Profiting from Customer Intimacy

“Customer intimacy” has become the latest buzz word among bank marketing managers. With little prospects of generating new growth in today’s sluggish economy, banks are pursuing deeper relationships with existing customers, also known as “expanding share of wallet.”

So, how do you go about establishing customer intimacy? And with which customers?

To help answer these questions, the BAI Bank Executive Marketing Exchange (BEME) has invited Massachusetts Institute of Technology Senior Lecturer Jonathan Byrnes to speak May 3 at its BAI BEME Spring Forum on the topic of “From Centricity to Intimacy: Preparing to Get Closer to Your Customers.” Byrnes, who is also president of the Jonathan Byrnes & Co. consulting firm, is known for his book Islands of Profit in a Sea of Red Ink, which advises companies on how they can become more profitable.

In the following interview, Byrnes explains how companies need to focus their profitability-improvement activities on their most profitable segments (typically only 20% to 30% of the company) by better understanding the “emerging needs” of those most profitable customers in order to serve them better. That’s where customer intimacy comes in, he says. “In that way, companies can extend their value footprint within their most important accounts and make them even more successful. And the increased success of those accounts pulls through huge revenue increases in industry after industry.”

And marketing managers, Byrnes adds, can play a huge role in this process by helping identify the appropriate value proposition and then matching it to the right customers.

Q: Please explain your concepts regarding “islands of profitability” and how that relates to customer intimacy.

Byrnes: In my work over the past twenty years, in over a dozen industries, including financial services, I’ve found the same pattern of profitability: 30% to 40% of every company is operating at a loss on a fully loaded basis while 20% or 30% of the company is so profitable that it’s providing all the reported profits and subsidizing the losses. The remainder is marginal at best. Profit reporting systems typically aren’t granular enough to pull this out.

In order to radically improve profitability, most people think the biggest gain will come from improving the unprofitable part. In other words, they’ll focus on the problems. What I’ve found in my experience working with companies is that the really big impact comes from focusing on securing and growing the islands of profit, the 20% to 30%.

That’s where customer intimacy really ties in. Companies that have been most successful have first, understood the importance of focus, second, identified where their islands of profit are located, and third, developed powerful ways to become much more intimate with those key customers by really understanding and meeting their emerging needs. In that way, companies can extend their value footprint within their most important accounts and make them even more successful. And the increased success of those accounts pulls through huge revenue increases in industry after industry – very fast, profitable revenue increases of between 20% and 30% are the norm. At the same time, these companies lower their cost of operations because they focus their resources where they have the most productivity. That’s the relationship between the islands of profit and customer intimacy.

Q: In terms of your work in financial services, can you think of any specific things banks can do to reinforce their islands of profit?

Byrnes: Yes, absolutely. Banks have incredible hidden reservoirs of expertise and capabilities that they’re not necessarily bringing to bear on enhancing key account relationships. I would emphasize that when I say “key accounts,” I’m not necessarily referring only to large accounts; small, high-growth accounts and opinion-leaders are very important as well. If you want to pioneer innovation in financial services, you typically do it with smaller accounts and then port it over to larger accounts.

Let me give you an example. I have spent time in my financial services work with the loan workout people. It always struck me that they’re like expert surgeons. They know everything that goes wrong, everything that can go wrong and everything that will go wrong. So, here you have an incredible reservoir of expertise. Why not apply it to helping your key customers succeed?

In every stage of a customer’s lifecycle, the workout people know what can go right, what can go wrong – and how to fix it. And yet, very few financial institutions bring this deep knowledge to bear on helping their key customers succeed. This is analogous to the situation of an expert health care provider shifting focus to utilize its deep expertise in curing diseases to provide highly-targeted prevention services.

This principle is what I call “touching the dream.” One of the most important ways to create customer intimacy is not only to be very, very good at your normal processes, your transactional processes, but also to really understand what your customers want to do to improve their respective situations. Typically, your customer is thinking, “How can I succeed and grow; how can I avoid big problems?” That’s what I call touching the dream. And in my experience, financial institutions possess knowledge and expertise that can not only touch the dream but turbo-charge it for customers. Unfortunately, that bridge is rarely built.

I’ve done a lot of work in healthcare and I’ll give you an analogy from the hospital supply business. When companies such as Cardinal Health and Baxter started doing vendor-managed inventory systems, they would essentially go into hospitals and manage the ordering of products and the stocking of shelves. This generated tremendous revenue growth for them and it was great for the hospitals, a win-win all the way around. No longer constrained in their ability to grow because of insufficient internal systems and processes, the hospitals then began opening satellite clinics and surgery centers to better serve the public. That additional growth wouldn’t have been possible without a partnership with companies like Cardinal and Baxter.

In a very analogous way, banks that really understand customer intimacy and how to develop it can partner with their customers to help them prevent problems and realize their growth dreams. That’s what I think of as touching the dream. When you do that, you are a strategic partner and not just a substitutable vendor, and that is the absolute win in customer intimacy both for individual consumers, as much as for business customers.

Q: One pushback you might receive from bankers in regard to both internal and external partnerships has to do with the siloed nature of the industry. Everyone is focused on their own silos and has little time to partner. How would you respond?

Byrnes: My response would be that I get that pushback from almost every company that hasn’t already done this. My answer to them is to say, “You don’t just simply take a major institution and say, ‘Yesterday you were like this, and tomorrow, you’re going to be like that.’” It will never work that way. The key to success is to understand that the institution will migrate toward real, concrete value that’s proven to have results.

So, you need to start with what I call a “showcase project.” This is an opportunity to work with a set of relatively small but extremely innovative accounts that are very receptive to trying new things with you. In this context, you can learn by doing and develop much more powerful ways to improve your value proposition. This is customer intimacy in action and it provides a concrete example for the whole organization.

Once you have a compelling showcase demonstration of a new value proposition, you can systematically manage the change process. The key is not to ask the whole institution to change on day one. Instead of going after the relatively large and complex bucket of unprofitable customers in a scatter-shot manner, focus on bringing the innovation to your islands of profit, your major customer relationships that can produce value quickly. Typically, you start with a relatively small number of key accounts, and when they are successful, the functional managers throughout the company will see so much value in the opportunity that they migrate toward it.

This change process is not unique to banking and it can produce amazingly fast results. I’ve seen examples in other industries where we’ve had a 40% revenue-and-profit lift in our target accounts within a few months. All of a sudden, everybody wants to get involved. Then you have to put some guard rails around the process because it has to be done well.

Q: How does your islands-of-profit concept apply to marketing managers, as opposed to lenders or operational managers?

Byrnes: In essence, there are two critical elements to a marketing manager’s role. The first is to develop a very compelling value proposition, which is a combination of product, services and expertise. By working on showcase projects featuring customer intimate innovations, by being the feet on the ground that identifies opportunities, marketing managers are redefining the product – and I use the word “product” to include services, or what they call the “extended product.”

The second critical role for a marketing person is on the account side, where it’s very important to match this extended product with the right accounts. So, as this process rolls out, you’ll typically find a range of different relationships with different degrees of intimacy that the bank can offer to its customers. Not all customers will be candidates for a deep relationship – some will be very good customers but want to edge into it, while others will be merely transactional customers. So, there needs to be a matching between what I’d call the offer, which is the extended product, and the accounts for which that particular offer is appropriate. That’s what I call “market mapping,” and it is squarely a marketing capability.

In my mind, the two most important things that a marketing manager can do are: first, push the envelope on the extended product for customer-intimate value creation and, second, match the shades of that product to the different kinds of customer relationships.

Mr. Cline is managing editor of BAI Banking Strategies. He can be reached at [email protected].