best practices in intgr loyalty programs into cust value mgmt strategy of comm and media...

SUW 20 April 2005 © 2005 IBM Corporation

Best Practices in Integrating Loyalty Programs Into the Customer Value Management Strategy of Communications and Media Providers

Christine Wyatt, IBMOnil Gunawardana, Siebel Systems

© 2005 IBM Corporation2 SUW 20 April 2005

Agenda

Issues facing telcos, utilities and media service providers in managing Customer Lifecycle and loyalty

Optimized Loyalty Management: An integrated approach from IBM and Siebel

Cross-industry case study examples


Market responsiveness is a key competence required by Communications, Media and Energy Service Providers in the competitive market of today

Situation

Implications

Problems

Needs

Customer development as opposed to acquisition has become increasingly important in a saturated market

Telcos need to increase revenue through the sell-on of new products and services

Increasing competition from other channels – banks, supermarkets, insurance

Objectisation of marketing budget to deliver customer lifetime value

Synchronisation with back end systems Need a competitive intelligence capability Need to obtain true information and

insight

Need to consider use/appropriateness of Customers Loyalty Programmes

Need to maximise use of marketing spend

Need to implement Multi-Channel strategy

Need to boost non-SMS data usage Need to meet strategies set by “Group” Legacy systems Need to match subsidies and marketing

to customer value


A variety of approaches aimed at generating deeper understanding of the customer have been implemented in Telcos

Customer Segmentation Transaction analysis Purchase pattern

understanding Churn prediction and

management

How have campaigns affected a customer’s value or loyalty?

What characteristics do customers within a segment share?

What is the lifetime value and risk (volatility) of my customers?

What proportion of each type of promotion should be offered to which customers?

How to exploit the correlations between marketing actions for better budgeting?

How much to invest in each marketing action?

How do the most cost-intensive marketing activities contribute to overall performance?

Approaches But too often key questions from Executives remain unanswered:


Almost 60% of communications companies think their Campaign Management initiatives have led to either failure or have generated limited success, while only 11% has implemented CM successfully

Success of CRM Initiatives

Question: How successful have you been at the following CRM and customer-focused initiatives in your company? (Failure = project stopped, on hold, Complete success = project implemented according to plan, on time and within budget.)

Number of Responses: Meta Analysis, 64 communications sector companiesSource: IBM Institute for Business Value survey and analysis, 2004.

Perc

ent o

f Res

pond

ents

Complete Success

Failure

8% 5%

17%11% 11% 13% 9%

27%

9%

6% 9%

9%

5% 6%8%

3%

22%

3%

8%16%

11%

13% 14%16%

17%

11%

22%

38%

42% 27% 42%47% 39%

45%

23%

50%

23%

14%23%

19%11% 16% 17%

13% 11%17% 14% 13% 11% 11% 9% 8% 5% 5%

0%

20%

40%

60%

80%

100%

Customerservice and after-

sales support

Strategic brandmanagement

Loyalty andretention

programs

Campaignmanagement

Sales programeffectiveness

Channelintegration and

optimization

Cost reduction CRMOutsourcing

Productoptimization and

management

Not Applicable


Why have these approaches been unsuccessful?

Strategically, churn management is a re-active approach reliant on success in interpreting behaviours as it happens, versus a pro-active approach of loyalty management

Inability to develop a single view of the customer – data has to come from many sources with all the data quality issues inherent in this

A lack of tools to use to optimise marketing dollars, eg. Within a particular segment being confident in a sequence of marketing actions that will increase long term customer value

A lack of integrated business processes and technology to execute Customer Lifecycle Management activities across the enterprise at every customer touchpoint


Agenda





Tools and approaches from IBM and Siebel to address these customer management pain points

Single view of the customer

Pro-active approach of loyalty management

Tools to use to optimise marketing dollars

Integrated business processes and technology to execute Customer Lifecycle Management activities

Siebel’s UCM

IBM’s CELM tool

IBM’s CELM tool

Siebel CRM

….Focusing today on CELM and how to use it with Siebel’s Marketing suite


An integrated, iterative implementation approach we call Optimized Loyalty Management (OLM)

Siebel Analytics• Churn rate• Customer Value Index• Offer acceptance rate• Loyalty Index IBM CELM

Understand customers Customer Value Index Loyalty Index

Siebel UCM Consolidate Customer Information

IBM CELM• Identify series of actions for each customer segment for a given budget

