Relationship Marketing
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This electronic document is for A.T. Kearney internal use only and is not to be distributed outside of the firm.Please obtain a printed version from your office managerif you would like to use this intellectual capital piece externally.IntroductionBest practice companies such as American Express, Sears Roebuck, Allstate, Neiman Marcus, Disney Vacation Club and USAA are realigning their core values to support the goal of building customer equity and to underscore the importance of protecting and enhancing consumer loyalty. These lead-ers have made the investments in technology necessary to capture, store, analyze and distribute cus-tomer information. By leveraging this information, they can increase the value of their consumer franchises.Customer information enables companies to look at their target customer bases not as static market segments—with discrete age limits and common purchase characteristics—but as a dynamic group of individuals. Leaders in relationship marketing are effectively using customer information, demographics, psychographics and analytical modeling to measure the long-term value of customer segments, prioritize the segments and tailor their offerings and customer service strategies accord-ingly. Through targeted attraction, retention and aspiration strategies, these more enlightened com-panies have identified and shed unprofitable consumers more quickly than their competitors, better targeted profitable segments and capitalized on the key underlying events that trigger con-sumer purchase changes.These companies’ strategies are not focused on increasing the absolute number of customers, but on increasing the worth of their customer franchise and maximizing the value of that franchise over time. Targeted acquisition programs are geared toward high-potential segments. Aspiration programs are targeted at consumers in high-loyalty segments who have demonstrated a propen-sity for increased loyalty. Life stage and life event programs are aimed at gaining a better than fair share of consumer expenditures during key life stages. And retention programs reward loyalty and reinforce the desired consumer behavior. All of these executable marketing programs are useful at both the enterprise and individual business unit level.Mary Purk, president of Retail Research Associates, provided information for and contributed to the writing of this paper.Relationship MarketingNew sources of data and improved analytical capabilities have fueled an evolution of market-ing approaches over the past 20 years (see fig-ure 1).The latest in the line of revolutionary approaches is relationship marketing, and the key to relationship marketing is customer information. Companies that can efficiently obtain it and effectively sort through it, can use relationship marketing to leverage cus-tomer information. A.T. Kearney has identi-fied five phases that companies must complete to transform their organizations into effective marketers capable of building customer equity through relationship marketing.These phases are:•Phase I:Develop an enterprisewide segmenta-tion scheme•Phase II:Establish customer segment acquisi-tion, retention and aspiration goals and strategies •Phase III:Develop life stage/life event mar-keting tactics to facilitate relationship market-ing strategies•Phase IV:Determine optimal customer con-tacts for customer maintenance and conversions •Phase V:Develop organizational transforma-tion strategy to support the new visionDuring these phases, companies work to overcome significant organizational and func-tional obstacles that may block the move from traditional brand/product marketing, or trans-action management, to effective relationship marketing.: Business units and functions that serve overlap-ping customer groups or the same customer group often do not understand how their efforts affect the entire consumer picture. An enter-prise segmentation scheme provides the entire company with the common framework and language needed for discussing consumer con-tribution and migration, and understanding how all the pieces fit together.Enterprisewide segmentation is an arduous journey. But the majority of companies that have taken this journey have gained invaluable insights and benefits. For an enterprisewide seg-mentation scheme to be effective, it must meet three criteria:1.The scheme must explain discrete differ-ences in purchase behavior2.It must identify the highest and lowest value contributing segments3.It must be dividable into executable seg-mentation schemes at the business unit level.A.T. Kearney has developed an enter-prisewide equity and migration cube that pro-vides companies with a useful framework for visualizing a whole-house segmentation scheme. (Figure 2, page 4, shows how this cube could be used by a bank to illustrate loyalty segmen-tation.) Segments of the cube are used to depict unique customer segments with unique purchase behaviors. When appropriate seg-mentation parameters are determined, the cube can be used to show the current distrib-ution of customers across the various seg-ments, penetration within those segments, likely migration rates and current as well as lifetime profit contributions.By illustrating the different dimensions of customer purchases across three interrelated axes, a company can develop innovative segmentationFigure 2: Enterprisewide customer equity and migration cube:schemes that explain the underlying differences in purchase behavior and