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RETAIL BANKING II

RETAIL BANKINGACADEMY

201.Direct Marketing

Course Code 201 - Direct Marketing

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Course Code 201Direct Marketing

Introduction

The objective of direct marketing in retail banking is to attract new customers, to create a direct customer-bank communication to promote an offer or obtain customer information, and to strengthen a long-term relationship with the customer.* In this sense, direct marketing has a link to customer relationship management. The channels by which such communication is created and fostered include internet, mobile, social networks and direct mail. The tools used on any channel may include email, telephone and SMS. Indeed, the internet may be viewed as a multimedia direct response channel where communication is facilitated by use of email, banner ads, pop-ups, and rich-media ads.

Definition

“Direct Marketing is the use of consumer-direct channels to deliver goods and services to consumers without marketing intermediaries. Importantly, direct marketers seek a measurable response.”†

†We note that direct response marketing is a subset of direct marketing where the marketer is also seeking a direct call to action (DCA). Direct response marketing is commonly defined as marketing activities targeted to a select audience for the purpose of soliciting a response. This type of marketing can employ email, direct mail, telemarketing, advertising (online, print, radio or TV), catalogue selling, billboards, trade shows, or a combination of any of these.‡

The basic direct response strategies are illustrated as follows:

* Adapted from the definition presented by A Tapp (2000). † P. Kotler, L. lane, and P. H. Cunningham, A Framework for Marketing Management, Pearson, (Prentice Hall, 2007, p 290).‡ American Marketing Association, Dictionary of Marketing Terms, <marketingpower.com>


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ReliabilityEmpathy

AssuranceResponsiveness

Tangibles

Brand MeaningCustomer ServiceQuality

ConversionAcquisitionRetention and

Customer Value Growth

Advertising

Public Relationsand Publicity

Personal Selling

Direct Marketing

Marketing Communications

Mix

Brand Identity

201.1: Basic direct response strategies

The first strategy, acquisition, refers to a direct call to action where the customer response might be the purchase of a banking product or the acquisition of customer information. This is referred to as ‘attention’ in the information processing model presented in Chapter 1.

Conversion denotes a client moving along the continuum from prospect to customer.

Retention and Customer Value Growth is synonymous with the client being a customer and eventually becoming a promoter of the bank. This process is usually associated with cross-selling success.

Key Point

Direct Response Marketing has a clear Direct Call to Action (DCA) for the Consumer. The objective is for the prospect or customer to be convinced that it is in his/her best interest to make a purchase or to request more information from bank staff.

It would seem natural that direct banking would find direct marketing to be an obvious form of marketing of financial products and services. Here is a recent example of direct marketing by ING Direct (Canada) which originally appeared on the www.marketingmag.ca website. This example is used as the basis for an open question.

Open Question #1

Consider the following direct marketing initiative in terms of the definition of direct marketing presented above. Also, outline from your own experience and expertise in banking whether this is an effective direct marketing initiative with a call to action (Direct Response Marketing).

“ING Direct believes it has found a cure for the common RSP. One TV spot launching Monday opens on a man glumly sitting in a chair outside and proceeds to show images of him lying motionless on the couch, or standing beside unused fitness equipment. The spot then informs viewers that his wife noted his condition and had him at ING.ca ‘first thing’.”

“Billboards feature the signature ING orange overlaid with messages like ‘Is RSP keeping you up at night?’ and ‘Every year, millions of Canadians suffer from RSP.’ Each board features the message ‘We can help’ accompanied by the ING logo.”

Source: Chris Powell, Marketing, 14 January 2013.

Post Script: ING Direct pulled this ad soon after it was launched, following significant customer complaints.

Why do you think customers complained about the ad?

In addition, direct marketing, particularly direct mail, is having a major effect on how national post offices do business.

The following excerpt comes from an article that appeared in the Wall Street Journal (19 February 2013):


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“The rise of the Internet has reduced overall use of the US postal system by 33 percent over the last 10 years, but one surprisingly resilient form of snail mail is thriving in the digital era - and that is direct marketing.

“‘The junk mail industry has taken advantage of more sophisticated databases computers and storage to make their business more effective than ever before,’ CIO Journal’s Joel Schectman reports.”

Source: Wall Street Journal, 20 September 2011.

This article leads to an interesting question:

Open Question #2

How effective is direct mail as a direct marketing method of customer acquisition?

Discuss.

The following diagram of a marketing communications mix is presented in Kotler et al (2007):

ReliabilityEmpathy

AssuranceResponsiveness

Tangibles

Brand MeaningCustomer ServiceQuality

ConversionAcquisitionRetention and

Customer Value Growth

Advertising

Public Relationsand Publicity

Personal Selling

Direct Marketing

Marketing Communications

Mix

Brand Identity

201.2: The Marketing Communications Mix

Direct marketing is one component of the bank’s marketing communications mix that affects brand identity. This clarifies the dual role of direct marketing in retail banking:

Direct marketing seeks to:

1. Obtain a response from the target group in terms of a purchase of banking products or the acquisition of customer information, and

2. Promote the bank’s brand identity

These two roles of direct marketing will be discussed throughout this module and inform the discussions involving the internet, mobile channels and social media.


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Direct marketing aims to efficiently market products or services by generating a sufficient response from prospects and customers to an offer. It establishes a direct connection with customers and prospects without intervention from intermediaries. But, significantly, the targeted set of customers and prospects is carefully selected with the expectation of obtaining a sufficient response in a timely manner on the way to cultivating a long-term customer-bank relationship.

What are the mutual benefits of direct marketing for both consumers and retail banks?

