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Author:Jennifer McEnroe Tarr bcCustomer LoyaltyContributors:Kara Gruver,Ruma SanyalMarch 1998Copyright 1998 Bain&Company,Inc.Reviewer:Rob Markey1CU7030298IMBCustomer LoyaltyAgenda What is Loyalty?Evolution of the Loyalty PracticeLoyalty EconomicsHow Bain Helps Clients Maximize the Value of their Customer BaseExampleLoyalty Tools2LoyaltyWhat is Loyalty?Loyalty is a perspective on business strategy which emphasizes the delivery of superior value to the best customers and employees.Since their loyalty is key to profit and growth,their acquisition,defection,share of relevant wallet provide focal points for measurement,learning and improvement.Customer Loyalty3LoyaltyCustomer LoyaltyBain&Company.is responsible for virtually all the economic research,financial analysis and consulting in the field of customer retention and recoveryCouncil on Financial CompetitionLoyalty is a Bain&Company Innovation4LoyaltyCustomer LoyaltyAgenda What is Loyalty?Evolution of the Loyalty PracticeLoyalty EconomicsHow Bain Helps Clients Maximize the Value of their Customer BaseExampleLoyalty Tools5LoyaltyEvolution of the Loyalty PracticeCustomer RetentionCustomer LoyaltyKeeping customers:GoodLosing customers:BadCustomers who buy more:GoodSome customers will never buy moreROS/RMS doesnt work in servicesQuantification of retention economicsCredit/casualty lossesLow spenders or non-borrowersShare of wallet economicsMaryland NationalMBNACommercialBaxter IVD&IV systemsAmerican ExpressState FarmBankInterFirst CommerceFundamental insights:What led to the insights:Some examples:Over the years,the training on loyalty has evolved from“dont lose any customers”to“how do I maximize the value of my customer base”.Early in Evolution:Current View:Customer Loyalty6LoyaltyCustomer LoyaltyRetention vs.LoyaltyWhat is the difference between retention and loyalty?Loyalty is an approach to business strategy that emphasizes the retaining and growing of profitable customer segments.It is particularly powerful in clients who are in low fixed asset businesses(i.e.,service businesses)Retention is a tool we use in diagnosing and measuring a clients success in maximizing the value of their customer bases.Other tools include share of wallet and customer segmentation.Retention is often confused with loyalty because the early insights of the loyalty practice were around the retention of customers.However,using retention rate alone to assess loyalty may mislead clients and not maximize value.Remember,not all customers create value.We want to help clients retain valuable customers.7LoyaltyProfitability Drivers-ROS/RMS(Profit vs.Share)Beer IndustrySoft Drinks Industry Anheuser-MillerSchlitzPabstOlympiaOperating Income10%9876543210(Percent of Sales)Relative Market Share3.0 x2.01.00.70.40.30.20.10.050.5BuschCottDr.PepperR.C.7-UpPepsiCokeRelative Market Share3x210.70.50.40.30.20.1.050Operating Profit22%2018161412108642(Percent of Sales)We start with the empirically based belief that in many industries,market share is the key driver of profitability.Customer Loyalty8LoyaltyProfitability Drivers-ROS/RMS(Profitability vs.Portfolio Size)R=.022*Claims and expenses as a percent of premium incomeSource:Bests,Property&Casualty Premium RankingsInsurance Industry ExampleCustomer LoyaltyHowever,many service industries(or other low fixed cost businesses)show no relationship between RMS and profitability.9LoyaltyProfitability Drivers(Profitability vs.Retention)For these industries,retention is a better driver of profitability.Companies with higher retention utilize their customer assets more effectively.R=.82*Claims and expenses as a percent of premium incomeSource:Bests,Estimated Retention RatesInsurance IndustryCustomer Loyalty10LoyaltyProfitability Drivers(Profitability vs.Retention)MidwestGothamChesapeakeLibertyGreat Lakes0%1%2%3%4%70%80%90%100%Profitability(Pre-Tax ROA,5 Year Average)Retention Rate OmnicomWPP*FC&BGreyInterpublicLeo