The Relationship Factor
By Rick Spitler and Sherief Meleis
Great advantages can be gained by incorporating relationship insights into product design and pricing, but only if providers learn to translate concepts into action.
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Relationships have taken center stage in retail financial services. Across the nation, providers have realized that the quality of interaction with customers must improve if they are to achieve their goals of profitable revenue growth. Institutions are working as never before to increase their sensitivity to customer preferences.
Yet, perhaps in the majority of cases, significant opportunities still are being forfeited because the customer point of view is not adequately reflected in the provider's offers. Cross-sales are missed, margins are needlessly compressed and customer satisfaction and loyalty are endangered, all because important variations in customer demand have not been taken into account.
Specifically with retail financial services products, for example, it is common to see elaborate bundles pushed at upscale customers on the basis of their purchase ability, disregarding this segment's general preference to work with multiple providers. In other cases, standardized offers are ineffectively broadcasted to customer groups with sharply differing needs and sensitivities.
In still other cases, pricing and benefit combinations ignore the way target customers make their purchase decisions. Discounts are used as a blunt-force tactic to encourage volume purchases, for example, but often wind up misdirected and ineffective.
The good news is that relationship insights can go a long way in correcting such problems. Leading institutions know that variations in customer demand actually provide tremendous opportunity. The future belongs to those who do the very best job of aligning offers with the needs of varying customer segments and the individuals within them.
To reach the next level, however, executives will have to surmount some organizational challenges. Separate product systems must be melded in a way that unlocks new pricing and packaging possibilities. Product design must be elevated so that relationship insights are embedded into the very architecture of the institution's offerings. And the sales process must be refined so that reps and their customers clearly understand the respective offerings and their benefits.
The enormity of the undertaking within a far-flung organization cannot be denied, yet there are benefits to be had at each step along the relationship path. And for the many major providers serving the full spectrum of customers, the one best hope in capitalizing on sophisticated capabilities and distribution systems lies with tailored approaches to major customer segments.
Product Disconnect
The continuing disconnect between what customers want and retail institutions provide is clearly reflected in product packages, both in design and pricing. An analysis of the top 35 U.S. banks shows that the most commonly offered bundle includes deposit, loan and investment products, typically targeted at the affluent.
By contrast, fresh consumer survey insights developed by Novantas and BAI Research show that the bundle with the broadest appeal to customers includes deposit and credit products, not investments, and that a significant portion of demand comes not from the affluent but from customers with more modest incomes. Indeed, many upscale customers exhibit a decided interest in engaging multiple types of financial services providers — not concentrating with just one.
Thus bundling is not just for the affluent, and it is not limited to gathering customer assets. There are no hard and fast rules on bundling, in fact, because customer preferences differ markedly, reflecting the great variances in the socio-economic circumstances of major segments. Many retail financial institutions have yet to recognize that fact and respond appropriately.
A further point with relationship bundling is that it need not — and indeed should not — be limited to a mix-and-match exercise based on current offerings. While it is true that intelligent combinations of current offerings can improve differentiation and profitability, there are even more advantages to be had.
In other industries, providers have found ways to spark volume purchases through innovative product bundles. Their technique is to array products around the solution of particular customer problems. Vacation packages, for example, encourage add-on purchases but also relieve customers of the need to sort through myriad options for travel, lodging and entertainment. Likewise, a "cold weather package" relieves the auto owner from having to separately chase down snow tires, a heavy-duty battery, special engine coolant, backup emergency towing arrangements, etc.
The best examples of solutions-based packages in financial services lie outside of banking. A premium-priced relationship product offered by American Express, for example, bundles concierge, travel and payment services. A bit closer to banking, ABN AMRO offers a "one-fee" approach to getting a mortgage that simplifies the process and helps ensure smooth closing of what is perceived to be a complicated and difficult transaction.
While banks have not yet gone beyond the traditional "value-added" package ingredients of reporting and information, advice and convenience, there are strong indications that the next wave of relationship bundling in that industry will emphasize "solution-based" offerings that combine a variety of financial and non-financial services.
Pricing Sensitivity
We have seen how retail financial services packages tend to overly reflect the preferences of the providers, as opposed to customer needs and sensitivities, and that disconnect certainly holds for pricing as well.
Consider volume discounts. Understandably, providers have seized on the favorable economics of packages and have flocked to discounts as a means to promote multi-product purchases. Of the 24 largest banks offering relationship pricing, 15 offer enhanced rates on either loans or deposits and a dozen offer fee waivers for combined balances.
The rationale for "the more you buy, the more you save" is clear, but what is often completely unclear is whether such offers are grounded in what customers want and how they make their purchase decisions.
With deposit products, for example, pricing is reflected in at least three ways: minimum balances, fees and rates. Customers not only vary by type of sensitivity to these three factors, but also by degree of sensitivity. Then with packages, customers also vary in their sensitivity to the various enclosed products. Not surprisingly, different customer segments respond in remarkably different ways to certain features and combinations.
One pragmatic application of relationship insights, then, is to learn to vary pricing in accordance with customer sensitivities. You might call it an advanced form of give-and-take, where the provider better understands the types of concessions required by various customer groups, and also pinpoints the areas where it can obtain full or even premium pricing for the value it provides.
A recent statistical analysis of national consumer survey findings by Novantas and BAI Research highlights the importance of catering to segment variations. For example, several segments are highly sensitive to fees and minimum balances but indifferent to rates on deposit and loans. Here, packages can be designed that reward customers with fee discounts and low minimum balances, and also reward providers with better margins on loans and deposits.
Underscoring the drawbacks of indiscriminate discounting, some customers are relatively indifferent to all forms of price and, therefore, do not require any form of discount or rate enhancement as a condition of patronage.
