Monthly Archive for November, 2009

Cross-selling equals customer retention…but who’s buying?

Published on November 20, 2009 in Brian Diepold. 0 Comments Tags: , , , , .

Brian Diepold, Pitney Bowes Business Insight

It’s pretty well recognized that the deeper the relationship with the customer, the more valuable it is for the bank and the customer.  For years we have been preaching cross-sell as the way to build relationships, gain lasting customers, and run a profitable bank.  It’s also generally regarded that cross-sell leads to customer retention.  There may have been a bit of chicken and the egg with this part, but I think that has been resolved by looking at the timing of most cross-selling.  As we all know very well by now, the great majority of cross-sell takes place within the first 90 days.

I’m willing to take that as evidence of causality – cross-sell does in fact lead to customer retention, not the other way around.  The luxury of having millions of customer data records is that one cannot find themselves bored.  It seemed like a worthy endeavor to quantify the actual impact of cross-sell on customer retention.  And with that, enter 80MM customer account records.  By quantifying this relationship, we can see the direct impact of a firm’s strategic initiative and diagnose the types of households where cross-sell is more important to strengthening the relationship and increasing the probability of retaining the household.  The analysis uses a logistic model to determine the impact of cross-sell on the probability of retaining a household.

The bottom line is that regardless of how you measure cross-sell ratios, you can find the intuitive relationship that more products per household lead to a higher probability of retaining that household.  We also find a diminishing marginal return – i.e., the first cross-sell is the most important to establishing the relationship.  While each additional product does increase the likelihood of retention, the biggest jump is with the first cross-sell.  Rather than rewrite the research paper, I’ll just highlight some of the key findings:

  • Moving from one product to two for the household yields the greatest increase in the probability of retention.
  • Households with low deposit dollars yield an 8 – 10% increase in the likelihood of retention through cross-sell.
  • Households with mortgages or interest-bearing deposits as the lead product also yield an 8 – 10% increase in the likelihood of retention through cross-sell.

If you have the luxury of focusing your resources on certain types of households, these are the ones where you can make the biggest impact.

Consumer Demographic Profiling: Does Distance-weighting Make a Difference?

Published on November 20, 2009 in Nat Evans. 0 Comments Tags: , , , .

Nat Evans, Pitney Bowes Business Insight

It is a standard market research practice to use psychographic segmentation as a primary tool for discerning a company’s target customer.  This “customer profile” creation is a primary means by which customer behavior is bucketed into distinct groups that reflect differing customer characteristics, shopping behavior and loyalty to a retail, restaurant, or consumer package brand.

Over time, the Strategy & Analytics statistical modeling team at PBBI has given a lot of thought to the idea that customer profiles, and their use in sales forecast models, may be enhanced by weighting the customer source survey data by distance.  It makes sense.  The farther away target (or non-) customers are, the more pronounced the profile scores may be.

For instance, a typical customer profile for a high-end department store, with a specific high income, suburban customer segment or “cluster” (Corporate Clout, say, from Acxiom’s PersonicX lifestage segmentation system) may have a score of 200, meaning that people within the segment spend two times what an average customer spends for the concept.  A low-income segment (Single City Stress, for example) may have an index score of 40, or the segment spends 40 cents for every dollar that an average customer spends. Weighting the profiles by distance, however, may yield a more intensified result.  You may expect the high-income cluster to go from an index score of 200 for customers only within 0 to 3 miles, to 225 for those same customers beyond 6 miles from any given store.  Perhaps the Single City Stress cluster would go from 40 to 25, meaning that the farther away the cluster is from the store, the less they are willing to patronize and spend at the department store relative to other customer segments at the same distance.

