
improving campaign response rates by using enhanced customer information from
segmentation and advanced modeling techniques. It is often critical to use multilens
segmentation (for example, behavioral, needs, attitudinal, economic value, etc.),
advanced modeling (for acquisition, development, and retention), both historical and
predictive lifetime value, and descriptive statistics. Only then will a banks specific
actions for selected customer segments be sufficiently precise to have impact,
whether through best next product to buy, alternative pricing, product rebalancing,
or early warning signals of attrition. The results of these analyses need to be then
translated into specific offers though sales support tools for the frontline to be able to
effectively communicate with customers in this increased complexity environment.
Effective targeting of campaigns using value-based segmentation and propensity to
buy/churn models is crucial in the first instance. However, banks then need to execute
on campaigns more precisely by testing them before they go out into the field with them,
and by using optimal marketing processes to continually improve results. Best-practice
banks use multichannel, multivehicle campaign design for this as well as fractional
factorial test execution, vehicle testing frameworks, peer group models, and advanced
measurement and performance monitoring (Exhibit 5).
Identify opportunities to create value across
the customer base
-170
-50
-20
0
20
48
105
230
8
Average profit
per customer:
EUR 80
10 9 7
-7
6 5 4 3 2 1
845
Destroy 25% of total profit
Customer
deciles
Generate retention
actions and early
warning signals
Development of
deciles 2 and 3 (up-sell
volumes and usage
increase)
Targeted offer for cus-
tomers with deposits
elsewhere
Optimize service
levels
Increase activation rates/activity
levels
Increase cross-selling (overall
cross-sell and selected product
penetration)
Promote sending salary to
account and contact inactive clients
Introduce typical product
bundles, especially for attractive
products (e.g., current account for
every buyer of a savings account)
Modify pricing
Redesign product
Increase activation
rates/activity levels
Develop targeted
actions to develop
customers below 30
Optimize service costs
Generate 85%of total profit
Average customer profit per decile
EUR
HEAT MAP CREATION
CEE CLIENT EXAMPLE
Exhibit 4
6
EMEA Banking Practice
Driving intelligent growth with Customer Value Maximization

McKinseys Customer Solution Center
Some banks struggle when it comes to developing commercial actions based on
analyses of massive amounts of datat or to changing mindset in their distribution
channels. Migrating frontline employees from a reactive product-dispatching approach
to a highly targeted proactive client-by-client pitch as well as using reactive contact to
proactively offer best next product to buy is often a major challenge. Typical hurdles
include:
Data infrastructure issues: Relevant data is often dispersed nonhomogeneously
across business segments or units in various data sources across the organization,
and is hard to integrate quickly. Banks frequently struggle with insufficient capacity
to handle very large data sets to perform analyses on their full customer data.
Limited analytical and modeling expertise: Banks all too often lack expertise in
designing high-power predictive data models at an individual customer level (for
cross-selling or assessing churn risk, for example). They also tend to have very few
tested hypotheses on key levers to pull by product and customer segment, or none
at all.
Low campaign management capacity and capability: Banks capability to handle
multiple campaigns at the same time is often low, with limited tools typically
available, especially in branches (for example, use of a separate Excel list for each
product campaign). They also do not optimize channel roles, their utilization of
branch potential is low, and they lack automated campaign report mechanisms/
tools to monitor results and quickly adjust/learn.
Descri pti on Status Pre-campai gn Post-campai gn
Take% Costs ROI% Subs Rev Take% Costs ROI Subs Rev
BM xxx Idea
BM xxx ROI
MM xxx Approved
MM xxx Approved
BM xxx In progress
MM xxx Finished
MM xxx Evaluated
37
CampaignOverview
SMSStimulation
Resources
Offer Economics
Campaign: SMS Stimulation
Overview: Campaigndesignedtostimulateusageof SMS
Hypothesis: SubscribersthatSMS atleastoncewill likelybeginto
useSMS tosomeextent
Value Drivers: Usage
Segment: Postpaidandprepaid
Dates: 15/1/2004 15/02/2004
Campaign Owner: None
TemplateOwner: T. Akgodan
Department: None
Date: 03/12/2003
ROI Model Owner: None
Department: None
Date: None
Offer Execution
Target: SubswithzeroSMS usageafterfirst2monthsof
service
Size: Target: 3x10,000 Control: 10,000
Business rules: ARPU>25EURforpostpaid, Balance>5EUR, 0
SMS MoUinanyof previous6months, consumer,
>2monthssinceactivation, revenueaccts
Offer: 1) $100contest 2) 10freeSMS
3) 10freevoiceMoU
Pre-Campaign Estimates:
Take Rate ARPU Churn ROI
10% xx XxEUR xx
Channels:
DM TM Email
0% 0%
SMS Bill Messaging Bill Inserts
100% 0% 0% 0% O/B:
0% 0% 0% 0% N/A N/A I/B:
Messages: 2differentmessagesperoffer
Takers: 1251 (12.5%) Contacts: 9002 (90%)
Economics:
Target Total Control Net Change
3.68% -0.34% 3.67% Churn ($2641)
1.5% 23.07 xx
-2.2% 0.07 xx
80.8% 0.33 xx
-51.2% 0.26 xx
4.2% 26.99 Total Revenue $10687
Benefit / Revenue* $8047
- Cost of Offer
0.85 Cost of Contact** $8502
Total Costs $8502
ROI: ($455)
Notes: * xxxxx
To be completed post campaign
Scientific campaign design with quick tests and feedback cycles
is essential for capturing value
More, diverse ideas
Opportunity trees
Deep-dive facts/analyses
Focus on "unknown"
assumptions to test
Campaign idea Pre-campaign ROI
Standard screening
Expected return (ROI)
Prioritization of ideas
Accelerated approval
Test environment
execution
Fast implementation
Dedicated test support
Accelerated new
offers implementation
Scientific setup
Post-campaign ROI
Automated evaluation
Real economics of
campaign
Campaign library
Institutionalization of lessons learned
Alignment of pre- and post-campaign evaluation
Objective comparison of new and existing offers
Knowledge base of ideas for future offers
EXECUTION ACROSS ORGANIZATION
Clear timing, ownership,
and end products defined
across campaign process
Exhibit 5
7
EMEA Banking Practice
Driving intelligent growth with Customer Value Maximization
McKinsey has developed an answer to these obstacles. Its global Customer Solution
Center (CSC) combines deep expertise, analytical power, and infrastructure to analyze
our clients customer base and help them prioritize actions to design highly targeted,
high-impact campaigns. McKinseys Customer Solution Center allows banks to
accelerate the identification of opportunities to generate faster impact. The facilities
available include:
McKinsey IT infrastructure: Client data is transferred onto a remote McKinsey IT
platform with 24 TB capacity, offering a fast track to eliminate IT bottlenecks, avoid
interference with regular operations, and secure, state-of-the-art hardware and
statistical software applications.
McKinsey capabilities and tools: Statistical/data mining software, tested,
ready-to-use algorithms, best-in-class tools and capabilities, tried and proven
methodologies with quantifiable results, industry-specific, proprietary models, and
knowledge-leveraging cross-industry approaches (Exhibit 6).
These facilities offer a unique opportunity to quickly create an integrated customer
view from fragmented data environments, deep-dive into the individual customer value
and profile, understand segments and drivers of value, and jointly define bank-specific
initiatives.