First, consumers obtain:

• A channel of convenience

The bank branch has limited opening hours and days of operation. The internet is 24/7. Customers and prospects have constraints on time and location.

• Increased product access, transparency and selection

Banks routinely list all their products and product features for the convenience of consumers. Consumers can easily compare a bank’s offerings with those of its competitors.

• Target products to meet consumer needs

Information is obtained on target groups, including their propensity to buy, by data mining on large databases. The objective of direct marketing is to provide offers to these target groups and deliver the right products to meet their needs. In this way, different targeted groups are served differently.

Second, retail banks obtain:

• Global reach

This permits better needs-segmentation of customer and prospect target groups and enhances better match of bank products with customer needs. The reason is that, with a potential to obtain larger target groups from a global reach, the law of large numbers can be more effectively applied where segments have homogeneous preferences and needs.

• Reduced cost

This arises from economies of scope* and increased efficiency arising from being selective about the consumer target group. Marketing materials are better directed and based on more accurate consumer data. The cost to serve is lowered.

• Potential for customer relationship management

Successful direct marketing begins with the acquisition of prospects and ends with a long-term customer-bank relationship. The targeted focus of direct marketing helps to achieve the goal of a long-term customer relationship. Note that, as opposed to mass marketing, direct marketing seeks to generate customer-bank interaction through a process of ‘customer individualisation’.

It is this process of addressing all customers in the target groups through channels with global reach, but treating each individually, which enhances the likelihood of generating a sufficient response and contributing to a long-term customer-bank relationship.

While there are many forms of direct marketing in the retailing space of tangible products, ranging from telemarketing to direct response television (DRTV), as well as catalogue marketing,

* One could conclude that mass marketing creates economies of scale.


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in this module, we deal only with the common forms of direct marketing in retail banking. These include the internet, mobile, social media and direct mail.

In this context, several questions emerge that require further consideration. These include:

• What is the best channel (e.g., website, call centre, mobile) for bank staff to use to contact customers directly?

• What is the best method (e.g., email, SMS) for the bank to use to contact customers on a mobile channel?

• What are the determining variables that increase the rate of adoption of online banking, and how can direct response banking influence these variables?

• Can bank staff forge effective customer-bank relationships online or is this the exclusive domain of bank branches and call centres?

• Is social media a new bank channel or is it an arena to increase the bank’s brand identity?

The rest of this module provides answers to these questions, as well as introducing other issues of interest to retail banking direct marketing professionals.

Open Question #3

What are the main benefits of direct marketing for both consumers and retail banks?

Discuss.

The remainder of this module is organised as follows: Chapter 1 discusses the fundamental issues of online marketing and demonstrates the calculation of the return of investment on email and direct mail marketing. Chapter 2 considers the main issues involved in direct marketing on mobile channels while Chapter 3 extends the discussion in Chapter 2 to social media. The chapter concludes with a summary of the main issues and permits a review of the main concepts and principles through a selection of multiple choice questions.


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Chapter 1: Online Marketing

Internet banking refers to banking services attained via an internet browser.* There are many academic and professional studies that investigate demographic factors that affect internet adoption rates. In some studies for retail banking, consumer perceived risk of financial transactions on the internet has proved to be a hurdle. But this barrier has almost disappeared globally as accessibility increases and technology has become user-friendly.

Direct marketing on the internet can be manifested in four different forms. Banks may seek to connect with consumers by:

a. Website

b. Text such as email

c. Image, including banners, pictures and pop-ups

d. Video, utilising a dynamic combination of voice and moving image

It is important to note that all four of these categories of direct marketing come under the heading ‘electronic mail’. This is defined as “any text, voice, sound or image message sent over a public electronic communications network, which can be stored in the network or in the recipient’s terminal equipment until it is collected by the recipient, and includes messages sent using a short message service.”† In other words, text, images and videos are all examples of electronic mail.

The benefits of the internet for retail banks

The direct marketer can focus marketing efforts on a select group of consumers.

Specifically, it permits the direct marketer of a retail bank to control which group of consumers receives the electronic mail, how often to repeat the message, by which method to send it (e.g.,

* Polasik et al: “Empirical analysis of internet banking adoption in Poland”, International Journal of Bank Marketing, Vol 27, No1, 32-52 (2009).† C Pounder, “Marketing by email? A review of some important rules”, Journal of Database Marketing & Customer Strategy Management 18, 322–325 (2011).


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email or SMS) and whether the message has been forwarded to others. The benefits to the bank are clear – efficiency and reduction of marketing costs. The bank also benefits from a global reach to consumers while still being able to focus on a select group. This is a core benefit of the internet as a bank channel.

But how does the retail bank ensure that its direct marketing efforts will lead to a long-term customer-bank relationship?

Can there be a meaningful customer relationship in a virtual world?

This is an important question, since constraints of time, place and method of communication are removed online.* The bank maintains a relationship with the customer at a distance. It is felt that face-to-face communication is the most natural form of communication, and the basis for a long-term relationship. This idea is contained in the ‘media naturalness theory’.† On the other hand, there is evidence that social and cultural background influence channel choice.‡ This proposition is supported by the fact that younger people in most countries seek information, entertainment and each other on the internet or mobile channels.

Still the question of forging a customer-bank relationship in a virtual world free of time and place constraints can be a challenge for direct marketers; we will discuss this further.

Open Question #4

“The internet offers the potential for financial institutions to obtain at considerable cost reduction new inroads to customer segments on a much wider playing field.”

Do you agree?