Burnett0%2%4%6%8%10%12%14%16%18%Profitability90%92%94%96%98%100%Retention RateCredit Card Industry(Disguised)Advertising IndustryCustomer Loyalty11LoyaltySource:Bain Survey,Bain&CompanyCustomer satisfaction was the traditional measure of quality in service businesses.But there is little correlation between customer satisfaction indices and financial measures.012345020406080Customer Satisfaction IndicesRevenue100Revenue(40)(30)(20)(10)00204060801001020304050Revenue Change(%)Customer Satisfaction IndiciesRevenue Growth04080120160200020406080100Customer Satisfaction IndicesProfit240ProfitCustomer Satisfaction ProfitabilityCustomer Loyalty12LoyaltyCustomer LoyaltyAgenda What is Loyalty?Evolution of the Loyalty PracticeLoyalty EconomicsHow Bain Helps Clients Maximize the Value of their Customer BaseExampleLoyalty Tools13LoyaltyCustomer ValueThe first step in viewing customers as long term assets is calculating lifetime customer value.$15,000$15Single purchaseRetained for 10 YearsNo matter how valuable I was telling them a customer was,our people needed to have that magnitude in their mental balance sheet.Phil Bressler,Dominos PizzaCustomer Loyalty14LoyaltyCustomer Profit PatternCustomers are costly to acquire.The longer a customer stays with a company,the more they recover the original acquisition cost and earn additional profit streams.Typical evolution of profit by customerAcquisitionVolumeCost ImprovementReferralsPrice PremiumAcquisition CostsCustomer LoyaltyMethodology 15LoyaltyCustomer Profit Pattern(Credit Card Example)50%67%75%80%88%90%Retention Rate:Companies with high customer turnover will continually be replacing profitable,mature customer relationships with unprofitable new ones.Customer Loyalty16LoyaltySource:The Loyalty Effect,Bain&Company,Inc.Impact of 5%Retention Rate Increase on Customer NPVDepending on the industry,a 5%increase in customer loyalty can increase profitability by 40-95%.AdvertisingAgencyLife InsuranceBank BranchDepositsAuto/HomeInsurancePublishingAuto ServiceCredit CardInd.DistributionIndustrialLaundryIndustrialBrokerageOfficeBuildingManagement95%90%85%85%84%81%75%50%45%45%40%0%20%40%60%80%100%Increase in Customer Net Present ValueCustomer Loyalty17LoyaltyLoyalty as a Growth Driver012345678910$0MM$20MM$40MM$60MM$80MM$100MM$120MM$140MM$160MMYearPretax Net Income(Millions of Dollars)90%retention rate 95%retention rateImproved customer retention greatly accelerates growth.Customer Loyalty18LoyaltySource:Bain Loyalty PracticeLoyalty Leaders Growth vs.IndustryLoyalty LeaderIndustryCompanyIndustryRelative RateDeere&Co.Lawn Equipment5%1%5xA.G.EdwardsStock Brokerage26%7%4xIntuitFinancial Software60%36%2xLexusLuxury Autos67%4%17xMBNABank Card27%9%3xState FarmInsurance8%3%3xUSAAFinancial Services8%3%3xRevenue Growth(1989-94)Companies with the highest customer loyalty rates have typical growth rates 2x to 5x the industry average.Customer Loyalty19LoyaltyCustomer LoyaltyAgenda What is Loyalty?Evolution of the Loyalty PracticeLoyalty EconomicsHow Bain Helps Clients Maximize the Value of their Customer BaseExampleLoyalty Tools20LoyaltyStrategic Approach to LoyaltyLifetime Customer ValueSegmentationLifecycle NeedsRetention ImpactFull PotentialNot all customers are equalSegments differ in value based onneedspreferencesbehaviorCapturing 100%share of relevant wallet requiresdynamic vs.static view of purchasestracking and projecting how needs evolve with lifestageAttrition rate must be used to discount expected cash flowsAttrition differs by segment and lifestageRetention ImpactCustomer behaviors are changeableValue of customers can be increased through targeted value sharing incentivesProperly capturing customer lifetime value has four requirements.Customer Loyalty21LoyaltyCustomer Value SegmentsDifferent customer segments create different levels of value for a company.Best CustomersOther CustomersHouseholdsAnnual Variable ContributionFully-Costed Contribution(50%)0%50%100%150%Customer Loyalty22LoyaltyCustomer Value SegmentsHousehold value:$1,118$91Number