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•Although least competent at measuring customer profitability, Insurance has made considerable progress in applying marketing budget to customer development – possibly with the objective of new and existing channel development.

Introduction
Business leaders and marketing professionals increasingly speak of ‘customer-centric’ strategies. Yet for all that the term is readily bandied about in the boardroom and in marketing strategy documents, few, when pressed, are able to systematically define what ‘customer-centric’ means for them in commercial terms. Business strategies are only useful if they advance real business achievements – market penetration, customer profitability, competitive position, and so on. There is little point in delivering excellent customer service if it does not drive revenue and profit growth. There is no value in creating delighted customers if they still defect when a price-competitive alternative appears. Nor is there sufficient commercial advantage in recruiting droves of new customers if equal numbers are going elsewhere.

Research by Pitney Bowes has shown that we are on the cusp of a sea-change in the balance of marking effort devoted to recruiting new customers (“prospecting”) when compared the effort put into doing more with existing customers (“customer development”). This research predicts that by the end of 2005, the overall majority of marketing spend will have turned towards customer development. Today, prospecting still holds the dominant position (just). Possible reasons for this trend are cited as: the expanding range of non-traditional products and services offered by companies from supermarkets to petrol stations to ISPs; the rising capabilities and sophistication of direct marketing techniques; increasing restrictions on the use of prospecting lists; and more.

In the light of these findings, business managers have a compelling incentive to understand what ‘customer-centric’ really means to their bottom line results, as doing more with the people you already know becomes more important than finding new friends. Establishing a generic formula for evaluating ‘customer focus’ and then researching how different industry sectors perform against those measures is the subject of this research report from Total DM.

Methodology
Three key measures were selected to describe customer-focus.

1. Companies must be able to measure the profit that each customer generates if they are to have ‘customer focus’ that is commercially useful. This is distinct from measuring the profitability of a product or a channel. Understanding profitability by customer allows differential strategies to be implemented, which reward and retain customers on a sliding scale according to their value to the organisation. This can then be modelled forward to predict which customers value to the organisation are likely to grow in the future and encouragements formulated accordingly.

2. Measurements of profit are, however, often constructed to embrace only the initial cost of sale. This is of little use if the ongoing cost of servicing a customer outweigh the margin of profit that customer is generating. We therefore have also included the ability measure the cost of customer service on an individual customer basis in our model of customer focus.

3. Finally, it is critical that organisations have recognised and embraced the importance of the trend towards customer development, and that this is reflected in actual marketing budget allocation. Therefore, the last component of our measure of customer focus calibrates the rate at which different industries are moving marketing spend towards customer development.

•Research was carried out amongst the UK’s top 1000 companies

•Research methods were email and telephone interviews.

•The research period was March 2004

Interpretation of Findings

Generally speaking, the less customer focused industries (Utilities, Telecoms and Insurance) tend to be far more capital intensive, and carry a greater burden of capital debt to service, than the industries revealed to be more customer-centric (Banking and Retail).

In the light of this overall comment, it is worth briefly examining each sector in turn.

Telecoms and Utilities, as well as being capital-intensive sectors (generating plant, network costs, 3G licenses, etc) they are also providers of a core service where it is difficult to change patterns of usage. Consumers will tend to use the same amount of power, and make roughly the same number of phone calls, however much marketing is put their way. Both sectors are gradually looking into the process of providing further, non-traditional products and services to their customers, but with heavy regulation, capped pricing and increasing competition, their core marketing activity remains very much driven by the finance department’s requirement to produce immediate revenue, both to service debt and to influence shareholders. This means that these sectors remain focused on customer acquisition and market share growth, over and above customer development.

Nevertheless, if the ambition of both sectors to extend their range of products and services into new areas such as finance, insurance, information provision, home services, and so on, then ways must be found to release significant resources in a bid to become more customer focused, understand customer requirements, motivation and potential, and grow bottom-line results through these new product lines. It is interesting to note that pioneers in these sectors that have already started to ‘stretch their brands’ into new product areas, have mainly done so through acquisition, and do not yet seem to have merged those businesses’ underlying databases to obtain a 3600 view of each customer. That is the first step on the road to customer focus.

Insurance is also capital intensive in the sense that regulatory reserves need to be retained, and re-insurance bought, to hedge the risk of loss. But it is perhaps more pertinent to say that the industry is very much finance-led. A bad risk cannot be a good customer. Risk is still predominantly measured by line portfolio and not by all-round customer profile. The management of risk is a very technical matter and is unlikely to compliantly change its processes in response to marketing initiatives. Indeed, many apparent marketing initiatives are in fact risk-based: women-only motor policies; household and motor policies for particular cities or localities; all derive from taking a density of risk knowledge and making it into a marketing specialism. And let us not forget that pricing for market rather than for risk in the 1990s caused the industry to become loss-making for several years.

Consolidation, rather than new product expansion seems to be the game in general insurance today. General insurance has finite product range, communicates with customers only a few times each year, is highly intermediated, and has little appetite for non-core product development. Yet a particular form of customer-focus is helping to drive insurance revenues and competitive edge forward. This is the process of gaining additional partner brands through whom to market policies, either on a white-label basis or as an overt partnership. This cannot be achieved unless a match between the insurer’s policyholders and the potential partner’s customers can be demonstrated, both to convince the partner to get involved and to reassure the insurer that there will be likely take-up from good risk customers of that partner. The insurance sector therefore has a major incentive to develop its customer focus in order to better select and manage new and existing reseller channels.

Why, then, should the banking industry be so much more customer focused than insurance? They are, after all, both financial service providers, and they both deal with risk – in the one case claims, in the other case defaults. The first answer lies in the nature of these two sorts of risk. For lenders, default risk is certainly important, but problem customers can often be managed back into health and actual losses avoided. Evidence is often available of a consumer’s impending financial distress, and rarely does a bank simply ‘lose the lot’. This contrasts with insurance risk where the first sign of a bad risk is the issuance of a claim. There is no halfway house in insurance risk.

A second factor is that banks offer a far wider range of products than insurers, affecting many more aspects of a consumer’s financial life. So the potential value of the individual banking customer is proportionately higher than that of the typical insurance customer. Moreover, banks have frequent communication with their customers, providing regular opportunities to cross-sell other products. Banking is also far less competitive than insurance, with typical annual defection rates less than half that experienced by insurers. So banks can rely on a high level of customer inertia, allowing them to spend less time on retention strategies and more time experimenting with customer development. Nevertheless, our research showed that the banking industry fell behind the retail sector when it came measuring immediate and long-term customer profitability. This could be greatly influenced by the cyclical nature of banking profits, but may also be the result of a lack of measurement of ongoing customer service costs in the banking industry.

Retail emerges as the star of the show for customer focus. In practical measurement terms, retail costs are highly identifiable. Goods sold have a very specific margin and associated cost of acquisition and distribution. Outlet maintenance and management costs, as well as staff expenses are relatively easy to measure. Add to this the increasing number and sophistication of loyalty card schemes which capture customer details, purchasing habits and preferences, and the retail sector moves into poll position for accurately measuring individual customer cost and profitability.

Retailers have perhaps most to gain through customer profiling. Adding products can be achieved with no extra capital investment required. Moreover, retail purchasing habits and preferences are more easily grouped into intuitive patterns – for instance, expensive wine, fine food, quality home furnishings and more expensive electronics logically go together – and the analysis of customer profiles can reveal fruitful cross-selling and promotional opportunities that immediately impact the bottom line as well as developing longer-term customer buying habits.