In theory, it seems to be a reasonably insightful approach.  In practice, the S&A modeling team created just such an analysis, and found that among several clients’ customer databases, distance has no significant bearing on the relative spend of psychographic segments at the same distance.  The following box plot will give a sense for one sample profile’s distribution:

Distance Weighted
As shown, 50% of all scores’ distributions fall between approximately 50 and 110.  A couple of outlying clusters find themselves floating outside the distributions (the “1”, “2”, or “3” above the whisker for each plot), but statistically, no significant difference was found between scores at different distance increments.  The distributions’ medians were roughly the same; variance was the same.  This pattern was consistent among several customer files we tested, and the application of several distance weighting methods yielded no statistically significant enhancement whatsoever.  Goes against the hypothesis.  To be sure, there exists a multitude of ways to carve up customer data, and this analysis is by no means definitive, but from a macro level, it seems the proof is in the data. This analysis also does not mean that distance in its myriad forms (straight-line, drive time, drive distance) has no influence.  Obviously, it does.  Distance decay portrayed on a sales per capita, or other relevant, basis is very important indeed, and is an extremely well documented predictor of consumer behavior.  It’s just a matter of proper application, and what any one retailer’s customer data is truly telling an analytics researcher.

Black Friday 2009….Cheap Thrills or Business as Usual?

Published on November 18, 2009 in Deb Purcell. 0 Comments Tags: , , .

Deb Purcell, Pitney Bowes Business Insight

My name is Deb, and I am a Black Friday shopper. At one time perhaps I would have been ashamed to admit this condition, but not today. For several years, I have braved cold weather on far too little sleep and far too much caffeine in search of the best deals. Wow, what deals! Cameras, laptops, and MP3 players for my teenagers, a leather jacket for my husband, and a few goodies for myself all purchased at a fraction of their normal cost. In fact, the hunt has become a family tradition. We scour the inserts over pumpkin pie to develop our shopping strategy.

With Thanksgiving around the corner, I am beginning to contemplate Black Friday 2009. The biggest question on my mind: is it worth it this year? As an industry professional, I am aware that retailers have reduced inventories in hopes of avoiding deep discounts that will cut into profits on an already limited revenue base. I know merchandise is already aggressively priced, and retailers have begun advertising early under the assumption that consumers are carefully planning their holiday shopping in advance to avoid overspending, particularly on impulse purchases using credit.

As a consumer, I also know the recipients of my gifts are not expecting much this year. Ours is not the only extended family to scale back our party venue and emphasize the importance of sharing each other’s company rather than the token presents that really seemed to escalate over the years. With a few members out of work or on the edge, I would be embarrassed to show up with bags full of frivolous goodies this year. Three major consumer shopping trends this year have been well publicized: make personalized gifts instead of buying expensive items, give a single gift to be shared among a group or family rather than individual items, and purchase what must be bought well in advance, with cash. Where does Black Friday fit into these trends, especially as consumers appear to now really understand the difference between must have and want to have?

Don’t get me wrong. I am not forecasting doom and gloom for retail sales this holiday season. Compared to the shockwaves of uncertainty that rippled through the markets in 2008, I believe there will be few surprises this year, and retail sales will come in pretty close to conservative industry expectations. I just don’t know how important the Friday after Thanksgiving will be in the whole equation. If I’m not planning to buy many items, then I am not really going to save very much through the discounts. Sleeping in is beginning to sound pretty nice. But then again, I may really miss the adrenaline rush, the thrill of the hunt….ask me again on November 30th.

PBBI Retail Practice Leader Appears in Retail Traffic Magazine

Published on November 16, 2009 in Leslie Nogue. 0 Comments Tags: , , , , .

In the October issue of Retail Traffic, Associate Editor Elaine Misonzhnik interviewed Devon Wolfe, Managing Director of Americas Strategy and Analytics Services with Pitney Bowes Business Insight, for her story on current site selection trends.

In the article Forced to Count Every Dollar, Retailers Re-evaluate Site Selection Practices, Devon assesses the current state of retail site selection, which is showing signs of growth, despite the economic downturn. In today’s economy, retailers are holding themselves to much more stringent criteria when assessing the viability of a new location. The industry push for accurate, up-to-the-minute information on a market by market level highlights the importance of macroeconomic data when retailers are evaluating market potential for new stores. Today, retailers need visibility into “statistics on employment figures, GDP growth, retail sales and the number of bankruptcy filings”. It is for this reason that Pitney Bowes Business Insight introduced MarketPulse, a quarterly subscription to a detailed macroeconomic report that provides insight into market level trends. [Read entire article...]