Internet marketing

Successful internet marketing is guided by the 4 ‘I’ Model, the characteristics of which are defined as follows:

• Interactive: describes the ability to offer information or products for sale and to document each stage of the prospective customer’s move along the client continuum in order to increase customer lifetime value.

• Information-driven: describes the need to generate reliable data on customer segments and to create information by data warehousing and, finally, customer insight by application of data mining techniques.

• Immediate: describes the intention of the direct marketer for the customer to take action straight away since a deferred action will likely lead to a lost opportunity.

• Involving: means that the customer participates in the delivery of the product or service – a type of co-creation

What are the lessons for direct marketing professionals in retail banking when marketing to consumers on the internet and attempting to start a relationship?

a) It is essential that the message from the bank is clear – no ambiguity or jargon.

* R. Baldock: ‘The virtual bank: Four marketing scenarios for the future’, Journal of Financial Services Marketing, Vol 1, No3, p260-268 (1997).† N Kock, ‘Media richness or media naturalness? The evolution of our biological communication apparatus and its influence on our behaviour toward e-communication tools’. IEEE Transactions on Professional Communication, 48(2), 117-130 (2005). ‡ Ojelanki K. Ngwenyama, and Allen S. Lee, ‘Communication richness in electronic mail: Critical social theory and the contextuality of meaning’. MIS Quarterly, 21(2), 145-167 (1997).


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Online customers do not have the patience to seek clarification from a bank. Similar to bank processes that require first-time resolution, direct marketers must get their message right first time.

Why?

Ambiguity creates doubt in the minds of consumers. Doubt leads to a delayed response or no response. This is exactly contrary to the direct (response) marketing objective.

Have an unwavering commitment to message clarity.

b) Retail banks must refrain from offering products that are close substitutes, differing only slightly. This will lead to a problem that is labelled the ‘paradox of choice’.* People are less likely to make a decision when faced with too many choices. Worse, there is substantial ambiguity of choice when the options are not sufficiently different. This arises when products are essentially similar but have minor differences. This is demonstrated in the myriad of savings products offered by a typical retail bank that are plain products but with different terms, withdrawal options and income tax advantages. This leads to the consumer being overwhelmed by too many choices that present trade-offs and generate less response.

Ambiguity of choice of bank products leads to a delayed decision or no decision. This is also contrary to the objective of direct (response) marketing.

Have an unwavering commitment to product simplicity.

Evaluation of information by the consumer on the internet

We now consider the process by which consumers evaluate information sent to them from an outside source such as the retail bank. Note that direct marketing expects a direct response and so creates a persuasive message that is targeted at an individual. Consumers go through three stages:

a) an attention stage: this is the critical stage when the consumer notices the message from the bank. If the consumer fails to notice or simply presses the ‘delete’ button because he/she is not impressed by the subject line or if he/she dislikes unsolicited emails, the direct marketer has failed.

b) If the consumer notices, the elaboration stage begins. This is where the consumer opens and reads the message. An assessment of the message is made and the consumer may seek comparisons from the bank’s competitors. If the message is deemed informative and the product offering meets immediate or long-term needs, the next stage comes into play.

c) The choice stage comes into play when the customer decides to respond positively or moves on without deciding. Indeed, the consumer has three options – delete the message, save it for later, or respond immediately seeking additional information or purchasing the product. The last option is obviously the one preferred by the bank, hence the importance of targeted messaging (i.e., individualisation).

* This problem was fully discussed in the Products Module of Retail Banking I.


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Here is an example of a message sent by ING Direct to a Customer at LightSpeed Marketing on his birthday:

Open Question #5

Analyse this message in terms of Attention, Elaboration and Choice. Was there a Direct Call to Action (DCA)?

Posted 4 December 2012 by Rob & filed under Marketing.

I recently celebrated a birthday and, as many people do, I received a bunch of birthday wish emails from companies that I patronise. Most of the wishes accompanied a special discount or purchase offer which I quickly deleted without a second thought. However, one message, in particular, stood out and that message was from ING Direct:

Just a friendly little birthday wish from us to you. We can’t send you a double-tiered chocolate cake (it won’t fit through the mail slot — we tried), but hopefully this little video will help brighten your big day.

Have an awesome b-day filled with fun, happiness and, of course, saving.

Enjoy many more, Saver

The simplicity of this short email message was backed by the great video that was the call-to-action

Online marketing and website

The bank website is a complementary information-gathering source for direct marketing. As pointed out above, the first step in the information processing model is ‘attention’. The bank’s website must command consumer attention on first viewing to encourage repeat visits. This is especially important, since there is evidence that the consumer’s propensity to buy online is directly related to frequency of visits to the website over a period of time.

As summarised by Kotler et al (2007), visitors to the bank’s website are first attracted by its ease of use and then by its attractiveness. These are the two most important qualities of a website designed to command customer attention.

Recall from the Customer Service Quality module that bank products are intangible, so attractive promotion materials and an inviting website all bring a degree of ‘perceived’ tangibility to the mix. When a website is easy to use, “the site downloads quickly; the first page is easy to understand, the visitor can easily navigate to other pages that open quickly and response processes are simple. Physical attractiveness is determined by individual pages that are clean-looking and not crammed with content, the typefaces and font sizes are readable and make good use of colour and sound.” (Kotler et al 2007)

Based on these two fundamental features of web design – ease of use and attractiveness –Rayport and Jaworski (2001)* presented a 7C model of webpage design as follows:

* J. F. Rayport and B. J. Jaworski, eCommerce page 116 (New York, McGraw Hill, 2001).