Strategy

Analyze

Execute

CustomerCustomer

Gather Data

Measure

Siebel CRM• Across ALL customer touch points• Marketing

• MRM• Campaign Management• Upsell / Cross sell• Lead Management

• Loyalty Program Management• Service

• Priority Service• Self-service

• Sales• Complex Order Management


Marketing managers can leverage their customer information for optimal modeling and control of Customer Dynamics

Loya

lty In

dex

Value index

Customer

Campaign planIBM

CELM Revenue

State: Medium loyalty & Medium valueSequence of actions: ExtraP campaign, Cash campaign, Accrual campaignRevenue: 2000 $Next state: High loyalty & High value

1 - A customer is in a given state

2 – CELM recommends a

sequence of specific campaigns

3 – The customer brings a benefit whe she responds to the

campaign

4 – The customer moves to a better

state

CC

XP

AC


CELM allows marketing managers to dynamically optimize marketing budget allocation per Customer/Segment

Given:

a time horizon for future planning

a (sub)set of customers with associated value/risk profiles

a (sub)set of eligible customer offerings (e.g. campaigns)

a limited marketing (targeting) budget

Determine the optimal portfolio of customers and offerings which maximize the value/risk ratio (ROI) and minimize Saturation over the given time horizon under the budgeting constraint.


Modules Functionalities

Prediction of Customer Dynamics (based on Markov Decision Processes(MDPs) and Reinforcement Learning Algorithms

• Identification of customer dynamics (probability to move to a higher/lower value state)

• High accuracy evaluation of customer lifetime value/risk (volatility) over variable time horizons

• Prediction of impact of future marketing action- sequences on customer lifetime value

• Generates optimal future customer targeting policies because of the consideration of optimal associations of future actions per customer vs. next action only

• Simulation of change from current to optimized marketing policies (cost / benefit analysis)

• High accuracy of estimated customer Financial Profile due to consideration of value and risk (volatility)

• Better customer targeting policies because of the consideration of optimal association of future actions per customer vs. next action as it’s usually the case with campaign management tools.

Value Proposition

Portfolio Optimization

• Optimally allocate restricted marketing budget to maximize return on investment and minimize risk (uncertainty) in customer response

• Optimized resource allocation per customer segment in a way which maximizes the Value/Risk ratio of the whole customer portfolio.

Segmentation

• Definition of customer groups based on demographics and transactional behavior (e.g. value/ loyalty/ recency/ frequency) or customized (business) segmentation rules

• Highly flexible state of the art segmentation algorithms

The functionality and value proposition of CELM can be grouped into three key parts: segmentation, prediction of customer dynamics and portfolio optimization


So how does the CELM solution differ from existing products on the market?

Key difference is the dimension of time– CELM marketing plans consider best treatment for the customer

segment to optimise the eventual value and loyalty of that segment to the company, rather than the immediate value (and the actions therefore could be different)

Second key difference is the calculation of the optimal budget allocation for a marketing campaign within a segment relative to the likely response and result from that segment of the campaign


An integrated, iterative implementation approach we call Optimized Loyalty Management (OLM)

Siebel Analytics• Churn rate• Value-Loyalty migration rate• Offer acceptance rate IBM CELM

Understand customers Customer Value Index Loyalty Index

Siebel UCM Consolidate Customer Information

IBM CELM• Identify series of actions for each customer segment for a given budget

Strategy

Analyze

Execute

CustomerCustomer

Gather Data

Measure

Siebel CRM• Across ALL customer touch points• Marketing

• MRM• Campaign Management• Upsell / Cross sell• Lead Management

• Loyalty Program Management• Service

• Priority Service• Self-service

• Sales• Complex Order Management


Siebel Analytics

Customer Value Customer lists and associated campaigns

Siebel CRM

IBM CELM

Value-Loyalty cell migration rate Offer acceptance rate

IBM CELM and Siebel exchange critical information about customers to provide a closed loop solution


A few sample stories emphasize the tangible business benefits that CELM can deliver to improve KPIs

Sample Story 1

Increasing Customer Profitability

Problem: 80% of the customer base consists of customers with a negative or low profitability. Those customers with a negative profitability should be presented attractive campaigns to move them to better profitability levels.