of services per household:4.42.8Retention:92%83%Share of business:44%16%Best CustomerOther CustomerThese best customers tend to look quite different from the others.Customer Loyalty23LoyaltyStrategic Approach to LoyaltyLifetime Customer ValueSegmentationLifecycle NeedsRetention ImpactFull PotentialNot all customers are equalSegments differ in value based onneedspreferencesbehaviorCapturing 100%share of relevant wallet requiresdynamic vs.static view of purchasestracking and projecting how needs evolve with lifestageAttrition rate must be used to discount expected cash flowsAttrition differs by segment and lifestageRetention ImpactCustomer behaviors are changeableValue of customers can be increased through targeted value sharing incentivesProperly capturing customer lifetime value has four requirements.Customer Loyalty24LoyaltyCustomer Corridor(Automobile Example)Customer EntryShoppingPurchaseDeliveryServiceTrade-InRepurchaseService RetentionTrade-InPoints Where Value is CapturedA loyalty leaders view of their customer goes beyond the initial product or service purchased to capture the total share of wallet.Points of Customer InteractionCustomer Loyalty25LoyaltyCreating a Loyalty-Based Business System(Lexus Example)Customer TargetingCustomer ExperienceAdvertisingDealer NetworkDealer TrainingMeasuresCadillac/MercedesRemove the flawsLoyalty themePartner with select fewLoyalty driversPercent repurchase and serviceLexus developed a business system that emphasized the customer and removed the flaws customers experienced with competitive products.Customer Loyalty26LoyaltyAutomobile Repurchase Rates45%61%78%0%10%20%30%40%50%60%70%80%90%IndustryHondaLexus(Target)Repurchase Rate75-80%Lexus target repurchase rates are 50%higher than the industry.Customer Loyalty27LoyaltyAutomobile Repurchase RatesLexus is approaching their goal with 68%of previous Lexus owners replacing their car with a new Lexus.AcuraPrevious VehicleNew Vehicle PercentageLexusMercedesBMWLincolnCadillacInfinitiJeepJaguarVolvoSaab68342324 1-121442425171-11113543-241-31841164712-1-31185411-117112-354111-29-2253-221523-22116-2-25-3-4141285 9212-21-29 2189679-10221282AudiLexusMercedesBMWLincolnCadillacAcuraInfinitiJaguarVolvoSaabAudiCustomer Loyalty28LoyaltyService Retention:Auto DealerLexusHondaFordIn addition,Lexus service retention is significantly higher than competitors.Customer Loyalty29LoyaltyStrategic Approach to LoyaltyLifetime Customer ValueSegmentationLifecycle NeedsRetention ImpactFull PotentialNot all customers are equalSegments differ in value based onneedspreferencesbehaviorCapturing 100%share of relevant wallet requiresdynamic vs.static view of purchasestracking and projecting how needs evolve with lifestageAttrition rate must be used to discount expected cash flowsAttrition differs by segment and lifestageRetention ImpactCustomer behaviors are changeableValue of customers can be increased through targeted value sharing incentivesProperly capturing customer lifetime value has four requirements.Customer Loyalty30LoyaltyCustomer Lifecycle Profits(Insurance Example)Annual Profits($300)($200)($100)$0$100$200$300$400$500Age 18-24Age 25-3412345678910YearLooking only at customer lifetime value,this insurer would conclude that both segments could be profitable.Customer Loyalty31LoyaltyCustomer Retention Rates Vary Widely by Age Segment(Insurance Example)35%36%37%41%45%52%61%70%85%9%13%17%23%28%36%45%58%72%100%0%20%40%60%80%100%12345678910Percent of Customers Retained100%YearAge 18-24Age 25-34Cumulative Retention RatesHowever,the 18-24 year old segment had much higher defection rates.Customer Loyalty32Loyalty(Customer NPV)Insurance Example$450($70)($100)$0$100$200$300$400$500Age 18-24Age 25-34Net Present Value Unless the 18-24 year old retention could be improved,they would not be a profitable segment to target.Customer Loyalty33LoyaltyRoot Cause Analysis:Why Customers Drop OutConvenienceServiceEmployeesMistakesProcessing delaysUnavailability of exclusive serviceSpeed of service (Long lines)Location of branch or ATMHours(Inconvenient)FarBad accessHomeWorkDrive-thruParking Walk throughCharges and feesFeesFinesToo highNot reversedInterest ratesVersus the competitionMinimum balanceUnfriendlyProblem-solvingDont know meTakes too longKnowledge and demeanorUnprofessionalUnknowledgeablePolicy not waived in certain circumstancesConcerns about check coverageSpecial treatmentSafe deposit boxesDirect depositPriceDepositor root causes of defectionRoot cause is typically utilized to determine causes of defection.It,too,must be analyzed on a segmented basis.Customer Loyalty34LoyaltyDifferent Customer Segments Defect for Different ReasonsA segmented view will lead up to develop different strategies for best versus other customers.Customer Loyalty35LoyaltyStrategic Approach to LoyaltyLifetime Customer ValueSegmentationLifecycle NeedsRetention ImpactFull PotentialNot all customers are equalSegments differ in value based onneedspreferencesbehaviorCapturing 100%share of relevant wallet requiresdynamic vs.static view of purchasestracking and projecting how needs evolve with lifestageAttrition rate must be used to discount expected cash flowsAttrition differs by segment and lifestageRetention ImpactCustomer behaviors are changeableValue of customers can be increased through targeted value sharing incentivesProperly capturing customer lifetime value has four requirements.Customer Loyalty36LoyaltyOptimizing Customer BaseAll other customers strategyBest customer strategyIdentify the most valuable customers to retain and penetrateDevelop a robust value proposition to sustainably meet these customers needs better than competitorsFind and attract more of these customersinternal candidatesexternal prospectsReduce the costs to servetransition to alternative delivery vehiclesprocess/product redesignbusiness system redesignselective automationoutsourcingpartnershipsPrice products and services for profitMaximizing the value of the customer base requires prioritization of segments,and the development of tailored approaches.Customer Loyalty37LoyaltyValue Proposition-Right Customers(Bank Example)At each point of contactplatformtellerATMstatementsteleserviceHigher service levelsBetter pricingRethink qualifying balances for discounts,bundled productsloans and deposits and investments balancesInfrequent overdraft feesCheck order feesConsolidated statementsPlatform identifiersTeller/ATM identifiersDedicated personal bankersSeparate teller linesSeparate teleservice phonelinesGrace period to requalifyTotal vs.deposit balance criteriaFree checksOverdraft to savings/MMAAction Implications:Banking Example:For your target customers,you must translate their needs into an improved value proposition.Customer Needs:Demonstrate that you know us“Treat us better because we are good customers”“Recognize the impact of life events on our needs”“Do not nickel and dime me”“Do these,and I will be willing to consolidate my business with you”Customer Loyalty38LoyaltyValue Proposition-Right Customers(Bank Example)ProductServiceDeliveryCommunicationBundled product to include:checkingbankcardservice discountsfree checkstiered savings rates CD bonus tiersTotal vs.deposit-only balance qualificationCreate links with investments,annuities,etc.Assign a well-trained personal banker to each customerAccess MMA/Savings account to cover overdraftsPre-approve loansOffer financial planningOffer premium service at each point of contactseparate teleservice line with shorter wait times,higher qualityseparate teller linesEmphasize targeted vs.mass forms of communicationtargeted mailingshigh value phone calls/telemarketingSemi-annual statement on benefits of product,current usage of featuresClear,consolidated statement for all accountsBank Co.offered a new integrated value proposition to high value customers.Customer Loyalty39LoyaltyProduct Simplification-Low Value Customers(Bank Example)FREE30 Minimum to openMonthly maintenancePer check chargesBalance for no chargeATM card issuanceFree