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Design Element Description

Context Layout and Design

Content Text, pictures, sound, video

Community How the site enables user-to-user communication

Customisation Site’s ability to tailor itself to different users or allow users to personalise the site

Communication How the site enables site-to-user, user-to-site, or two-way communication

Connection Degree to which the site is linked to other sites

Commerce Site’s capacity to enable commercial transactions

Lessons for the retail bank direct marketer

From this discussion, some lessons on website design can be learnt. These are:

• The target market affects website development: data that defines the target market (e.g., demographic and psychographic data) can be used in the choice of appropriate colours, graphics, core messages and, importantly, brand personality;

• The site layout should promote the brand, provide easy access to information and create an aesthetic environment for a great experience;

• Navigation must remain consistent across all pages on the site.

Open Question #6

In what ways is the internet a direct response channel?

Explain.

We close this chapter with a discussion of email, a popular method of communicating with consumers on the internet as well as on mobile channels.

• Direct marketing can be initiated by a customer or by a prospect’s request to be kept informed or may be initiated by a bank to a target audience. But the bank must note some critical issues when sending unsolicited emails to increase their chances of commanding customer attention – the first stage in the information processing model described above.

These include:

a) Subject the bank’s unsolicited email to a spam checker. According to The Financial Brand.com, some of the most common spam checker trigger words are common words in banking, such as ‘credit’ and ‘loan’.

b) Be mindful of the image-to-text ratio.

The FinancialBrand.com advises:

• “Have minimal text: Often the thing that separates a blocked email from an opened email is a paragraph of text for each image. One major image with one paragraph of text can make a world of difference.”

• “Optimise images – size matters. Larger images mean slower download time and a greater


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likelihood of never being opened. Make sure you ‘travel light’ with content.” (Source: The Financial Brand.com Why I Never Got Your Email, 21 March 2012)

The main advantages of email marketing are:

It is the preferred method of communication for many people (See: International Journal of Marketing Studies, Vol 2, No1, May 2010)

It is cost-effective (especially when requested by the customer)

It can be customised and personalised for each recipient

Response can be tracked and measured

As stated, email marketing can be effective and cost efficient if it is permission-based. There is evidence that the customer or prospect who has given permission to be contacted by the marketer is likely to be in favour of the bank’s offers and start a long-term relationship.

Indeed, as stated by MacPherson (2001):* “Combined with the fact that most email users find unsolicited email marketing messages intrusive, and many of them have started to take measures in trying to protect themselves from receiving spam, there is little reason for any email marketer to attempt building a relationship with customers without first acquiring their permission.”

In email marketing, the bank takes the initiative and then receives permission to send future emails to the consumer. Content and the attractiveness of the email are important. We have already indicated the importance of spam check and structure in terms of image to content ratio.

There are two rules that govern customer-bank interaction and have added importance for email direct marketing.

a) Emphasise benefit in the main headline

b) Customise the message

When the aesthetics (image to content ratio) are right, and the email has been subjected to a spam checker, the chances of a positive response from the consumer are higher. There is evidence that the return on investment (ROI) is highest for emails compared to all other channels.

Open Question #7

“Obtaining and maintaining ongoing email contact with your customers should be the most important marketing task on your list right now. Having a reliable email database allows you to connect directly with your customers when you need to, at a highly effective cost. This can include operational messages, marketing campaigns, educational content, feedback, and onboarding new customers, among other things.”

(Source: The FinancialBrand.com, 26 April 2012)

Do you agree with this statement?

* Kim PacPherson, Permission-based Email Marketing that Works, Dearborn Trade, A Kaplan Publishing Company (2001).


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Calculation of Return on Equity (ROE) for Email Marketing

In this section, the return on equity (ROE) for email is calculated, followed by a break-even analysis showing how sensitive the success of a direct marketing campaign is to the outcome on key variables.

First we present some definitions:

• Opening rate is the proportion of contacts that opened an email relative to the number of emails sent. For example, of 100,000 emails sent, where tracking shows that 20,000 of these were opened by the recipient, the opening rate is 20,000/100,000 or 20 percent. A Direct Marketing Association (DMA) report for 2012 shows that the opening rate for financial services is about 30 percent.

• Response rate is the proportion of contacts that opened the email and responded by seeking more information, or filled out the application for a loan or credit card or a savings product. Hence the respondent’s propensity to buy is typically smaller than the total response rate since the respondent may seek additional information. On receiving this additional information from the bank, the respondent may choose not to continue, or purchase a bank product.

• Conversion rate is the product of the opening rate and the propensity to buy. To illustrate this, let’s suppose the bank contacted one million customers with an email promotion. Assume that the opening rate is 20 percent, some 200,000 customers opened the email. Assume that one percent of these replied to the bank and wanted to purchase a bank product. Then the propensity to buy is one percent. Note that the response rate is expected to be higher than the corresponding conversion rate since some customers will typically seek additional information before making a decision. In this example, the conversion rate is 20 percent* 1 percent = 0.2 percent.* This means that for one million emails sent by the bank, 2000 customers opened the email and wanted to purchase a bank product.

• The average cost of email per contact is the total cost of the email promotion divided by the number of emails sent. For example, let’s say the bank employs the services of an agency to create and deliver the email, track opening rates, response rates and propensity to buy, and this costs $100,000 for one million contacts. The cost of fulfillment per new product is assumed to be $12. The cost per product purchased is calculated as ($100.000/2.000) + $12 = $62.