the multidimensional aspects of customer profitability.At the enterprise level, marketers can locate specific areas on the cube that indicate opportu-nities or potentially damaging trends. These “hotspots” can be isolated and a more detailed analysis performed to identify category purchase levels and corresponding customer demographic information associated with the broader trend. For example, a retail store might notice that a young family segment is beginning to show increases in a number of category purchases, specifically in a private line apparel category that has a strategic relevance to the company’s future competitive thrusts. Marketers can then use the analytical framework to explore different scenar-ios to assess the change in the overall potential of the segment’s future value. Questions such as “How would young family lifetime value change if promotional contacts and discount coupons were increased?” or “What would happen to incremental revenues this year and in future years?” can be answered.If significant outcomes result from running particular scenarios, marketers will be prepared to act. They can use segmentation attributes to help determine possible creative approaches for their marketing plans. High-level investment proformas can be calculated and profitability margins identified and plotted against the seg-ment’s future growth projections to estimate the effects of the marketing action.: ,Once agreement on an enterprisewide segmen-tation scheme has been reached, companies can begin building relationship marketing acquisi-tion, retention and aspiration programs. Innovative marketing programsBest practice companies have led the way in relationship marketing by creating innovative marketing programs tailored to specific cus-tomer segments. Sophisticated analytical and predictive models combined with data from rich, historical contact databases are used to predict changes in absolute spending levels, as well as likely changes in the types of pur-chases made.In recent years, Federal Express has success-fully used relationship marketing to continually refine segment classifications for their second-and third-tier customers. Historically, these cus-tomers have not significantly contributed to profits individually. However, by developing relationship marketing programs aimed at increasing retention rates in segments with high-churn and stimulating inactive accounts, Federal Express has turned its so-called second-and third-tier customers into major contribu-tors, in aggregate, to profits.American Express, which is well known for its tiered program (green, gold, platinum) for active customers, also uses a two-tiered segmen-tation strategy to identify those inactive cus-tomers most likely to reactivate. It segments inactive and low frequency customers into two groups: those customers without discretionary income and those that had discretionary income but elected to use other cards instead (the zero spender group). American Express then targets unique offers at the zero spender group to win those customers back.Rewarding loyaltyAlmost all analytical approaches currently being developed use some sort of customer loyalty or proxy variables. Using loyalty as the basis of marketing programs makes sense because of the high cost of acquiring new cus-tomers. It is much cheaper and more effective to determine how to give value to current cus-tomers as they move throughout their life stages. In turn, customers appreciate the ser-vice and are much less likely to take the time to wade through the clutter of other compa-nies’ marketing pieces.Firms define and document loyalty in dif-ferent ways. However, the underlying theme for all variations is the value that a firm assigns to the past relationship with the customer. The most popular variables used to represent loyalty of a customer are also the easiest to capture and measure:•Purchases over time•Willingness to buy at full price•Share of walletNeiman Marcus is one company that has invested heavily in tiered aspiration programs to reward high-spending shoppers and moti-vate them to even higher levels of spending. Its InCircle program has greatly exceeded the initial projections of 10 percent purchase increase with 95 percent redemption rate—increasing average purchases by 25 percent, while holding redemption rates under 60 per-cent. And the program has not only motivated incremental spending in the target segments, it has provided Neiman Marcus with unex-pected financial benefits. The company cre-ated an expanded Platinum InCircle program, which for a $300 fee allows customers to receive double points on purchases up to $30,000.The companies mentioned here, and other best practice companies, have been successful because they have developed definitions based on the unique nature of their businesses and then developed tools and models to both classify and predict changes in specific customers’ loyalty states. The tailored marketing programs then work to migrate customers up the loyalty ladders and minimize attrition, thereby maximizing each customer’s value contribution.: ⁄The increased availability of customer data and new innovative technology to manipulate the data gives marketers a key strategic tool for cre-ating powerful relationship marketing pro-grams. The power of life stage marketing is its ability, when combined with life event market-ing, to get to some of the underlying causes of differences in consumer demand. Through the use of sophisticated direct and database mar-keting tactics, life stage