Download OFFENDING AND DEFENDING CUSTOMERS: MANAGING

OFFENDING AND DEFENDING CUSTOMERS:
MANAGING CHANNELS IN UK RETAIL FINANCIAL
SERVICES
*Jillian Dawes Farquhar, Reader in Marketing.
Tracy Panther, Associate Lecturer and Doctoral Student
Business School, Oxford Brookes University, OXFORD OX33 1HX.
*contact, tel +44 (0) 1865 485977, fax +44 (0) 1865 486830,
e-mail [email protected].
Jillian Dawes Farquhar is Leader of the Marketing & Operations research area in the
Business School and she is editor of the International Journal of Bank Marketing. Her
principal area of research is customer retention and loyalty in retail financial services and
she has published extensively in this and related areas.
Tracy Panther is a doctoral student researching into the field of customer
satisfaction/dissatisfaction in relation to the service sector, including financial services.
This research was funded by the pro-vice chancellor of Oxford Brookes University.
Full competitive paper submitted to ANZAM 2005 conference.
OFFENDING AND DEFENDING CUSTOMERS: MANAGING
CHANNELS IN UK RETAIL FINANCIAL SERVICES
Abstract
Much has been written about the adoption of virtual channels for banking, but to date there
has been little investigation into the management of multiple channels, in particular how
multiple channels ‘fit’ with strategies of offensive or defensive marketing. Automated and
virtual banking channels aim to reduce the costs of operating the branch network, however
an outcome of a strategy to shift customers away from the branch is that many customers
now tend to use a number of channels for their banking needs. Banks are faced with the
problem of managing these channels economically and, at the same time, trying to defend
or retain desirable customers from competitor action. To explore this issue, this paper
investigates channel management within a framework of offensive and defensive marketing
by interviewing senior marketing staff in banks. The findings of this exploratory study
suggest that banks can offend new customers and defend existing ones by managing five
channel dimensions.
Key words: channels, offensive and defensive marketing, financial services.
Introduction
The proliferation of channels in retailing and banking in particular has generated challenges
for marketers, especially in those companies in the UK that have a well-established high
street presence. The benefits of offering virtual channels, such as conventional telephony,
the internet and, more recently, mobile phones are lower costs for the organization and
greater convenience for the customer. There have been a number of studies into
distribution channels in financial services with a focus on internet banking (Devlin and
Yeung 2003, Hitt and Frei 2002, Mattila 2002 etc), customer choice (Black et al 2002,
Thornton and White 2001), a marketing mix and the introduction of new channels (Mols
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2000). However, investigation into how channels are managed with reference to offensive
and defensive marketing has yet to be undertaken, in spite of the competitive environment
and the costs of maintaining multiple channels. To explore this area, senior bank staff were
interviewed adopting an interpretive approach, specifically semi-structured interviews.
Channels
Banking consumers can interact with their provider across a number of channels for a range
of financial services, which include the traditional high street branch, mobile and landline
telephones, post, internet and other digital TV. This ability to interact across all these
channels is perhaps a distinguishing feature of personal banking and the multiple channel
literature has researched competition in multiple channel markets (Balasubramanian 1998).
Costs for providing the services vary dramatically dependent upon the channel used by the
customer, with the bank branch being by far and away the most costly. To reduce the costs
of the branch transaction, banks introduced automated teller machines (ATMs) about 30
years ago and have been trying to migrate customers to lower cost channels ever since
(Harrison 2000) by means of education and training in using the new technology.
However, the introduction of technology-driven channels has added to the overall cost
structure of banks, as consumers have tended to avail themselves of a range of channels,
rather than selecting just one (Mintel 2002b). In spite of all the effort and expense
dedicated in trying to persuade customers to use lower costs channels, the role of the branch
is still pivotal in distribution mix in the retailing of financial services, although in other
retailing scenarios, direct channels have weakened the role of location (Alba et al 1997).
As the level of competition increases with renewed efforts by supermarkets and other
retailers to encroach upon the retail financial services marketplace, effective management
of channels remains critical within a context of defending desirable customers and, at the
same time, acquiring new ones. . In financial services, customer longevity, in itself, does
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not necessarily generate a profit, so banks are attempting to identify those segments of
customers, which are profitable or potentially profitable (Payne and Frow 1999).
