In the face of continuing economic uncertainty, retail banks and insurance companies are facing the combined pressure of having to find ways of increasing revenues while also reducing costs. At times, it can seem like an unsolvable equation: There doesn’t seem to be a "golden egg" that could transform the situation.
However, there is one area where a change in approach could make a real difference: the marketing strategy.
Traditional marketing mantras have proved to be effective over the years–but that effectiveness is often limited because financial institutions have special needs and they fail to implement the mantras in the way that will meet those needs.
The First Mantra
For example, one marketing mantra that was coined by Philip Kotler in 1967 is the "4 Ps of Marketing": product, price, promotion, and place (which, for banks, usually means the channel). Most banks have based their approach to marketing on this mantra since the early 1970s. It takes the form of a straightforward product push marketing process:
- Produce the product.
- Decide on the price.
- Determine your target market and create the promotional campaign.
- Deploy it through the chosen channels (the right place).
Although this is a tried-and-tested approach, why does it only result in a sales conversion rate of 1 percent to 3 percent? I think there are two main problems:
• The timing. The methods used to determine a target market are typically statistical analysis tools, which might tell you that 87.2 percent of the target group will buy a new car in the next three years. It can be amazingly accurate and at the same time absolutely useless. Financial institutions need to know who wants to buy a car today. Like comedy, the essence of marketing is timing. The traditional approach is a bit like stabbing in the dark and hoping to hit your target.
• The basis. The 4P approach was set up to help product companies, but I believe that financial institutions are service companies (even though they have a few products). Each product that a bank sells will be used many times by their customers--for example, a credit card. That represents hundreds of opportunities for service, based on a single sale.
Financial institutions differ from most other retail-based organizations. The more that they focus their marketing effort on trying to sell products, the more they are missing the point–and handing a big opportunity to their competitors. Financial institutions need to change their marketing strategy away from a 4P product-based approach and move to a strategy that is more in line with marketing for a service-based company.
This has been underlined by recent research that suggests of all of the customers who leave a bank, more than 80 percent switch because they are dissatisfied with the service, compared with less than 10 percent who are dissatisfied with one or more of the bank’s products. Service-based marketing is about determining the customer’s needs and addressing them. Unfortunately, financial institutions have always tended to develop their marketing strategy based on selling products.
The Second Mantra
The latest mantra in the service industry is called "Sense and Respond." The sense element requires the answers to several questions before a reasonable response can be formulated. These questions are: who, what, where, when, and why.
For service-based marketing, the who, where, and when are usually answered by the interaction itself (i.e., the customer; in the channel; now). In most modern real-time marketing systems, this is enough. A service request therefore typically asks, “Customer A is in the channel now. What should I offer him?”
These systems, using previously stored customer information, will then suggest an offer based on either:
- The precalculated next best offer.
- A simple rule based on what the customer is doing (e.g., if he is looking at a mortgage, offer a mortgage).
This is wrong.
If financial institutions don’t correctly answer the questions "Why are they doing this?" and "What is the need (if any)?" they are simply exchanging outbound product-push marketing for inbound product-push marketing. The difference is that with an outbound approach, customers can set up filters or opt out of it–but with an inbound approach, they feel that they are being targeted whenever they contact the bank. That could even lead to them leaving the bank.
Answering the why and the what are the keys to highly effective marketing. If you know what a person wants and why, the chance of being able to meet his needs is immensely higher than if you play the guessing game. When you look at the figures, the results are even more startling:
- Standard product-push, statistically-targeted marketing will generate average sales of 1 percent to 3 percent.
- Marketing to an understood need results in sales of 18 percent to 54 percent.
The potential is stunningly obvious. So why isn’t everyone doing it?
The answers might include:
- “My bank’s marketing is product-focused.”
- “My bonus is based on product sales.”
- “It’s what my supplier told me.”
- “Isn’t this what everyone does?”
The Solution: Event-Driven Marketing
Kotler’s 4P marketing mantra is product-focused. Financial institutions know the who, what, where, and the why, but they don’t really know the when, which has resulted in consistently low response rates. Over the years, this approach has been advocated and developed by every single CRM and statistical modeling company. No matter who a financial institution bought it from, it achieved the same business results.
With the advent of Internet-based technologies and channels, it has become possible to identify the who, when, and where in real time. You can now buy real-time advisers from most major CRM players. The problem is that none of them have really understood sense and respond, service-based marketing, nor have they provided a proper analysis of the why and the what. Instead, they have all simply added their "next best product push" back-end thinking to their offerings.
So depending on which approach a financial institution has taken, it can either know what to sell and why but not when, or when to sell but not what or why. In reality, the complete customer-focused marketing approach is one that answers all five aspects: who, what, when, where and why.These questions are all addressed by event-driven marketing (EDM). This involves determining the correct time to contact a person based on a significant change in their behavior (a customer pull approach) instead of the typical direct marketing (product push) approach. With EDM, commercial and communication activities are based on relevant and identifiable changes in a customer's individual needs. Events determine when a customer needs something–not when the financial institution wants to sell them something.
This clearly makes sense–if you want to sell a car to someone, you’re much more likely to have success if it’s at a time when that person is actually looking for a car. With EDM, customers receive communications and service messages that are of interest to them at the right moment–and marketers avoid the shotgun approach and cost that is typical of most targeted campaigns.
Those financial institutions that have successfully deployed EDM are reporting average sales of 12 to 54 percent, a churn reduction of 50 percent, and customer satisfaction indices that are 10 to 15 percent higher than their competitors. That means their conversion rates are roughly 10 times higher than those achieved by a traditional marketing approach.
EDM addresses the limitations of Kotler and determines the correct timing of any marketing activity: i.e., it identifies the who, when, and where, but also focuses on answering the what and why. It tells a bank who it should be contacting on any given day and provides perfect opportunities for customer service.
The results of EDM are therefore often spectacular–yet there are still only a tiny handful of banks that have implemented it successfully. This is because all EDM work to date has been based on expensive consultancy, specialized, hardware or risky self-development. However, when successful, it has been well worth the time and effort.