marketing programs target consumers in specific life stages with specific lifestyles. Then, by anticipating key life events, a company can offer those con-sumers the exact bundle of products with the right services that they are most likely to need and purchase at any given time.As part of relationship marketing, life stage and life event marketing are natural extensions of product/brand merchandising and category marketing.A company’s sales focus moves from optimizing sales of an individual product orbrand in product merchandising to optimizing sales of a whole category in category manage-ment to optimizing wallet share of profitable customers within a life stage.USAA Insurance is one of the most highly visible, not to mention successful, users of life stage marketing. By targeting its insurance offerings around key life events such as mar-riage, the birth of a child, new home owner-ship and retirement, USAA has reduced its underwriting expenses to almost half those of the property and casualty industry average. At the same time, USAA has enjoyed growth rates well above the industry average in all of its major property and casualty insurance product lines during the 1990s.USAA uses predictive models to assign its customers into one of 40 different categories, based on the probability that these customers will purchase a particular product or service in the near future. With these probabilities in hand, USAA marketers develop relevant tai-lored marketing programs. These programs have helped USAA achieve a 95 percent pene-tration rate among active duty military officers. Underlying USAA’s targeted marketing prowess is its centralized customer database, which cap-tures more than 140 personal variables and tracks customers’ purchase behaviors. Defining life stagesA.T. Kearney recommends that the marketing function coordinate the defining of life stages, but input should come from all areas of the business that serve customers. Once a company has agreed on specific life stage definitions, it assigns products and/or categories to each life stage (see figure 3, page 8).Some categories will appear in more than one life stage (i.e., elec-tronics), while other categories are exclusive to one life stage (i.e., baby furniture or baby food). Life events are triggers to watershed purchases What marketers want is information that indi-cates when consumers are about to make a cat-egory purchase, where those consumers might go to buy the products and their propensity to spend within a given time period. Retailers and consumer packaged goods firms with this type of knowledge greatly improve their chances of effectively targeting their offerings. Predictive modeling of this type requires “trig-ger” data—information that indicates when customers or potential customers are entering a new life stage, or when they are about to have a major life event.If a company can predict or identify when a consumer has had a major life event, the enterprise can target a highly specific bundle of goods and services, tailored to the consumer’s needs during the life event, and thereby cap-ture a greater share of the associated purchase peak (see figure 4, page 9).The primary goal of any life event program should be to capture the majority of incremental expenditures that occur during the first six to 12 months of each life event. And the purchase peak associated with a major life event can be large. For exam-ple, during the first 12 months surrounding the birth of a first-born child, parents will spend anywhere from $1,200 to $9,700 in incremental purchases.With the wealth of consumer information available today, companies can predict with tremendous accuracy the specific bundles of products and services a consumer is most likelyFigure 4: Illustration of life event purchase peaksSingle adultsChildless couples (renters)Childless couples (owners)Young families Established families Empty nestersMature adultsRelationship Marketingto buy (see figure 5).For example, a recently wed couple has a 253 percent increased likeli-hood of buying a love seat and a 165 percent increased likelihood of buying a ceiling fan, while a couple whose last child has just left home has a 550 percent increased likelihood of buying a snowblower or an edge trimmer. Consumer products are not the only thing affected by life events. Consumers’ insurance, banking, real estate, telecom and utility needs also change through each life stage. Capturing greater “wallet” sharewith life stage marketingCapturing more dollars at the beginning of each life stage/life event and better cross-merchandis-ing increase a company’s wallet share. The key for the company then is the ability to predict a life event and contact customers at the begin-ning of life stages.To calculate the wallet share potential within each life stage, a company’s wallet share for each product or service associated with a specific life stage is estimated and compared to the sales history of each customer. From this analysis, an opportunity index is calcu-lated, which is then used to calculate opportu-nity dollars per household for the coming year. All these numbers are compiled into a customer scorecard to track and evaluate per-formance of each life stage program by cus-tomer over the year.Life stage “loyalty” programsDuring each life stage/life event, customers reevaluate their behavior, lifestyle and habits—both consciously and unconsciously. The transi-tion time between life stages is a double-edge sword for companies. A company risks losing a customer if it does