Additionally, since profitability can be measured across channels, that migrating low value
customers to cheaper channels should result in an improvement (Myers et al. 2005).
Offensive and defensive marketing
Although marketing is concerned with both the acquisition and retention of customers
(Drucker 1963), customer retention, until recently, has suffered neglect through a lack of
emphasis and inappropriate measurement (Payne 2000), in particular assessing the value to
the organisation of retained customers. Instead, strategies directed at gaining market share
through a volume of customers, have often been preferred. The benefits of relationship
marketing and customer loyalty have become evident during the last twenty years or so as
markets have become saturated and competition intensified (Day 2000, Fornell 1992).
Fornell (1992) has argued the case for customer satisfaction in gaining repeat business and
proposed a model of offensive and defensive marketing to support his case. The
offensive/defensive marketing analogy encompasses the trade-offs between economies of
scale where existing customers are moved to lower costs and the contrast of customer
lifetime value which emphasises the need to build relationships (Johnson and Selnes 2004).
Within financial services, existing customers subsidise the attractive rates offered by
offensive activities (Miles 2004). The challenge for marketing is to ensure the
complementarity of these two activities as recognised by Woodall (2004).
Research design
To generate the data for the study, interviews were arranged with senior banking 1 staff
responsible for or having an interest in customer acquisition and retention. Ten managers
participated in the research, all at a senior or middle level in UK high street financial
1
Bank is the term used here to describe all the organizations participating in this research, although building
societies also participated.
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services retailers. The interviews were conducted either in face-to-face or by telephone
with the informant at the headquarters of the institution concerned. The interviews were
audio taped for verbatim transcription and lasted on average one hour. Informant details
have been concealed using the names of famous battles, chosen as a reflection of the highly
competitive nature of the retail financial services sector (see Appendix). In two instances,
two informants participated in each interview (Bosworth and Culloden). Immediately after
each interview, a brief summary of the interview was made as an aide-memoire and which
assisted in the analysis by highlighting key points and potential themes. The data were then
transcribed into electronic files and stored in a computer aided software analysis
programme (NVIVO). Using the software, the data were coded as ‘trees and nodes’, and
passages in the text bracketed accordingly. After a number of iterations, revisions and
discussions, five dimensions of channel management appeared to capture the data, as
follows: segmentation, choice and flexibility, relationships and loyalty, structure and
service and satisfaction, which are now explored and discussed.
Findings
The findings of the study are organised around the five dimensions mentioned above
starting with segmentation.
Segmentation
The research into channel usage (Black et al, 2002, Thornton and White 2001, Wan, Luk
and Chow 2005) has indicated the importance of grouping customers often by
demographics in as well as other variables such as lifestyle and, as an example of this, the
Edge Hill informant talks about the use of the internet more mature customers.
.. we have got a very big penetration of our internet service amongst our maturer population,
our senior population, the ‘grey surfers’, as they say, who once they are up to speed with it,
are fantastic advocates. Their usage is very high, they find it very convenient. The feed
back we get back from them is very positive, it’s very strong and you know it just added to
that experience, it added a dimension of convenience to them. (Edge Hill).
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Banks have successfully targeted older consumers (Mintel 2002b) as customers who use
their personal computer (PC) for banking tend to be higher value than regular banking
customers (Hitt and Frei 2002). The banks also recognise that the proliferation of channels
has resulted in consumers using a range of channels (Mintel 2002b) somewhat to the
surprise, at least initially, of the banks as this informant states with reference to a particular
group,
our most valuable customers, a lot of them do interact through a number of different
channels and it was quite a surprise to me, I think, when we started to get that analysis, the
output of the analysis, and one kind of expected that a lot of customers would interact with
us through the branch network only and make a few phone calls, but actually we’ve got quite
a high number of customers who do interact with us concurrently through separate channels.
(Waterloo)
The challenge for the banks is to maximise the value of these customers and yet offer them
the choice that they clearly desire, Currently, cheaper channels such as the telephone cross
subsidise the branch, so one possible response from the banking sector would be to use
differential pricing for channels (Devlin and Yeung 2002), but this would reduce the choice
that customers appear to appreciate. To address the problem of higher value and lower
value customers, grouping or tiering customers according to their value to the organization
has been proposed (Zeithaml et al. 2001), but banks face a particular difficulty with
customers who are relatively low in value and high in transaction costs (Mintel 2002b) as
they usually bank in the branch and issues of social exclusion.