Automated TransactionsBasic CheckingInsurance CheckingPremiumChecking Simple New Bundle$50$50.55 over 5N/A$5.0010$50$8.990.20 over 35N/A$5.0010$50$7.990.20 over 20$700$5.0010BankcardAPR discount1st year feeReady ReserveAPR discount1st year feeNoYesNoYesYesWaivedNoYes YesWaivedNoYes YesWaivedYesWaived Incentive for not using branch for transactionsNo No No YES l3 products1 product:Lower costslIncentive to use alternative deliverylIncentives for bundling other productsOne standard price,fee,and balance structureConsolidate/EliminateYou also need to reduce resources serving the non-target customers.Bank Co.streamlined service to low value customers.Customer Loyalty40LoyaltyOptimizing Customer Base-Summary(Bank Example)At Bank Co,streamlining offer to low value customers drove near-term profitability which was used to invest in value proposition for higher value customers.High Value CustomersLow Value Customers%of Households20%20-40%50%Average Value$250+$0-$250$0GoalAcquireRetainPenetrateIdentify high potential upsellLower cost to serveReduceLower cost to serveO.K.to defectPercent of Year 1 Value Created25%15%60%Percent of Year 5 Value Created65%2%16%Customer Loyalty41LoyaltyAchieving Full PotentialAcquire Right CustomersMaximize Relevant Share of WalletCross-sell/UpgradeBuild OnRetain/RecoverCustomer segmentationDecliner analysisRevenue sieveChannel share/growth analysisLifetime valueBehavioral economicsAnalyticSystem economicsExpanded customer corridorDefector analysisVulnerability assessmentCustomerneedsresearch Targeted acquisitionAwareness building(advertising)Loyaltyprograms ImplementationNew businessesRecovery unitsDialogue marketingProduct DevelopmentBain&Company assists clients in maximizing value of their customer bases.Customer Loyalty42LoyaltyCustomer LoyaltyAgenda What is Loyalty?Evolution of the Loyalty PracticeLoyalty EconomicsHow Bain Helps Clients Maximize the Value of their Customer BaseExampleLoyalty Tools43LoyaltyCustomer LoyaltyInsure Inc.*-Background*Disguised client caseSituationInsure Inc.is the second largest auto insurance company in the US Historically,Insure has been profitableComplicationFor the past two years,the industry growth rate and profitability have declined8The market is only growing at the rate of population growthInsures growth rate has declined recently,and for the past two years it has been running a lossHypothesisInsure will be able to regain its strong growth rate and high profitability by retaining target customersBain developed a retention strategy for Insure Inc.,a large U.S.auto insurance company.44CU7021398RSACustomer LoyaltyInsure Inc.-Profitability Drivers(p.1)Auto Premium-Auto insurance premium paid by customersPremium per customer increases with customer tenure due to the following reasons:customers tend to buy more insurance as they get older.For example,as they get older and their family size increases,they buy insurance for a second carcustomers tend to buy more expensive products as they get older.For example,they tend to buy more expensive cars that require higher premiums.Investment Income-The income from premium invested in securitiesIt increases from$9 per year for a new customer to$52 per year for a 10 year customerThe reason for this increase is a combined result of lower premiums and higher expenses for a new customer versus higher premiums and lower expenses for a customer with longer tenureAcquisition Cost-Cost of acquiring a new customer.Acquisition cost only exists in the first yearFor Insure,the average acquisition cost per customer is 5%of the first year premiumCommission Expense-Sales commission for customer acquisition;paid to the agent/sales representative who sells the policyThe commission expense for new customers is 17%and for existing customers 6.5%of the premium,since it is more difficult to bring in new customers than to retain existing onesFollowing are the drivers of profitability in the auto insurance business:45CU7021398RSACustomer LoyaltyInsure Inc.-Profitabili