Retail Traffic is a monthly magazine written for senior level retail executives.

“The Pub” at Wegmans

Published on November 13, 2009 in Shawn MacDonald. 0 Comments Tags: , , , .

Shawn MacDonald, Pitney Bowes Business Insight

Hey! That was my idea!

Rochester, NY-based Wegmans Food Markets, Inc. recently opened its 74th store in Collegeville, Pennsylvania, a small town located 22 miles northwest of downtown Philadelphia. While the store’s grand opening was locally newsworthy, it signaled a first for the 93-year-old company: the 132,000-square-foot store includes a full-service restaurant and pub, aptly named “The Pub.”

As a 15-year-old boy, my first job was stocking shelves at an independent supermarket in the west suburbs of Detroit. As I stocked the lunchmeat and dairy sections on Saturdays, I noticed the host of middle-aged men following their wives aimlessly during their weekly grocery shopping trip. The men with a keen sense of hearing might notice the sounds of a Detroit Tigers baseball game or a University of Michigan football game emanating from the back stockroom. They would undoubtedly ask the score, and if there was a change, one of the stockboys would track them down to give them an update.

The visions of those bored husbands looking anything but engaged in the shopping experience got me thinking. What if the store’s owner bought out the adjoining retail space, knocked a hole in the wall and put in a pub? Mind you, this was well before the advent of the sports bar, so it would be only a “shot and beer” joint with maybe two or three televisions and a limited food selection. But still, a veritable nirvana for the husband with the “please get me out of this place” look on his face. Then, once his wife finished the shopping, the cashier would simply announce over the store’s public address system that Mrs. “So-And-So” is ready to leave.

Now granted, The Pub is not a “hole in the wall” but rather a traditional Irish pub where patrons can view Wegmans’ chefs busily working in the open kitchen. It is also not a “shot and beer joint,” as the restaurant does not offer shots, pitchers, happy hours or pool tables. While the company states the emphasis is on the food, The Pub boasts craft and imported beers to satisfy the most-discerning palates among its 750 varieties offered for in-restaurant consumption or take-out.

Having worked in the supermarket industry for 20 years, and spending the past 12 years as a retail site location specialist (visiting many Wegmans stores over the years ), I have come to greatly appreciated what Wegmans brings to the table (pun intended). No doubt Wegmans will do a first-rate job in serving their pub customers, but whether or not they rollout the concept beyond the Collegeville store remains to be seen. If the concept does thrive, will other supermarket chains follow suit?

So, while the dream of a 15-year-old boy never came to fruition, one highly successful supermarket chain has taken the plunge. Bottoms up, your wife has just left the checkout!

Attack Back With Financial Literacy

Published on November 11, 2009 in Brian Diepold. 0 Comments Tags: , , , , , , .

Brian Diepold, Pitney Bowes Business Insight

You couldn’t go ten minutes at BAI Retail Delivery without hearing about – or talking about – NSF fees. It’s natural that it would be a hot topic as it is certainly getting its share of media and congressional attention these days. Richard Davis made a great point that the industry needs to educate Congress and the public that these fees are not necessarily immoral – after all, as he so nicely pointed out, we are providing a service for the consumer and we are charging for that service.  I agree, and we need to take Mr. Davis’ advice that we need to tell the story in a more positive light.

I also think it’s important that we do more to educate our consumers. This economic crisis is very tightly linked to the lack of economic education and financial literacy in our country. We don’t do enough as a society to arm our population with the necessary tools to think about the world the same way we do as bankers, financial advisers, and economists. Not everyone needs to have a passion for these topics, but they certainly need to have a basic understanding in order to manage their personal finances. The national and state councils on economic education do everything they can to support these initiatives for our youth, but we also have an adult population that lacks this knowledge.