Solution: Based on the marketing budget available for Q1 and Q2, and the risk profile that is preferred for moving the customers to a better profitability level, CELM predicts and suggests 5 next subsequent campaigns for each value/loyalty subsegment

Sample Story 2

Retention Program Enhancement

Problem: Customer churn rates are high, and retention programs are costly with limited success rates on retention offers that are provided.

Solution: Based on historic transactional data, CELM predicts trajectory paths that newly acquired customers will follow towards the end of their predicted customer lifetime. Sequences of campaigns are identified to treat customers in the most effective way to prevent churn behaviour and make customers loyal, already in the early stages of their lifetime.

Sample Story 3

Segment Value Enhancement

Problem: The ýoungsters´ segment is underperforming in terms of uptake of new services. No ideas exist as to better promote new products/services and increase campaign response rates.

Solution: CELM re-segments the ýoungsters´ segment into different value/loyalty subsegments. Based on this new, enhanced segmentation, CELM proposes 3 targetting campaigns for the next quarter to drive the ýoungsters´ segment to a better value/loyalty state


LegacyUCMHR DataMartERP SCMOrderMgmt Service

Process & Data Integration

Marketing Provisioning Service

Employee Alignment

Business Intelligence & Analytics

Sales, Marketing, Service Best Practices

Web, Call Center, SMS, IVR, Email, Partner

Customer

Siebel provides an integrated set of tools for executing Loyalty Management


ODSSiebelOLTPPSFT Data

WarehouseSAP Data MartsXML Other

Siebel DW Server

with pre-built ETLPrograms

SiebelRelationshipManagementWarehouseLegacy/

Host

Siebel Marketing Suite 7.7 is the industry’s most comprehensive solution

Enterprise Analytics Platform

Industry Specific, Best Practice Enabled Marketing Applications

Planning and

Resource Management

Segmentationand

Targeting

MultichannelCampaign/

DialogManagement

EventsManagement

PartnerMarketing/

Trade PromoManagement

Email& Web

Marketing

LeadManagement

LoyaltyManagement

Field Sales

Web/eMail Partners Call

CenterDirectMail WirelessPOS/

ATMsBills &Stmts

BranchesStores

CustomerCustomer

Intelligent Interaction Across Customer Touchpoints

Customer and Business Insight

http://www.reuters.com/


Partners

• Enroll members• Send transactions to the

host organization• Approve joint loyalty

promotions

• Manage service requests• Approve transactions• Manage products• Collaborate on servicing the

customer

MembersCarrier

• View complete member profile

• Define tiers

• Enroll members

• Reward behavior• Create targeted promotions• Define accrual and

redemption rules

• Service a member’s request

• Join program

• Keep profile up to date• Conduct web transactions• Enroll in loyalty promotions

• Redeem rewards• Refer friends• View statements• Create Service Requests

• Set contact preferences

Rules Rewards Tiers Member Profiles Eligibility Promotions Transactions Point Expiration

Loyalty Manager Loyalty Member Portal Loyalty Partner Portal

Loyalty Engine

Siebel Loyalty Program Management


Siebel Loyalty supports all the key loyalty program management business processes

• Business and customer analytics• Proactive alerts• Fact-based loyalty planning

• Loyalty promotions• Define rules, criteria and actions• Partner approvals

• Engine updates tiers automatically• 360 degree member profile • Order history and transaction

history is maintained

• Measure success of promotions• Analyze member transactions• Rate partners, products, etc.

Business and Customer Insight

Create a Personalized Experience

Update Member Tier & Behavior Profile

Closing The Loop andMeasuring ROI

• Personalized web site• Multi-channel campaign• Reward behavior

Define Targeted Loyalty Promotions

Collaborate w/ Partners Online

• Partner submits transactions• Partner services members


Adopting and integrating the Optimized Loyalty Management in your organisation

Scenario 1 (Proof of Concept), Provisioning of a pilot study: one-off study performed jointly with IBM

experts on a limited scope to demonstrate value of CELM Study iterations require involvement of IBM experts on a case-by-case

basis

Scenario 2 (Planning and Set-up)Provisioning of methodology and a desktop application (e.g. Excel based) or

as a stand-alone tool Client enabled to perform analyses independently on a day-by-day

basis, input data needs to be imported by user Planning OLM approach

Scenario 3 (OLM Implementation)Provisioning of simulation method and (system-) tool which integrates the

modeling with other marketing applications in use or required Multiple users/processes enabled to use CELM independently on a day-

by-day basis to support CRM operations, input data is automatically imported from appropriate systems and can automatically link to execute and manage campaigns

Project/ integration effort

Operational practicability

low

high


Agenda





25/01/04

“Last spring, IBM's Services and Research Labs started working with FinnAir on a project to use mathematical modeling and optimization algorithms to try to increase customer loyalty, reduce marketing costs and improve response rates among members of its frequent-flier program...