• The final piece of information required to calculate ROE for email marketing is the average (monetary) value of the profit stream of the bank product. Assume that the email promotion was about a new savings product and the average purchase amount was $2500. If the gross margin is two percent and the OPEX is 1.2 percent, then the profit margin is 0.8 percent or (0.8 percent of $2,500), which is $20 per year. If the client is expected to stay four years on average, the total average annual profit (disregarding time value of money) will be $20 – $62/4 = $4.50.

• The ROE for this product includes two sets of income; the first is net profit minus (acquisition and fulfillment cost divided by duration) and the second is the actual investment return on capital. To see how these two components are calculated, we assume that Basel III capital requirement for savings is one percent and, hence, the capital required for this savings product is one percent of $2,500, which is $25. The assumed (actual) investment return on invested capital is five percent. The ROE for this product is then ($4.50/$25) + 5 percent = 23 percent. If this value exceeds the required ROE set by the bank, an email campaign creates value for the bank.

We derive a formula for the calculation of the (simplified) annual ROE for this promotion. The ROE includes two sets of costs – one associated with the delivery of the product, and related to the pricing of the product and the operating costs, and the other with the acquisition and fulfilment

* DMA reports that the average response rate for emails is 0.12 percent in 2012 for the UK. Of course the propensity to buy a bank product will be lower as some responses seek additional information.


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costs of the email promotion.

This formula is as follows:

ROE =Net Profit Margin Average Product Balance Total Acquisition and Fulfilment Cost

DurationRequired Capital

+ Actual Investment Return on Capital

For the example presented above, Net profit Margin = 0.8 percent; Average Product Balance = $2,500; Duration = 4 years; Total Acquisition & Fulfilment Cost = $62; Actual Capital = $25 and Required Investment Return = 5 percent.

0.8%×$2,500− $624

$25+ 5%=

$4.50$25

+ 5%=18%+ 5%= 23%

Clearly, if the bank’s ROE hurdle rate is 12 percent, this email programme is creating value of 23 percent - 12 percent = 11 percent.

However, this analysis does not adequately identify the sensitivity of ROE to the average value of the product balance. If this value declines to $2,000, then, all else being equal, the ROE declines to seven percent, which is value destroying in that it is lower than the hurdle rate.

Hence, it is important to calculate the break-even product balance – that is, the product balance for which value creation is zero. The break-even formula is:

Average Product Balance =

!

((ROE Hurdle Act. Invest. Return on Capital) Required Capital)+ Acquisition & Fulfilment CostDuration

Profit Margin

Using the data presented above, we see that the break-even average product balance is equal to: (12 percent - 5 percent) x $25 + $62/4)/(0.8 percent) = $2,156.25

This means that if the average balance is below $2,156.25, the direct marketing programme is value destroying.

Lesson

Bank direct marketing professionals must not evaluate a direct marketing programme only on the basis of response rates or even conversion rates. The key performance indicator is value creation. Value creation is positively affected if:

• Profit margin is higher

• ROE hurdle rate is lower

• Actual investment return on capital is higher

• Required capital is lower

• Average annual acquisition and fulfilment costs are lower, which is determined in part by a higher conversion rate


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Comparison of email with direct mail marketing

These results show that email promotions have potential for high ROE and the drivers of higher ROE are indicated above. But evidence, provided by the Direct Marketing Association, shows that conversion rates are quite low – in the order of 12 basis points. On the other hand, direct mail is more costly, leading to, all else being equal, lower ROE. But there is evidence that the conversion rate response rates for direct mail are much higher than for email. Indeed, it is reported that the conversion rates for letter-sized direct mail sent to homes is 3.4 percent, about 30 times the 0.12 percent response rate for email.

While response rates are not the same as conversion rates, clearly there is a connection. Higher response rates to mailing (email or direct) should lead to higher conversion rates.

If the strategic objective of a bank is to increase market share in terms of customer acquisition or cross-selling to existing customers, then ROE for direct marketing may be comparatively lower than for email but, importantly from a strategic perspective, the number of customers as represented by the conversion rate will be higher.

In the following example, we assume that the conversion rate for direct mail is much higher than for email marketing but that the market reach in terms of contacts is much lower. The cost of direct mail is also assumed to be higher ($2.00 per piece) in terms of layout and design, printing, handling and posting. We assume that the customer reach is lower than for email. We also assume that the average customer product balance is 15 percent higher for direct mail. The table below shows that the ROE for direct mail is lower than for email and that the number of customers who responded to the mail and bought a bank product is higher for direct mail. The fact that the ROE for direct mail is lower is a result of the assumption regarding average product balance. Hence, ROE can be higher for direct mail than for email marketing if the product balance is higher, which is a real possibility.

In the table below, we use the same data for email marketing as in the example above. For direct mail we assume that the conversion rate is three percent leading to 3,000 customer purchases. This value is obtained as 0.03 * 100,000 = 3,000. The total acquisition cost = 100,000 * $2 = $200,000. For 3,000 customer purchases, this gives an average value of $67. For a fulfilment cost of $12, we get a total product acquisition cost of $79. Finally, the ROE = (0.8 percent * $2,875) – ($79/4)) / $28.75 + actual investment rate of return on capital of five percent = 16 percent.

Factors Email Direct Mail

Conversion Rate 0.0012 0.03

Sample Size 1000000 100000

Acq. cost per prod. $62 $79

Average Purchase $2500 $2875

ROE 23% 16%

# Customer Purchases 1200 3000

Comment

If the strategic objective is increased market share, the direct mail may in fact be a better option than email, which has a comparatively lower response rate (and hence lower conversion rate) than direct mail but better ROE in this case. Of course, if direct marketing also leads to higher balances, then it will likely be preferred to achieve growth in market share. A 20 percent higher balance per product for direct mail which is not unusual ($3,000 = $2,500 *1.2 in this case) leads to an ROE of 19 percent, which is almost the same ROE for email but with 2.5 times more customer purchases.