Let’s take it upon ourselves to help solve that problem. Banks could generate goodwill by offering simple educational programs at the point of sale. Let’s take 15 minutes to teach a new customer how to use their checking account. This may just allow them to avoid the extra fees down the road, while at the same time allowing you to guide them to being a profitable customer in other ways.

Not only is it good for the customer, but it would have to go a long way to convincing Washington that we are serious about addressing the issue ourselves – without Congress imposing their own solution.

Worst case – you are the only bank in your market that makes this effort. In that case, it should allow you to differentiate your offering and build that goodwill or brand value with the market. It’s a win-win.

Are American Retailers Ready for a Universal Reward Program?

Published on November 9, 2009 in Eric Steckling. 0 Comments Tags: , , , , .

Eric J. Steckling, Pitney Bowes Business Insight

As Democrats work toward a universal healthcare system for America, should American retailers take a cue from Canada and support a universal rewards program?

The Air Miles reward program in Canada has been in business for about 17 years and is supported by over 100 retailers (including retailers in the U.K., Spain, the Netherlands and several Middle Eastern countries). The Air Miles program has a fanatical following among its 9.5 million collectors. Parent company LoyaltyOne touts that 97% of Canadians know about the Air Miles program. So if the program is so successful in Canada why hasn’t a similar program been deployed state side? Well, they tried. The Air Miles program was introduced in the U.S. at the same time as the Canadian version in 1992, and was picked up by several national retailers. The U.S. program was shortly there after deemed unprofitable and discontinued in May 1993.

American retailers understand the value of customer loyalty programs, and many companies have developed their own programs. We are all familiar with Delta Skymiles, the Kroger card, CVS ExtraCare and our credit card’s Reward Points systems. Just take a look on your key chain or in your wallet. How many loyalty cards do you carry around every day? Retailers and consumers could benefit from a more universal system. The idea is simple: customers sign up for one program and are able to trash their wallet full of cards. Retailers join on the program and dole out the “points” at their discretion, and then benefit from a larger base of customers carrying a universal card. This will allow participating retailers collect more data about their customer’s shopping patterns than with a proprietary system. It will also allow smaller regional retailers to join into a loyalty program rather than create their own from scratch. As simple as the idea sounds, implementation of such a system would face many challenges and push back from multiple constituents, including retailers worried about margins or derailing their existing reward program and consumers wary of giving out personal information or losing benefits they have already earned.

The whole truth is that for retailers, the customer data that is collected from a reward program may be more valuable than the loyalty they generate. Participation in a universal program would mean more data for all. Those of us in the predictive analytics field are well aware of the value and usefulness of recording point-of-sale data and being able to link it with a specific customer. The retailers who collect and use this data gain efficiency in efforts including marketing, store planning, and product promotion to name a few. The barriers for a universal system are high, and pose a chicken and the egg dilemma between consumers and retailers: Without the critical mass of supporting retailers, consumers have no need to participate in the program. If the consumers are not signed up and participating, then where is the benefit for the retailers? And would Americans willingly supply one “big brother” company with all their spending data?

This initial failure of the Air Miles program in the U.S. may have been in part due to a translation issue. What do airline miles have to do with gas or groceries? Or an American need for instant gratification, why collect points when I could save money NOW?! One would think that if the program is so popular north of the border with our metric neighbors, shouldn’t it be called Air Kilometers?

Increased Store-Brand Purchasing and the Importance of Store Localization in a Down Economy

Published on November 5, 2009 in Nat Evans. 0 Comments Tags: , , , , , .

Nat Evans, Pitney Bowes Business Insight

A recent AP article seems to underscore the substantial shift in consumer sentiment toward less expensive goods and services that has been going since even before the official start of the current recession. Consumers at all ends of the economic spectrum are much more willing to preserve cash and give cheaper store brands a try, which may be an opportunity for Kroger, Safeway and other purveyors of in-house manufactured goods to gain market share in customer segments once not thought possible.