FinnAir is pleased with an initial project involving half of its frequent fliers. Eero Ahola, Senior Vice President for Business Development and Strategy, says the technology has reduced marketing costs by more than 20 percent and improved response rates by up to 10 percent... "That can be huge money in the airline business," Mr. Ahola said. "And it's done with mathematical modeling. We could never do it ourselves." Such work, he added, shows another step in the evolution of FinnAir's relationship with IBM. "They've gone from being a supplier to our data center to a partner," Mr. Ahola said. "It's a totally different relationship."

CELM In The Press …


Finnair FFP optimizes targeted marketing activities

Finnair FPlus, as most of existing loyalty programs, was lacking advanced value and loyalty metrics to quantify, plan, and optimize targeted marketing activities efficiently

CELM was introduced to optimize marketing planning and budgeting of targeted marketing activities in Finnair FPlus in order to:

Enhance existing segmentation with customer value/loyalty metrics Estimate customer lifetime value and risk (volatility) over variable time horizons Identify customers’ different life cycle phases and dynamics (e.g. Track the value of a family) Optimize planning of sequences of campaigns per segment (avoid saturation!) Optimize marketing budget allocation to maximize the Value/volatility ratio Deliver quality consistently at all customer touch points (call center, check-in, gates, etc.)

Benefits Reduced marketing costs by 20% while improving response rates by 10% Achieved 80% accuracy rate for predicting eventual customer value Helped improve customer satisfaction rate by 10%


Nestle/Nespress optimizes their promotion policies toproactively promote up-/ cross-selling and avoid churn

Identification of optimal marketing policies per customer segment to maximize marketing efficiency across the entire customer portfolio and decrease churn rate

Solution

Sophisticated approach for using analytics on both a strategic and operational level

CELM tool for multi-staged marketing campaign planningBenefits

Optimized customer equity over lifetime and increased revenues due to actionable plan to minimize defection and/ or transition to low value segments and to optimally promote and leverage up-/cross selling opportunities

Enhanced marketing ROI due to optimal resource allocation to maximize value/risk ratio across the entire customer portfolio


Scalability for integrating large multi-channel data Optimization of generated rules across channels and over time Mapping rules into channel-specific actions

DemographicData

Transaction Data(Channel 1)



EstimationModule

Data PreparationModule

Virtual Join

ValueIteration

ChannelOperational CRM Rules

Selective Sampling

Model 1

Model 2

Model 3

Scalability

Optimization Mapping

CELM is highly flexible and scalable against typical customer requirements and needs


An integrated, iterative implementation approach we call a loyalty management lifecycle

Loyalty Marketing Lifecycle

Measure Promotion

Results and Effectiveness

Create and Execute

Marketing Campaign

Create Proactive Marketing

Strategy and Plans

Create Flexible, Targeted Loyalty

Program

Segment Members and Create value

Profiles

Design Reactive,

Event-based Marketing

Respond to Customer Questions

about Promotion

Process Members

Transactions and Accruals

Siebel LoyaltySiebel Analytics

Siebel Marketing IBM CELMOptimize Marketing

Budget Allocation


Screenshot (1): Data Management – Raw Data visualization

Raw Data: dynamic information (transaction

and marketing activities).

Raw Data: static information

(demographics)

Raw Data: temporal information visualization


Screenshot 2: Customer Histories – build customer profile and track them over time

Customer profile/events over

time

Customer temporal data computed every

time period

Static information (demographics)


Screenshot 3: Customer Dynamics – use customer histories to model customer response

Searchable list of marketing actions with statistics

(revenue/profit, coverage)

Transition probabilities over time from one segment to

another

Customer path along the market segments (path is

highlighted in red and tagged with individual marketing

actions)

Market dynamics over time with some statistics (number

of customers in each segment, transition probabilities, etc.)