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Important Point

This indicates again how sensitive the success of a direct marketing campaign is to the outcome on key variables.

Lesson

The relative effectiveness of email and direct mail marketing campaigns must be assessed with respect to the bank’s strategic objectives. If bank staff believe that the direct mail version gets much higher response rates than email, this should be tested. This may still be the preferred route to targeted growth.


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Chapter 2: Direct Marketing and Mobility (i.e., Mobile Marketing)

Bill Gates is reported to have said: “We need banking but we don’t need banks.”

A Wall Street Journal article (17 February 2013) reported that ING Group would cut another 2,400 jobs in its retail banking operations. Why?

The Wall Street Journal article reported that for ING Group:

“Customers in the Netherlands have embraced new technologies for their banking needs at a faster rate than expected, reducing the need for traditional branches.” This is reflected in the following statistics:

a. Some 84 percent of retail transactions were done online; the figure was 57 percent in 2011.

b. Traffic to mobile applications increased to 25 million visits per month in 2012, up almost 300 percent on 2011.

c. Significantly, 60 percent of all sales on savings and loan products were made through the internet.

If this is typical, and there is evidence to show that customer migration online is increasing at an accelerated pace,* then direct marketing online becomes more significant for retail banks.

Indeed, many studies have shown that for the younger generation, the following are true:

• Most get their news and entertainment online

• They share information through mobile phones and social networks

• They prefer the convenience of the digital world over face-to-face communication

* The American Banking Association (ABA) reported that, in a survey for 2012, 39 percent of respondents used the internet as their primary banking channel (36 percent in 2010), while branch figures fell to 18 percent (from 25 percent in 2010).


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It is worth placing direct marketing in its proper context for retail banking. Customers have needs. Banks have products that match these needs. How the needs are fulfilled is another matter. Marketing must go where customer needs are being met – that is, increasingly, online. Hence, direct marketing on the internet, mobile channels or social media takes on added importance for retail banks.

The lesson is clear: banks should focus marketing efforts on where customers prefer to do their banking.

What is mobile marketing?

Mobile marketing refers to marketing activities that deliver advertisements and promotions to mobile devices using a wireless network.

What differentiates mobile marketing from other forms of direct marketing?

The following diagram illustrates the four main sources of differentiation:

MobileMarketing

Interactivity

Personalisation

Ubiquity

Localisation

201.3: How mobile advertising is different

Mobile phones, like the internet, are ubiquitous. They can also be highly interactive in that communication flows between both sender and receiver. But two other features of mobile marketing are key to the accelerated growth of mobile banking and, by implication, mobile marketing.

These are personalisation and localisation. In the case of personalisation, mobile devices grant permission to accept the sender’s messages. Recall that user-permission helps to break down the first hurdle of the information process model, that is, attention. Consumer attention is achieved when the user opens the message.

Furthermore, mobile devices are personal so that mobile systems can provide user data with accuracy and immediacy. This permits one-to-one interaction with the customer and advances the idea that different customers should be treated differently.

The issue of localisation is interesting. Mobile devices permit communication without the constraints of time and place. The hour of the day does not matter. The location of the sender or receiver does not matter. This makes all communication local.


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Why is mobile marketing important for a retail bank?

There are several reasons:

• First, as the ING Group citation above shows, consumers have adopted this channel to conduct financial transactions at an accelerated growth rate. Banks that do not quickly get on board will pay the price of high operating cost and reduced market share. This has a double negative effect on the bank’s cost income ratio and, hence, on its bottom line.

A related direct marketing tool on mobile channels is SMS marketing. The increasing popularity of short message service (SMS) or ‘texts’ enables the bank to maintain regular communication with clients and offer such services as notice alerts of loan approval or new product delivery. These are all instances of customer service quality that enhances the brand.

Mobile marketing is an important aspect of direct marketing. By providing personalised and immediate messages to consumers, the bank is taking steps to enhance its brand identity.

Mobile offers three dimensions of marketing – push, pull and viral. A push strategy is where the bank initiates contact; a pull strategy is where the consumer requests content information from the bank. Viral is when there is communication exchange between customers or prospects – a mobile word-of-mouth.

Open Question #8

“Mobile marketing contributes to brand development.”

Do you agree?

Summary of the usefulness of mobile marketing for retail banking.

Mobile is ubiquitous and easy to use but provides limited support for media-rich content. Hence it is most suitable as a marketing tool to send alerts and notices and customer-focused messages.

Do not underestimate the strategic value of staying in touch with customers on a regular basis. Constraints of time and place are eliminated.


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Chapter 3: Direct Marketing and Social Media

A social network is a collection of interconnected people. These people create and share content with each other on the network. This is called social media. It also involves the creation and sharing of know-how between communities. This is called collective intelligence.

Some financial institutions have started to embrace social media as an alternative channel. Here is an excerpt from Direct Marketing News:

Like Capital One, ING Direct US – a financial services institution that offers branchless banking by enabling consumers to transact on the web by telephone, ATM or mail – doesn’t make direct offers on social media.

John Owens, head of marketing at ING Direct US, says ING uses social media to “have conversations with customers for advocacy and loyalty” and to answer questions, but not as a direct response channel. Owens says ING has “avoided trying to buy fans and followers [on social media platforms]. We’ve not done offers but we’ve used the channel to connect with customers one-on-one.”