The article got me thinking about if and how these retail grocery chains, or other retailers for that matter, differentiate their product between customer segments. If the sale of store-branded grocery products has gone up 10 to 15% nationally in the past year, is that percentage equally distributed among all stores? The answer is most certainly not. Does it mean that all categories of merchandise will differ? Not necessarily. Only the data can tell. 

Regardless, consumer preferences are still going to be a driving force, even in a down economy.  It is critical, especially in these times, for a retailer to have the ability to micro-merchandise to the primary customer segments that lie within any store’s primary area of influence (or trade area). Store locations for any chain or consumer packaged good are bound to have significantly different demographic and psychographic characteristics with each trade area, and as such, merchandising the stores in an identical fashion limits optimal market penetration. By examining merchandise shopping patterns and analytically “clustering” stores that have similar characteristics, a retailer will be able to identify trends and compare store groupings of like characteristics.

The information derived from store clustering analysis and localization will be increasingly pivotal for local store planning, marketing, merchandising, cross-promotional activities, and in general, maximizing business potential. This type of analysis is fundamentally important and should be maintained as an integral part of any organization’s regular analytical program. 

For additional thoughts from our Predictive Analytics Consultants, download a free whitepaper on this subject.

Customer Segmentation: Canadian Style

Published on November 3, 2009 in Sebastien Rancourt. 2 Comments Tags: , , , , , .

Sebastien Rancourt, Pitney Bowes Business Insight

Canadian privacy laws set ground rules on how organizations may collect, use and disclose personal information. Under the Personal Information Protection and Electronic Documents Act, for example, personal information can only be collected when it is gathered with the knowledge and consent of the consumer—and only used for the reasons for which it was gathered.

Despite these data challenges, marketers and strategic planners have found effective ways to understand customer needs and create actionable customer segments. These insights and best practices—while particularly germane in Canada—are relevant to anyone looking to improve results by targeting more effectively.

Today’s leading solutions begin with geo-demographic clusters. While cluster segmentation strategies have existed for decades, contemporary clustering methods use robust statistical data and advanced analytical power to capture, create and measure more precise customer segments based on geography, demographics and lifestyles. With the right data and analytical tools, organizations can characterize the behavior of every clustered customer—from their favorite movies and foods to their preferred attire and avocations—enabling users to more accurately predict customers’ responses to every campaign.

Professionals in retail, financial services, media planning, real estate and restaurants, among others, rely on cluster segmentation to improve decision making and business results. Yet with the enhancements made in recent years, some marketers have yet to incorporate the latest advances which can boost overall performance. In speaking with experts across Canada, we’ve identified a series of best practices to help guide your next steps.

Segment by neighborhood, not postal codes. Some segmentation strategies rely on postal codes, which can lead to problems down the road. Each month, as many as 5% of the roughly 850,000 six-digit Canadian postal codes change, as Canada Post updates this system solely on the basis of their mail delivery needs. Not only does this taint campaigns in the short-term, it makes it nearly impossible to manage year-over-year modeling and analysis.

The best neighborhood segmentation clusters begin with census data at the dissemination area levels—which are the lowest levels for which reliable census data are published—providing hundreds of reliable data variables. In addition to data accuracy, these neighborhood-based models offer year-over-year consistency, so marketers can build on past success over time.

Incorporate household-level insights. This past year, leading cluster models have found ways to use more comprehensive household level data, incorporating consumer information that goes far beyond census findings. These inputs, which conform to Canadian privacy laws, represent an unprecedented level of detail and behavior-based data—and create a more high-definition view of customers and prospects.

Maximize data points. Not all household level data is the same. Some cluster models are built extrapolating data from as few as 8,000 surveys across the full population of 33 million Canadians. More reliable cluster models will analyze self-reported data from as many as 10 million individuals—providing for more accurate targeting and a lot less guesswork.