Market dynamics can be restricted to only a sub-set of marketing actions. Allows to

assess the impact on the value and the dynamics.


Screenshot 4: Marketing Action Planning – use the customer response model to infer the best marketing strategy that maximize the profit under budget constraints

Revenue distribution per state

Revenue distribution per action

Number of customers to target in each state with the selected marketing actions at specific times

Marketing budget constraint (user input)

Risk aversion factor (risk averse = do as before)

Simulate what will be the customer distribution over

market segments if this marketing plan is

implemented

Expected revenue and cost of the current

marketing plan


CELM software components are all Java-based and by result can be easily integrated with a customer´s existing CRM software components (e.g. campaign management software, call center software)

SQL Scripts (*.sql) : SQL command files to perform:– Data model creation and import of core data from files/tables– Basic OLAP functionalities for quick data diagnosis– Data preparation (pre-processing) for CELM algorithms

Discretization, Segmentation and Clustering (CELM.discretization, CELM.segmentation, CELM.clustering): discretizes customer features and creates segments based on business rules or on advanced clustering algorithms. Classifies new customers into one or several segments given the value of their features.

Markov Decision Process (MDP) and Reinforcement Learning (RL) (CELM.mdp & CELM.rl): models the inter-state dynamics (trajectory) of customers as they react to actions (targeting policy) and generate value (profit). Predicts the best series of actions to take in order to maximize probability to move to higher value states and minimize the volatility of that value over given time horizon T.

Defector Transition Model (celm.defector): uses the Markov Chain modeling to analyze historical customer dynamics and produce transition patterns which lead to customer defection

Portfolio Optimization (celm.portfolio): Models customer segments as financial assets in a portfolio. Finds the best marketing budget allocation strategy which would maximize the portfolio Return/Risk Ratio (ROI).


IBM’s CELM allows CME companies to understand and optimize customer lifecycle dynamics across value and loyalty states

r1 $ r2$ r3 $

BargainHunter

Repeater

LoyalCustomer

ValuableCustomer

One Timer

Repeater

Defector Defector

Repeater

LoyalCustomer

PotentiallyValuable

Campaign A

Campaign B

Campaign C

Campaign D

Campaign E

Present Future

The customers states are represented by the customer/segment features Actions are represented by the marketing events (e.g. campaigns) Each transition has a probability (p), generates a revenue (r)

CELM answers the key question: what are the optimal sequences of actions which would maximize Customer value and loyalty over some given time horizon?


Step1: Find targetting policy ( sequence of campaigns) which maximizes customer value/risk ratio over specified time horizon T (weeks, months, quarters).

Step2: Determine when to target, and how much to allocate to, each customer to implement the policy within horizon T.

... ...

t

t

t

$

$

$

Customer Portfolio Discounted cash flows Value

distribution Cost

... ...

Staged Relationship actions and options

...

periodstateactionsoptions

p1S1A1O1

p2S2A2O2

pnSnAnOn


p1S1A1O1

p2S2A2O2

pnSnAnOn


p1S1A1O1

p2S2A2O2

pnSnAnOn

How does it work: The CELM solution generates its actionable business intelligence based on a predefined two-step approach

PortfolioManagement

•Resource Allocation•Portfolio ROI optimization

Simulation

Historical Policy Assessment•Campaign Mix•Product / Customer Mix

Model

Optimization

Optimized Policy•Optimal Mix Design•Optimal targeting policies over variable time horizons

Understanding

Optimizing

Customer Behavior•Value-based Segmentation•Lifetime Value/Risk profiling•Customer Transition model


Our team built a model based on the German market data to analyze the impact of marketing selections on customer dynamics

Goals:– Analyze the impact of the marketing selections on customer dynamics.

Methodology:– We analyze the German market for a period of 11 months: June 2003 to May 2004.

– We started by defining customer histories. A customer history is modeled as a list of (state, selection, revenue) triplets computed every month as follows:• State: Client position in the segmentation stages given by client. The state value

is computed the first of every month.• Selections: the sequence of marketing actions that have been assigned to a

customer during the whole month.• Revenue: the revenue generated by the customer during the whole month.

– Looking at (state, selection, revenue), (next state,…), we build the following transition model:

New Member

Active Member

EKS06/03 + NACC06/03

9.7 Euros

State Selection Revenue New state

best practices in intgr loyalty programs into cust value mgmt strategy of comm and media...

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