Source: Direct Marketing News, 1 March 2012

But this is changing rather quickly. First National Bank of South Africa, ASB bank of New Zealand and Commonwealth Bank of Australia are all launching apparently major initiatives to capitalise on ‘social media banking.’ (Banking.com, January 2013). Indeed, an excerpt from Moneyweb (19 July 2012) also illustrates this movement to social media.

Open Question #9

In relation to the following excerpt, do you believe that social media is a bank channel?


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“As a bank, we average around 15,000 conversations monthly, via social media, with existing and potential customers. It is without doubt that social media banking is the next frontier – to us this is a channel that will provide our customers with more choice and convenience to do their banking,” said Ravesh Ramlakan, CEO of FNB Cellphone Banking.

The structure of social networks permits an exponential lift in the value of belonging ‘to the network’ and consequently, a high cost of being excluded.

Metcalfe’s law states the value of a network grows approximately according to the square of the size of the network.

This means that the larger the size of the network, the greater the value to those who belong to it and by implication, the greater is the cost of exclusion.

Social media is growing exponentially. Facebook alone has exceeded one billion users in its short history: the service has 1.28 billion monthly active users as of March 2014. But growth in the customer base is now coming from the emerging markets. A report by eMarketer showed that social media usage would experience its highest growth in emerging markets but with modest growth in mature markets. For example, in 2013 India and Indonesia were expected to see high growth rates of 37.9 percent and 28.8 percent respectively. Modest growth rates were anticipated for the UK and the US at seven percent and 4.1 percent respectively. The highest growth region was expected to be the Middle East and Africa followed by Asia-Pacific and then Latin America.

But not all members of a social network are potential bank customers and not all customers of a bank are part of a social network. While the process of converting a social network into a bona fide banking channel is slowly emerging, the benefits of belonging to a large network and exploiting the value that Metcalfe’s law presents are important for a retail bank.

Specifically, we discuss how a bank can use the social network to its advantage to serve its customers more efficiently and in a cost-effective manner. One of the key benefits of a social network is collaboration. Recall that a social network has the significant advantage of members and communities sharing and creating information that is disseminated across the network.

Leveraging the collaborative value of social networks

Banks can leverage the value of collaboration on social media platforms. Online communities contribute to the creation of information – albeit information that is not always validated, such as Wikipedia the free encyclopedia anyone can edit. Such information may be readily accessed by search programmes. For retail banks, collaboration on social networks such as Facebook can potentially be an enormous benefit. For example, retail banks can ask members of the social network to provide ideas for a new bank product or service that can be assessed by other members via ‘like’ responses. This is an innovative approach to new product development where the potential customer creates or co-creates the bank product.* Of course, this process enhances the likelihood of a match between the banking product and the customer need. The retail bank can also build brand equity on social networks. This is a second benefit of exploiting the value of the social network.

In Canada, ING Direct was a pioneer in the use of social media. Its head of digital media, Mark Nicholson, was responsible for building the company’s online brand, as well as implementing its social media strategy and online and mobile marketing. “There’s generally not a lot of conversation around banking and personal finance,” he says. “Our approach is to use social media to brand our company and create an honest, transparent dialogue around these topics.”

Unlike most companies, ING Direct has taken a top-down approach towards online engagement. Senior company executives play a key role in corporate branding within online communities.

* The original IdeaStorm was essentially an online suggestion box. Dell customers suggested ways the company could improve products, features and support and a Dell representative might respond. Sounds mundane now, perhaps, but in 2007 it was a bold move journeying where no enterprise had gone.


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“Our CEO, Peter Aceto, is always looking at ways to use technology to connect with consumers and peers, and create transparency around banking and personal finance,” says Nicholson.

ING Direct has many ‘listening tools’ in place as a means of connecting employees and customers. “We will use just about any platform if it’s relevant. We maintain a branded image across the major social networks and provide our own site where customers can report issues, shower us with praise, or ask questions. That’s what transparent banking relationships are all about.”

As a result of this engagement, in February 2013, ING Direct Canada noticed that a new TV advertisement about tax sheltered savings (RSP) was generating a negative response online. This threatened to damage the brand. The reaction was analysed and a decision made to pull the ad. Customers expressed their appreciation for the swift response to feedback. This is an example of how being connected can prevent a company from unintentionally damaging its brand.

Building the brand on social networks

Retail banks can use social networks to publicise corporate social responsibility (CSR) projects or even to ask members to suggest new projects. This will most certainly enhance the bank’s brand. For instance, American Express created a project inviting members to promote their favourite cause. A prize of $5 million was pledged to the cause that garnered most support.

“NEW YORK, 4 March 2011 – American Express and TakePart announced today the final round of Members Project winners, chosen by the public through online voting. These five organisations will collectively receive $1 million in funding from American Express to advance their missions of serving communities around the country.

‘The charities that were selected are doing so much to improve the world around us, and we are pleased to congratulate and recognise their efforts,’ said Pepper Evans Roukas, vice president, Digital Brand & Social Media Development, American Express. ‘Over the past year, we have been overwhelmed by the dedication that our Members Project community has shown to doing good and getting involved. We are proud to have created a program that has done so much good for so many people and organisations.’”*

So, while banks are learning how to create a new banking channel from social networks, they can use it for immediate and personal contact with existing customers as is the case with ING Direct Canada and First National Bank of South Africa. Significantly, retail banks can exploit Metcalfe’s law and leverage social media to co-create new products and services and build brand equity.

Open Question #10

How can a bank leverage the value of a social network even if it is not used as a banking channel?

