The Hindu Business Line : `Loyal customers not the most profitable ones'

"The problem plaguing India is growth. I've met with many CEOs of major corporations — they're talking acquisition, not retention. They're happy so they are complacent, but they don't realise that there is so much churn."

DR V. KUMAR, the ING Chair Professor and executive director, ING Centre for Financial Services at the University of Connecticut

You could say it created quite a stir when it was published in the revered Harvard Business Review earlier this year. An article by Dr. V. Kumar, along with two others, titled: `Knowing what to sell, when and to whom', laid a finger on what top corporate honchos were always asking for from the marketing discipline: how to assess what bang were companies getting for their well-spent marketing buck. Chennai-born and IIT-educated Dr Kumar, the ING Chair Professor and executive director, ING Centre for Financial Services at the University of Connecticut, is among the top marketing academics and professionals in the US. He brings to bear on his work a strong quantitative orientation driven by data and numbers. But, this discipline, he said in a recent interview to BrandLine on one of his trips to Chennai just before Diwali, is what is proving to corporates that marketing can deliver accountability and companies can actually assess how much returns they get for their monies spent. Excerpts from an interview with Dr Kumar, a recipient of several awards, and who has published papers extensively, apart from having consulted for top corporates:

What's the current debate on the role of marketing today in corporate boardrooms? There's a feeling that marketing is not delivering enough and that it does not have a seat in the boardroom?

The biggest challenge marketing is facing today is its ability to show accountability. Traditionally, marketing expenses have been in advertising: IBM, Xerox and Procter & Gamble alone typically spend $500 million per year in advertising and they have not been able to link the money spent in advertising to profitability.

The main purpose of advertising is to create awareness; since the resources have become scarce they have to demonstrate where the biggest bang for the buck is. Therefore, marketing has been asked to show: `Tell me, if I spend so much on promoting this product, how much more profit will I get.' And, at an aggregate level it has become very difficult. The biggest blessing to the field of marketing is the advent of scanner data and database marketing which is capturing customers' transaction data well.

So, with the help of this data we can say which customer is buying what and how much, and how much profit is given by a customer to the company for a given level of expenses the company incurs on the customer. This has become one-to-one marketing. That has become a reality and a necessity, and because of that if I contact someone and tell him this is the best product for you and spend two hours and $1,000, I should know how much I am getting back.

This is the next wave which is hitting business groups and why this is going to be sustainable is because this is the first time marketing is made accountable and is getting a seat in the boardroom. It's because it can show clearly that if you invest $1 you can get $10 back.

Can you give some anecdotal instances from the work you have done where companies have got more bang for the buck? Where what you've been saying has been proved in action ...

We have implemented this model in the retail setting in Polo Ralph Lauren and ING, with hi-tech companies like IBM and banks and pharma companies. The way it goes is, first, we tell the companies that you've got to become customer-centric: many of these companies are product-centric companies where product level managers sell their own products.

The biggest organisational restructuring is companies realising that they need a customer-level view as opposed to a product-level view. Take IBM — it has many B2B customers and if Coke is a customer - a primary candidate for hardware, software and services - should it have one relationship manager managing that account or three product-level managers each selling their own products. The verdict is you need a relationship manager managing that one account furthering growth and profits from that account.

In order to implement this kind of strategy you need to find out which customers are more valuable and which less so that you can appropriately allocate resources. So, the first thing that happens is customer lifetime value (CLV), which is expected future profits - not in a lifetime but over three years.

But, how do you presume that a customer will behave in a certain way over the next few years?

We use historical data. The reality is that future behaviour may not resemble anything in the past but the way the past has evolved we will be able to predict the future. Predicting it better than whatever methods companies are using currently. Because we measure future profitability over the next three years, get a score for each customer, order them from the highest to the lowest, and accordingly allocate resources. We've implemented this in both settings: B2B and B2C as well.

For example, if IBM has two million customers in the database, it may contact only about 20,000 or so; that's all the resources permit. So, they have to prioritise. So they have to go to the high CLV customers because they exhibit the potential to give the highest profit; it's not a guaranteed profit unless you touch them and sell these products to them to get the biggest bang for the buck. So, what do you do with less valuable customers - you move them to call centres and direct mail and lower level of communication costs. That would be a low-cost strategy.

The current way of targeting customers is using the spending model - `who has spent the most with me in the most recent years; those are my best customers' and putting resources behind them. However, we tell them that's not an efficient model; yes, you can make money but you can make even more money if you switch from the spending model to future profitability. The biggest shift is not only are we making them think that, but also the paradigm has moved from just revenue to profit as cost was something ignored before. You must remember too that loyal customers are not necessarily the most profitable customers.

How much I am spending on you to hold on to the relationship was ignored before. Earlier, IBM said if somebody did not spend, it never contacted them. But, when we built the CLV model and profiled customers, we found about 30 per cent of customers it never touched in the study sample; they just came on their own and bought whenever they needed.

From the CLV, we found they really displayed high potential, but IBM ignored them because they never spent enough the previous year. So, we told them to take the resources from negative CLV customers based on last year's spending - but whose future profitability is shown to be negative - take the money from these customers and put it in untouched customers till now but who exhibit higher potential. We advised them they would make more money. So, they took the money out, put it in untouched customers and made $20 million!

But, while your model takes into account the past three years' spending, it cannot take into account customers who may suddenly have a large investment plan; in one particular year spending may go up, so how do you account for such customers?

If there are such unique situations, models cannot handle it, only if it's a steady pattern. That's why we take three years and see if there are not many lifecycle changes or innovations in this time. We estimate this model on a rolling 12-month period, so if something happens next month, we can re-estimate the model; it's a dynamic one. To build this CLV you need three forecasting models: one to predict at what frequency the customer will be buying; second model to predict how much he or she will buy and the third one for the company to predict how much to spend on those customers to make them buy. It's very challenging but we have been able to crack the code and implement it and show more money for the company. We are implementing a high cost project here too for ICICI Bank through my company IMC International.

What about other companies in the Indian context? Would companies look at such a model to better target their marketing monies? In most cases, companies only pay lip service to the customer, so do you think they would take the trouble to build relationships with customers?

The problem plaguing India is growth. I've met with many CEOs of major corporations here. Take the telecom industry; it is acquiring one million customers a month, so the thinking is: `What are you talking about?' They're talking acquisition, not retention. They're happy so they are complacent, but they don't realise that there is so much churn — 40 to 60 per cent churn in this industry and unless you build relationships, you cannot prevent this. In fact, we have helped firms reduce the churn and retain more profits.

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