Customer life time value: core of CRM in banking
Customer Relationship Management (CRM) is a strategy and process employed to learn more about customers’ needs and behaviors with a view to develop stronger relationships with them. CRM is an important aspect of banking as the primary role of banks is to service financial needs of individuals and businesses. Money drives commerce as well as personal transactions. Banks as the principal arbitrators of money thus have a leading role in serving these needs. Finance and money is a life time necessity, thus banks must envisage the life time value while servicing customers.
Customer life time value is a significant facet of CRM in the banking industry because of its sound conceptual correlation with banking, nature of services provided by banks, inherent necessity of building long term relationship with clients and as an effective tool for shaping strategy of banks. Relationship Marketing is the process whereby both parties – the buyer and provider – establish an effective, efficient, enjoyable, enthusiastic and ethical relationship: one that is personally, professionally, and profitably rewarding for both parties.
CRM is defined as a series of strategies and processes that create new and mutual value for individual customers build preferences for their organizations and improve business results over a lifetime of association with their customers. (Gordon, 2002). CRM is particularly relevant to the service industry in general and the banking industry in particular as there is intimate interaction of the bank and the customer both in terms of number of times and points of contact.
By adding value to these transactions, CRM can provide multiple benefits to banks. Customer life time value on the other hand is an integral part of CRM. Customer life time value is regarded as the total value of the present customer calculated in terms of his present value and future contribution. (Hanssens. Lewis, 2005) This has been amplified in terms of customer equity which is considered as the total of life time values of all customers of a bank. Customer equity provides a measurable quantity to customer life time value.
Customer equity comprises of four parts to include quantitative analysis of factors such as, how many new customers have been acquired, what are the innovations in the present service provided which has ensured retention of customers, how many products have been cross sold to a customer(s) and in what way has the customer been gradually upgraded to higher levels of financial transactions. (Hanssens. Lewis, 2005). The soundness of this concept particularly to the service industry in which banks operate is thus undeniable.
It is seen that it particularly suits the banking industry due to its larger dependence on customers for profitability, variety of products and requirement for life time servicing. Customer life time value can thus be used as a powerful tool within the overall paradigm of CRM by the banking industry. A key facet in a service industry as a bank is to focus on the customer. This is in consonance with the changing paradigm in marketing where customer focus has gained over spotlight on brands. Thus customer equity is considered more important than brand equity.
(Rust. Zeithaml. Lemon, 2000). The profitability of the customer is prioritized over focus on profit to the company as in the long term it is felt that the customer will transfer a large portion of his gains including goodwill to the company. Thus it is ownership of customers by brands which determines profitability and not just a big brand name. This phenomenon is particularly evident in emerging markets where local brands frequently out sell well established external brands attempting to profit from their global image.
(Rust. Zeithaml. Lemon, 2000). The nature of services provided by banks has considerable impact on the significance of customer life time value. Thus in retail banking it is seen that a customer would not like to shift his bank frequently unlike buying goods when he could modify his choice from one product to another even on a daily or weekly basis. Thus despite having to transact with the bank regularly it is only infrequently that the customer switches his loyalty. (Rust. Zeithaml. Lemon, 2000).
However once a new product comes it may be possible that the customer may get attracted to the same but even if he shifts his focus will continue with the new bank for a long period. Both these factors highlight the need for providing customers life time value. The view of the banking transaction cycle will reinforce this premise. A customer opens an account with a bank firstly in the form of a checking account which may appear an innocuous instrument without providing direct benefits to the bank. But this is just the beginning of his transaction with the financial organization.
From here he progresses to a savings bank account, a fixed deposit account, car loan, mortgage of property and so on. Thus a single account sets off a chain which can be effectively exploited by considering life time value of the customer rather than a series of one off transactions. Development of customer life value perspectives and programs aligned to the same should ensure retention and repetition of customers across the board. This has also been called as Retention Equity. (Rust. Zeithaml. Lemon, 2000). Creation of customer and retention equity should thus form powerful instruments for shaping strategy of banks.
The veracity of relationship between banks and customer life time value can be appraised by examining the model of HSBC (Hong Kong and Shanghai Banking Corporation) which brands itself as the world’s local bank. While this unique image has enabled HSBC to denote its differential with other banks, it is seen that its powerful CRM programme in which customer life time value has been intimately incorporated provides it the basic advantage. HSBC very appropriately uses the CRM maxim, “Define the Best Customers, Design the Best Experience”.
(Bryon, Ned). For this purpose segmentation of the customer based on the customer pyramid is carried out and then followed up with other techniques as Customer Experience Management, Business Process Management and Requirement Mapping to provide the customer the best experience. The Customer Pyramid (LV Quadrant) is considered as ideal for the HSBC as it enables full scale categorization of the customers in six sub categories and further envisages how value can be enhanced of each segment rather then adopting a single paradigm for all customers.
The bank is not focusing on the revenue per customer model but prefers long term customer value paradigm which is considered more effective. This is effectively translated into providing comfort in banking to the customer. Keeping in view the need to establish multiple touch points with customers a large number of options have been provided for transaction by the bank such as banking on the internet, telephone, and mobile as well as Branch and self service banking.
This is designed to establish customer life time value through use of appropriate technology available within the system and with which the customer is comfortable. Having applied these and other processes it is also ensured that the CRM metrics are put into place to envisage the effectiveness of adaptation of each facility. Customer satisfaction and retention rates are also vital imperatives of the metrics underlining the importance that the bank gives to building customer life time value.
Customer life time value is a significant facet of CRM in the banking industry because of its sound conceptual correlation with banking, nature of services provided by banks, inherent necessity of building long term relationship with clients and as an effective tool for shaping strategy. This is evident from the success of HSBC which has succeeded in linking its brand image with building long term customer value. Thus it would be seen by adopting this strategy over a period, HSBC has succeeded in matching its brand and customer equity successfully. Reference: 1. Bryon Lo. (Nd (No Date).
How to Improve A Particular Customer-Related Area in HSBC. http://www. greaterchinacrm. org:8080/eng/content_details. jsp? contentid=1890&subjectid=101. (10 December 2006). 2. Gordon, Ian. 2002. Best Practices in CRM. Ivey Business Journal. November/December 2002. 3. Hanssens, Dominique. Lewis, Barbara. 2005. Divvying Up the Marketing Pie. Banking Strategies. September/October 2005. Volume 81. Number 5. 4. Roland T Rust and Valarie A. Zeithaml and Katherine N Lemon. 2000. Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy. New York: Simon Schuster.