We conclude this section by showing how to calculate a Social Influence Marketing (SIM) score for a retail bank

Social Influence Marketing (SIM) score

Whether the bank uses social networks as a new channel or not, there are nonetheless places where customers voice their opinions to others at digital speed – that is, at the speed of light. Recall that online mobility and social media platforms are places where word-of-mouth (WOM) can go viral. People on social networks express their preferences for bank products and services with ‘like’ and ‘dislike’ clicks. These preferences are then shared with others, occasionally spreading so fast, they are described as ‘going viral’.

* Source: American Express <about.americanexpress.com/news>


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It is common to calculate a social influence marketing (SIM) score for a bank brand by considering the amount of good and bad conversations that occur online relative to the industry. The calculation is as follows:

Calculation of SIM

1. Add the positive and neutral comments on the brand and subtract the negative comments. Divide this by the total number of comments about the bank brand.

(So far this looks a little like the Net Promoter Score except that in the NPS we only subtract the detractors from the promoters.)

2. Repeat Step 1 for the banking industry in your country or region.

3. Divide the answer in Step 1 by the answer in Step 2. This is the SIM score for your bank.

Note this provides a relative score that tells how your bank is doing with respect to the industry.

We end this chapter by noting that whether a bank uses SIM or NPS, it is the relative position in the local market that matters. But it would be incorrect to look only at the SIM or NPS score even if it is trending upwards. There could be errors hidden in these scores. Let us look at a simple example to see how:

Time period % detractors % promoters NPS

Last month 10% 40% 30%

Current month 12% 45% 33%

The NPS score is trending upwards but the percentage of detractors has increased. For a network the size of Facebook, a two percent increase in detractors could represent a group sufficiently large to go viral.

Lesson for retail bank marketersA positive trend in NPS or SIM may not provide a complete answer in relation to customer satisfaction. The proportion of detractors can still be increasing. Also, on large social networks the percentage of dislikes can represent a large number of people with potential to go viral with negative comments about the brand. Research has shown that dissatisfied customers recount their experience to four times as many people as satisfied customers. So, it is important to keep the number of detractors low. Finally, NPS is an indicator but it does not explain why customers are promoters or detractors. So, additional analysis is required to establish the underlying reasons why people are detractors or promoters. What do they like or dislike?

It is important to take action to reduce detractor numbers.


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Summary

This module considered the central issues of direct marketing in retail banking and its close counterpart, direct response marketing. We showed that the goal of direct marketing is to communicate with prospects and customers in order to forge long-term relationships. We showed that an integrated communications strategy involves building the brand to create long-term customer value. In this integrated view, direct marketing plays an important role.

The module then covered internet marketing, the role of email direct marketing as a special case, and the 7C model of website design. We also considered mobile marketing that is distinguished by two important attributes – personalisation and localisation. We then examined the role of mobile marketing in this context. The chapter ended with a discussion of the role of social networks in retail banking. We presented arguments for leveraging the collaborative features of social networks in new product development and developing the brand. Finally, we showed that measures of customer satisfaction such as SIM and NPS scores are indicators, but must be viewed with caution.


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Multiple Choice Questions

1. A feature of direct response marketing that distinguishes it from other forms of direct marketing is:

a) It is a direct connection to customers and prospects b) It seeks a measurable responsec) It does not involve any intermediariesd) It has a direct call to action (DCA)

2. Direct marketing has a direct effect on which of the following?

a) Brand awarenessb) Brand identityc) Brand personality d) Brand equity

3. A direct marketing programme achieves break-even when the average product balance is at a value of $2,168. Which statement is correct?

a) An average product balance below $2,168 means that the marketing programme is value-destroyingb) An average product balance above $2,168 means that the marketing programme is value-destroyingc) The break-even average product balance is when operating cost is the highestd) The break-even average product balance is not related to when the marketing programme creates value

4. The potential benefits of direct marketing for retail banks include which of the following?

a) Global channel reachb) Channel conveniencec) Reduced costd) Potential for customer-bank relationships

Choose the option that comprises potential benefits for the retail bank.

I: a) onlyII: b) only III: a), b) and d) only IV: a), c) and d) only V: c) and d) only

5. The two roles of direct marketing are:

a) to create a response from the target group in terms of the purchase of banking products or the acquisition of customer informationb) to promote the bank’s brand identityc) to create a positive net profit d) to be able to cross-sell to customers

In your answer, select the two correct choices.


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6. In the evaluation of information on the internet, which stage is associated with the phrase, “the consumer notices the message from the bank”?

a) Attention b) Elaboration c) Choice d) Evaluation

7. Which is likely not value-creating for a direct marketing programme?

a) Profit margin is higherb) Return on equity (ROE) hurdle is lowerc) Required capital is higherd) Investment return on capital is higher

8. According to Kotler et al, there are two essential qualities for optimal website design. These are:

a) Content to image ratiob) Attractiveness of the websitec) Ease of used) Colour and taglines

9. Which statement is incorrect?

a) In the design of emails, the bank should emphasise the benefit in the headlineb) The content to image ratio for emails is a measure of aestheticsc) The 7C model of website design includes context and contentd) Direct mail is more cost-efficient relative to email, and it generates a higher response rate

10. Comparing an email with a direct mail marketing strategy, it is typically the case that email:

a) is more cost-efficientb) generates a higher average product balancec) has a higher return on equity (ROE)d) gets a higher response rate

Choose the option with correct statement(s) only

I: a) and c) onlyII: b) and d) onlyIII: b), c) and d) onlyIV: a), b), c) and d)

Answers

1 2 3 4 5 6 7 8 9 10

d b a IV a), b) a c b), c) d I


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