CSC has developed an innovative service model, where on top of
analytical skills McKinsey also provides physical infrastructure

Action per client Client list
Mr. Smith
Mr. ___
Mr. ___
Mr. ___
Mr.
80,000 names

Mr. Smith
Mr. ___
Mr. ___
Mr. ___
150,000 names

Mr. ___
Mr. ___
Mr. Smith
Mr. ___
Mr. ___
100,000 names

Mr. ___
Mr. ___
Mr. ___
Mr. Smith Mr. ___
Mr. ___
50,000 names

Mr. ___
Mr. ___
Mr. ___
Mr. ___
Mr. Smith
1 million names
Cross-selling
Retention
Repricing
Nonperforming
loan early warning
McKINSEY CUSTOMER SOLUTION CENTER
Confidentiality
agreement
McKinsey bank

McKinsey
Customer
Solution Center
Data request

Sources
of value
Cross-selling
Retention
Repricing
Transaction
migration
Nonperforming
loan early warning
EUR m
10
20
30
5

25
90 Total
2
5 3
4
1
Commercial strategy for Mr. Smith: " Increase these 2
commissions, ask him not to use branches for cash
withdrawals, offer him this deposit, and have a con-
versation on whether his wife's payroll could come
into the accounts, too"
6
1
2 4
6
3 5
Exhibit 6
8
EMEA Banking Practice
Driving intelligent growth with Customer Value Maximization
Managing a banks existing customer base to capture higher revenues while also offer-
ing greater customer value requires vast analytical precision and reach. Clearly the
preferences and needs of each individual customer are different: the difficulty is mining
the relevant data time- and cost-efficiently. CVM turns data into value using a lifecycle
perspective with highly effective end-to-end customer analytics. Banks lacking the IT
architecture or skills have the option of entrusting the entire operation to McKinseys
Customer Solution Center. The advantage is that these capabilities and techniques,
once in place, are so granular that they are extremely hard for rivals to replicate. This can
give a bank a substantial competitive advantage, translating into boosting its bottom
line.
EMEA Banking Practice
December 2010
Copyright McKinsey & Company, Inc.
Driving intelligent growth
with Customer Value
Maximization
How banks should go
beyond CRM
Authors:
Anna Fiorentino
Knowledge Expert
Rome Ofce
anna_orentino@mckinsey.com
Magdalena Proga-Stpie
Associate Principal
Warsaw Ofce
magdalena_proga-stepien@mckinsey. com
Radek Przyby
Principal
Warsaw Ofce
radek_przybyl@mckinsey.com
Carlos Trascasa
Director
Madrid Ofce
carlos_trascasa@mckinsey.com