not recognize his/her chang-ing needs immediately. However, a company that can meet a prospective customer’s needs before the competition can gain a customer dur-ing the transition time.Life stage marketing gives companies the ability to extend the “purchase life” of con-sumers by transitioning them from one key life stage to the next. By creating a tier of products or new customer experiences that appeal to consumers as they mature, companies can suc-cessfully create a multifaceted, extended rela-tionship with their consumers and improve customer retention.Programs or clubs that reward customers for their purchases and loyalty are popular and effective ways to increase wallet share during discrete life stages. The most familiar life stage program is a gift registry, which was first introduced by major department stores nearly 50 years ago. Target and Toys “R” Us have recently expanded this registry concept to include baby registries.The next step beyond registries are clubs that motivate consumers to make all particular types of purchases from one company. For example, one retailer’s Baby Club rewards cus-tomer loyalty by awarding a store gift certificate to each club member for every $150 spent on baby purchases. This program increased baby category sales by 25 percent and gross margin by 17 percent. In addition, store customer count increased by 5 percent, and total store sales rose by 4 percent.Although only a few companies are doing so now, A.T. Kearney expects more companies to develop a continuum of life stage programs.Relationship MarketingFor example, following a Baby Club, a com-pany could aim to migrate their consumers to the next life stage club, a Back-to-School or Kids Club (see figure 6).This club could tar-get households with grade-school-age chil-dren. Qualifying purchases would include all school supplies, lunch boxes and lunch bags, as well as basic soft goods, such as socks, tights and underwear. Birthdays and other annual event programs could then be used to maintain continual contact and dialogue throughout the year.Consumer packaged goods firms are also testing life stage clubs by creating lifestyle mag-azines. One firm recently created a new mother’s club, complete with gifts and a monthly magazine that provided the household with new parenting tips and valuable coupons.No matter what type of life stage program a company offers, for it to succeed a few key conditions must be met.•Each program has to be important to the cus-tomer.Customers have to perceive that the incentives, perks or services offered as part of the program are benefits. The aforementioned Baby Club succeeded because the $10 merchandise certificate was deemed valuable, and the execu-tion of the program was simple and hassle free.•Each program has to offer predictability and reliability.Once a company commits to a pro-gram, it must maintain the program for the long-term. Loyalty is a two-way street. If a com-pany starts a loyalty program for customers, it has to remain loyal to the customers and keep the program going.•Management commitment and expectations must align.If management creates high expec-tations, but no resources are allocated, the life stage program is destined to fail. Given the potential of life stage marketing, companies should be ready to make a serious commit-ment to programs.Financial measurementsCompanies have to agree on financial models and metrics to measure both consumer prof-itability and the success of life stage marketing programs. Three such metrics that have proven to be quite useful are customer reten-tion rates, customer transition rates and life-time value calculations.Most companies with customer databases track average customer retention rate. Typically a company will measure retention based on the number of customers shopping today ver-sus a year ago. In addition, a company may calculate a similar retention rate based on the number of customers that were retained over a specific period from each life stage. With any customer retention rate, it is best to base com-parisons on a year-to-year basis to avoid any seasonal distortions.Life stage transition rates calculate how many customers the company has successfully migrated from one life stage program to the next. An example would be the transition of a customer from a Baby Club to a Kids Club for families with grade-school-age children. This measurement can be captured by looking at a customer’s average number of monthly visits and average transaction value per visit, and comparing it to the current customer base in the specific life stage to which the customer is moving.The key to the success of utilizing the life-time value measure of the customers is toacknowledge the dynamic nature of this mea-sure. It changes over time due to individual, social, economic and firm related factors. However, this approach forms the basis for a long-term orientation toward the customer and allows a firm to track long-term goals. The life-time value is a function of two measures: the likelihood of membership in a segment at a given time and the average value of the relation-ship with that segment.:. Along with customer segmentation strategies and life stage marketing tactics, best practice companies have designed whole-house contact management strategies. These strategies ensure that customers are not contacted too often and that each contact provides the optimal benefit for the overall customer franchise.At the vanguard of these companies is American Express, which has leveraged a large scale