Adjusting Value Propositions in Times of Crisis - Lessons For Banks
Introduction
During the good times, most banks went some way towards developing a set of defined customer value propositions, but in these difficult times many are wondering whether this approach really adds value.
On the contrary, research conducted shows that, more than ever, a recession highlights the importance of understanding how to create value, and of how to adjust an organisation's value propositions to meet both changing customer needs and shareholder expectations.
The current economic climate demands that financial institutions focus on attracting and retaining customers who add value, and on finding new ways to deliver products and services to them in increasingly cost-effective ways. This while also ensuring that they are retained in the long term in order to optimise on the lifetime value of the relationship.
This sounds no different to what shareholders have been asking for over the past ten to fifteen years, though, when times were good and profits were easy. Why then should value proposition refinement still be one of the top issues for banks? How do organisations derive long-term value from customers, and is there such a thing as a value proposition that satisfies both the customer and the organisation?
Deriving Customer Value
Deriving customer value is based on two different but equally important activities, customer segmentation and the development of a set of value propositions.
Obtaining true value, then, begins with an understanding of how customers and groups of customers can and do add value to the financial performance of an organisation. Segmentation enables organisations to divide customers and potential customers into groups that share similar characteristics, which can be clearly defined based on demographics, psychographics, values and aspirations, as well as on attitudes to the organisation, its products and services. Specific individuals or groups may use the organisation's products and services in a particular way, and may either create or destroy value through their actions. It is therefore important to understand exactly who is creating value, and how they are choosing to do so.
In these tough financial times, it is vital to understand how to make each customer profitable, and this depends on effective execution. Financial institutions collect data from all customer transactions and interventions, but this data is seldom converted into insights and learnings from which real value propositions can be built.
"Received wisdom in the business world has it that there are "devil customers" and "angel customers" - and your company's profits ... ride on your ability to rid yourself of the first and attract the second ... That's nonsense ... there's no such thing as an unprofitable customer - just one you haven't figured out how to make money on yet. And if a customer is truly unprofitable, that's the company's problem, not the customer's." - Dick Kovacevich, CEO of Wells Fargo
The second requirement for deriving customer value is the development of a set of value propositions.
Although commonly known as "customer value propositions", value propositions are as much about the organisation as they are about the customer. They need to reflect what customers value most, while also providing a delivery framework that reduces cost, attracts new business, retains valuable customers, and supports profitability.
In a recessionary climate, an easy tactical option for banks is to reduce levels of service, and cut back on costs by, for instance, reducing lines of credit to certain customers in order to reduce exposure to risk. Unfortunately, tactics like these often have the effect of conveying the message that the organisation only cares about its customers when times are good, and can seriously undermine the long-term worth of adhering to a sound value proposition.
While robust value propositions are not about delivering whatever the customer wants at any price to the organisation, they should be an intelligent synthesis of insights into operational and business processes that meet customer needs. It is here where many organisations fail to successfully embed their value propositions, to make them a fundamental part of their processes, services and information. How an organisation delivers to different groups of customers in a cost effective and profitable way is an internal implementation issue, and not the customer's problem.
The Issue of Value
If the implementation of value propositions is so important to the profitability of a business, why is it that so many financial institutions have not done so effectively? The first issue is one of not seeing where the value lies.
A strategic assessment of how customers provide value to banks and other financial institutions in Africa and the Middle East has highlighted the fact that many organisations are not aware of who creates value or, as importantly, who destroys it. The rigorous analysis required to understand these issues simply does not take place. This leads to a lack of innovation, "more of the same" delivery mechanisms, and unhappy shareholders who do not see the promised returns.
A strategic review of a retail bank in the Middle East, for instance, revealed that only 64% of the customers the bank perceived to be revenue-generating users were in fact active i.e. completing at least one value transaction per month. This, in turn, revealed that the bank's value propositions appeared to be most suited to unbanked and entry-level customers generating an average revenue per user per month of $4, in marked contrast to the target value of $30 per user per month defined in those propositions. As importantly, the retention rate for these low-value customers was also low.
These two factors were significantly destroying the value of the organisation, to the extent that it was not meeting its strategic objective of being a significant and profitable business with a competitive offering that could attract customers and lock them in.
An analysis of customer product utilisation for a retail bank in Africa highlighted a similar trend. In the retail segment, only seven products accounted for more than 1% of loans by value or by number of accounts. Even though the bank had a comprehensive suite of products to meet the needs of their SME customers, usage was far more rudimentary than the suite would have suggested.
Geographic analysis further showed that only one third of the bank's regions had more than 40 active customers on their books, and that staffing levels did not meet this uneven distribution. This significantly increased the cost of delivery in some areas, and probably meant that customers in other areas were being under serviced.
These results should prompt similar organisations to question the way in which they are using their internal data, and how this can be used to eliminate unnecessary costs and redundant services while still delivering a valuable service.
Does the Customer See the Value?
The second issue that needs to be examined is the customer's perspective of value.
The successful implementation and delivery of customer value propositions does not necessarily mean the customer sees value in those propositions. When dissonance such as this arises, it may result in some customers being over serviced, while others are under serviced. An in-depth understanding of customer behaviour and product usage, together with knowledge of the way in which technology will impact on customers in the future, must be a key consideration when designing value propositions.
A review of customer profitability, product utilisation and service requests, mapped against the value propositions offered to high-value clients by a large retail bank in Africa, highlighted a number of these concerns.
The segment serviced by the bank could not be considered homogenous, as a number of the groups within it showed very different banking needs. It was evident that one sub-segment preferred to use self-service channels such as the internet and ATMs, and did not see value in the frequent calling program, face-to-face visits, and regular advisory interventions provided for by the value propositions. The older customers in the segment did, however, see value in this aspect of the service offering, and so found the substance of the value propositions beneficial.
This understanding enabled the bank to redefine sales and service delivery across the segment, and to reduce costs where customers did not see value in the services being provided. In this way, the long-term value of self-help customers was increased by providing service tools which enabled them to feel empowered, which met their needs, and which made them feel as if their bank understood them.
Design and Implementation
Designing a set of value propositions that meet customer needs as well as strategic organisational imperatives requires a broad view of key learnings, such as those described above. Clearly-defined value propositions need to be developed for each segment and sub-segment in order to ensure that returns are in line with the organisation's financial and strategic drivers.
The implementation process should integrate the value propositions into the organisation's orientation, configuration, operations and information. All aspects of sales and service delivery should be aligned with the specific propositional deliverables.
What is clear, however, is that the number of different value propositions an organisation can deliver is limited by its capacity. It is therefore important to select propositions that meet the needs of the majority of customers, and to deliver on them well. A single bank cannot be all things to all people! Implementing a meaningful set of value propositions is not a simple matter, but propositions that are clearly defined and embraced by customers will result in them being satisfi
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