Comprehensive Approach
The place where packaging and pricing insights powerfully come together is with customer segments. At Wells Fargo & Co., for example, the Homeowner's Pack blends deposit and loan products, a low-minimum-balance requirement and a mortgage in a package apparently designed for young families. At KeyCorp, the Access Solutions account apparently serves time-sensitive customers who want expedited ways to manage their money. It offers enhanced non-branch access and targeted services such as account aggregation.
Although these individual examples are encouraging, breakthrough performance requires far more than having a few highly tailored products. To get the most from relationship insights in packaging and pricing, the institution needs to strengthen itself in the areas of product breadth, merchandising and messaging, and relationship anchoring.
Product breadth. A robust implementation of relationship-based packages recognizes opportunities to customize offers across the full spectrum of customer segments. The goal is to build a broad suite of products that capitalize on relationship insights.
This is necessary because the typical branch-based retail franchise draws customers broadly from the market and thus serves a wide range of market segments. These groups are by no means homogenous, and indeed, there really are no "average" customers.
Merchandising and messaging. By crafting messages that resonate with customers and clearly communicating product benefits from their point of view, the provider unlocks opportunities to increase customer satisfaction even before revisions in package features, functions and pricing.
Setting aside specific product attributes and simply considering customer viewpoints for a moment, there are enormous variations in how customers perceive various offers and providers. Relationship insights can help the institution to position products — and itself — more precisely and more advantageously with different customer segments.
Relationship anchoring. The first priority with customers is to establish a dialogue and get in touch with their needs. With a foundation of understanding and trust, the provider has the best opportunity to offer appropriate solutions, expand relationships through cross-sales, and minimize damaging misperceptions and errors.
Given the huge variations in customer perceptions and needs, there is always a risk of getting off on the wrong foot with new accounts. The client's needs may not fully come to light. Products may not prove appropriate. Features may not get activated. Such outcomes can have a disastrous effect on customer satisfaction and loyalty.
Organizational Challenge
As senior executives know, many clear and highly compelling initiatives have foundered on the rocky shoals of execution, and that is why certain organizational barriers must be overcome if relationship-based ventures are to reach their full potential. Specifically, product systems must be melded so that they better support package and pricing variations, the packages themselves must be clarified and elevated in their design, and representatives must assimilate new approaches so they can convey the value to customers.
At many institutions, various major types of products still are supported by separate systems that are limited in their ability to interact with each other. That is a problem if the goal is to create a suite of segment-targeted packages each having unique product/pricing characteristics. The provider shouldn't have to build an electronic "stovepipe" between product silos each time it wants to try something new.
An additional rationale for the integration of product systems is that there could be tremendous opportunities to vary offers not only on a segment basis, but also on an individual basis. Research techniques and products already are in place that enable the provider to gauge individual preferences and price sensitivities with a high degree of statistical accuracy. With the right system support and front-line training, such insights could be woven into individual customer interactions and offers, boosting both customer satisfaction and relationship profitability.
With product design, an approach based on relationship insights and targeted customer segments ups the ante on getting the packages right and places new responsibility on the product managers. By definition, customization sacrifices some aspects of mass appeal in order to capture pockets of special demand. If a particular custom configuration resonates with the target segment, there can be special rewards for the exercise, but if not, the offer likely will resonate with no one and may penalize the provider.
This is why it is critical for product managers to understand customer segments and their needs and then impound relationship insights into the design of packages and products that meet those requirements. It is important to keep this exercise in balance, however, so that customization does not result in runaway product proliferation. The positive connotation of "choice" can veer into the negative connotation of "complexity" if customers feel they have to sort through too many options to find what they want.
Complexity also is an issue for the sales force. Branch reps need to be trained on relationship products so that they can explain them clearly to customers. When the product line-up becomes too complex for the sales force to explain, the odds are increased that customers will wind up with the wrong packages. Such mismatches inevitably come back to hurt the bank.
Providers should solicit feedback from front-line representatives as they decide on the number of product packages to be offered, and then invest heavily in training before rollout. In essence, reps themselves need to be sold on the packages before they can sell them to customers. Experience suggests product line-ups should feature no more than five or six packages.
Keeping Sight of the Goal
As executives roll up their sleeves and try to incorporate advanced relationship insights into the daily operations of the organization, there is a distinct danger of getting lost in the process and losing sight of the goal.
The end game is to improve customer retention and relationship profitability. This is achieved not through relationship insights per se, but by using such insights to make constructive changes in products, packages, campaigns and customer interactions. In that light, analytical groundwork should be broached in the spirit of preparation for action.
Either for the entire customer base or for target groups, the whole purpose of exercises such as demand-side analysis and customer segmentation is to discern important — and actionable — variations in customer needs, product preferences and pricing sensitivities. In turn, such insights can be used to improve the overall organizational approach to the customer, as well as opportunistic campaigns aimed at various target customer groups.
As an example of how relationship insights can make a difference at the bottom-line, it is reasonable that such insights could bring about an improvement of 10 basis points in the yield of a typical deposit portfolio. In the current rate and margin environment, this translates into a roughly $10 million improvement — and scores of institutions have deposit portfolios larger than $10 billion. This sort of achievable financial reward is the fuel that will propel institutions into the next level of relationship products and pricing.
The first wave of relationship packaging involved discounts that rewarded purchase volume. But incentives were strictly based on the provider's product economics and did not incorporate customer perspectives on pricing sensitivities and desired combinations.
In the new wave, providers are beginning to understand the differing preferences and sensitivities of major customer groups, and they are incorporating such insights into a menu of products targeted at those segments. The retail financial services institutions that prove most adept at this will distinguish themselves from competitors and gain market share while minimizing commodity competition.
Mr. Spitler and Mr. Meleis are partners with Novantas, a management-consulting firm based in New York City.