Massively Parallel Processor (MPP) data-base to create a central repository of customer information and contact history. With the aid of this database, American Express is able to code internally agreed upon list selection and suppres-sion rules, ensuring organizational control over when and how customers and prospects are con-tacted. In addition, it has recognized that, because each business unit is its own profit cen-ter, there are inherent conflicts over contact strategies. Recognition of these conflicts permits an evaluation of business unit versus enterprise profit considerations, ensuring prioritization of the most profitable or strategically necessary con-tacts at both the business and enterprise levels. :Expanding a company’s marketing activities to include relationship marketing strategies requires a customer perspective change across the entire enterprise and personnel changes within the marketing department.The most important factor in transitioning to relationship marketing is to identify a visible, senior-level champion. Since successful relation-ship marketing focuses on customers rather than on products or categories, by definition, it requires cross-brand and cross-category coopera-tion. This is needed to gather the necessary data, divide the shared customer base into key seg-ments and execute the cross-brand and cross-cat-egory life-oriented programs. The champion needs to be able to influence the organization to make these trade-offs and mandate enter-prisewide participation in relationship programs.Best practice companies have appointed dedicated marketing executives to further the company’s understanding of key customer seg-ments across existing brand and category man-agement groups. Some companies call these individuals, “relationship marketing managers,”and their primary goal is to optimize the equity in the consumer franchise, in the same way that brand managers seek to optimize the equity in the company’s brands.Adding relationship marketing capability does not necessarily require significant head count additions. Factors that may influence the number of people added include how many direct and database marketing resources a company wants to allocate to customer seg-mentation and contact analyses.Not many companies would argue with increas-ing customer equity, but not all companies are positioned to benefit from relationship market-ing. A.T. Kearney has found that companies with the following characteristics are most likely to be able to execute programs to successfully leverage customer information:•Consumer data is collected efficiently.You can’t leverage customer information that you don’t have. As simple as that sounds, many companies do not take advantage of the many opportuni-ties they have during the transaction and credit authorization processes to gain critical informa-tion such as address, income levels, living situa-tion and other demographic data. •Purchase data is tied to customer data quickly. As we noted, life events present opportunities for companies to transition customers or acquire customers. Companies that tie transaction-level purchase data to specific customer data can bet-ter predict when life events will happen, or detect them immediately after the fact. When a customer buys a new crib, mechanisms have to flag that customer as having a new child. Other connections may not be as direct. For instance, the purchase of home improvement materials could indicate the selling/buying of a home. •Direct customer marketing or sales channels are established.Programs are much easier to put into place when these channels are already estab-lished. Developing the channels from scratch takes time, money and usually a change in the sales and marketing organization.•Multiple organizational units sell to consumer. Relationship marketing requires contact man-agement, which is more complicated with the increased number of business units having con-tact. However, this also presents more opportu-nities to gain valuable information needed for relationship marketing and helps in bundling appropriate products and services. •Robust product/service offerings are available for major life panies have to have some-thing of value to offer consumers for various life events and life stages. Companies with limited product lines will have trouble trying to transi-tion customers from stage to stage. •Organizational fortitude to coordinate activities. Relationship marketing can’t be implemented as a side project. Support, coordination and funds are needed to make it work. Any time that changes cross organizational and functional lines, strong leadership is needed to keep things on track and communicate why these changes are important. Relationship marketing can get sticky because of the centrally coordinated, con-tact management strategy needed for success.To leverage customer information, companies must have systems in place to capture the information, store it efficiently and move the information to the various areas in forms they can use. Each business unit has to have the mechanisms in place to capture all available information about the customer base. A cen-tral, whole-house database must be created so that the entire organization has one complete view of each customer.T echnology enables marketing departments to use information gathered from throughout the organization. The ability to flexibly import and export customer data is necessary to segment cus-tomers, determine which segments are most profitable and how best to increase wallet share.。