Overall, organizations that employ these best practices will benefit from a multidimensional framework that makes it possible to sort through the complexity of Canadian consumer culture without having to manipulate literally hundreds of census and survey variables.

One such solution is PSTYE HD, the Pitney Bowes Business Insight segmentation system created using an innovative two-step clustering process. The 59 clusters identified, including Canadian Elite, Joie de Vivre, Urban Verve and Next Gen Rising, leverage the largest and most robust repository of Canadian consumer intelligence to date—making it easier for organizations to locate new opportunities, connect with customers and communicate more efficiently.

Learn more about PSYTE HD at www.pbinsight.com/psytehd. As always, we look forward to your feedback!

A Senior Economist Weighs-In at PBBI

Published on November 2, 2009 in Gary Faitler. 0 Comments

Gary Faitler, Pitney Bowes Business Insight

On October 14, the Ann Arbor office of PBBI Strategy and Analytics hosted a two hour seminar with Sam Kahan, Senior Economist with the Federal Reserve Bank of Chicago. Sam began his remarks by placing the current economic downturn in perspective with previous declines. Often termed “the Great Recession”, the scope of the current recession invites references to the great depression of the 1930’s but still critically avoids direct parallels with that chronic long term economic despair preceding World War II. Terminology aside, Sam made the point that within its time frame, every recession, has in some sense, been viewed as unique and unprecedented.

Of great interest to all, Sam indicated that despite persistent high unemployment, in the early months of 2010, the hindsight analysis will likely indicate that this recession technically ended between May and September 2009 with real GDP growth hovering slightly above 2%. The consensus forecast suggests however that the rebound will reflect a much shallower trajectory, relative to the depth of the decline, than observed with prior recessions. In prior recessions, the sharper the decline, the stronger the recovery in the first year following the recession. If that pattern were to hold here, then we would expect a 6% annual GDP growth, rather than the modest consensus estimate cited.

Questions also remain with respect to the retail arena. Consumer confidence to “go out and spend” continues to lag, as indicated by the current high personal savings rate in excess of 5%. This rate reflects a recessionary mindset and is in stark contrast to the more typical rate in recent years of 1% to 2% – which accompanied the “exuberant” consumerism preceding the current decline. Sam was careful to offer repeated caveats in predicting any future trends, but his personal view is that when we emerge from the current recession, although the consumer will likely be somewhat “sobered”, the personal savings rate will likely be closer to the 1% to 2% range than the current 5%.

Another critical point of discussion was the prospect for inflationary pressures. Sam presented recent historic trends for total inflation as well as for core inflation (excluding highly volatile food and energy expenditures). Total inflation displayed major spikes and plummets largely following the oil price surge and subsequent decline in early 2008 through 2009. The core inflation levels, however, have been generally hovering within a historic “normal” range of 1.5% to 2%. Again, with duly noted caveats, Sam believes inflationary pressures in the foreseeable future are low given the large quantity of excess capacity in the economy (the output gap has recently declined sharply suggesting greater risk of deflation).

Sam also provided an overview of the Michigan economy, his own specific charge from the Federal Reserve. Sam noted considerable pent up consumer demand in the auto industry as current production levels are well below replacement quantities. The outstanding question is whether the Michigan-based manufacturers will be the ones to capitalize on the likely future up tick in sales. One point Sam made was that Michigan’s weakened position may, in fact, provide an attractive manufacturing site selection for some “outside” company to capitalize on the potentially “discounted” cost of infrastructure, housing and labor. He further noted that Michigan’s woes go beyond national trends with necessary restructuring required on multiple fronts. The state’s dubious distinction of leading the nation in unemployment will be heavily impacted by this turn of events.

The session was preceded by our senior management team providing to Sam an overview of the PBBI Strategy and Analytic company services, including a specific demonstration of MarketPulse, our tool for custom formatting and modeling of macroeconomic trends by market for our national chain clients. We agreed to maintain an on-going collaborative relationship with Sam, sharing appropriate information and insight from our respective vantage points.