Choice and flexibility
Since banks incur these high costs of keeping customers satisfied across a number of
channels, it is important for them to understand not only who uses which channels but why
customers choose to use them. This informant recognises the importance of this
understanding,
…..but the internet bankers [are] using on average five different channels, they are not just
internet only, which means actually that they do go into the branch, not as much, but they
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still go in there. So we need to understand and we need to make sure that we don’t treat
them as though they are the anoraks and geeks out there. (Edge Hill)
Previous consumer research into this aspect of retailing of financial services shows that the
nature of the product such as its price, complexity or perceived risk influences the choice of
channel (Black et al. 2002, Howcroft et al. 2003, Lee 2002) as this informant comments,
[Channels are] very product sensitive, such example as bank accounts, the vast majority are
through branches. Mortgages are a completely different equation, as are some other
investments. (Hastings).
As Black et al’s (2002) work has shown that the choice of channel is influenced by the
consumer, the product, the channel and organizational factors and under these
circumstances, customisation could prove valuable in this type of situation to bind the
customer if not to a channel but to the provider (Sarel and Marmorstein 2002) or perhaps
continuing to offer flexibility and access to all channels. However, there is some disparity
in the range of channels available with this hint from Crecy that there are limitations that
appear to depend upon the product,
We’ve also cover of most of the channels of distribution, so on the savings side we’ve got a
branch network, we’ve got postal, we’ve got telephone and we’ve got internet and on the
mortgage side we’ve got all of those channels plus an intermediary channel. So we deliver
through all forms of, all methods if you like. So our customers, let me explain have the
choice of using different channels for different products as well. So if they’ve got a branch
account they can still contact if it is an appropriate to the terms and conditions of the
account over the telephone, so there is a bit of flexibility in there. (Crecy)
But overall there was little evidence to suggest that these banks were seeking to restrict the
use of channels and were therefore responding to the requirements of the ‘unfettered
consumer’ (Nunes and Cespedes (2003:98).
Relationships
Banks seek to build relationships with their customers as a means of improving profitability
through longevity (Harrison 2000) and, in turn, customers have generally been receptive to
such overtures (Alexander and Colgate 2000), but not necessarily all of them requiring this
bank to adopt flexibility in their channels and service.
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…because some of the more tactical contact with particularly high risk customer segment
was that perhaps [they] wouldn’t be too responsive to an invitation to come into a branch
perhaps for an annual review. Maybe they need something, some engagement in a different
way at a different time, so we offer both internet and telephone-based contact to meet their
needs because quite often we find that people are time poor, particularly those that come
through broker channels. So we offer a different kind of service, I don’t think better, I think
a different in the sense of, perhaps more in keeping with the way they want to manage the
relationship. (Edge Hill)
Edge Hill and Trafalgar both recognise that the ‘high risk segment’ may be susceptible to
retention if defended appropriately. Not all customers seek a relationship (O’Malley and
Tynan 1999), some instead preferring a transaction-based exchange as this bank has
discovered in casting its offensive marketing net wider.
We find that that base is very much changing like a traditional type customer, which is
somebody who would use a local branch and now we are getting a lot more people who are
coming in. We’ve got a direct lending, [and] we get, for example, a best buy that we lend
all around the country so those people don’t really have any loyalty or affinity with the us
and they kind of like the softer brand stuff and community type approach that we have
doesn’t really work very well with them. (Blenheim).
By opening a new channel to attract new business, this bank now has to develop defensive
strategies if they decide to that these new customers are worth retaining and is an example
of disharmony between offensive and defensive marketing strategies. The Hastings
informant expresses his awareness of the challenge posed by multi-channel banking when it
comes to building relationships.
At the end of the day we can try to talk to customers on the phone but if they want to talk to
their friend Bill in the branch then well, one, they are probably not going to leave us because
they’ve got a friend and the fact that they call them a friend is great and it probably means
they’ve got a very good relationship but we just need to be aware again of trying to
understand how customers would prefer the staff [to act]. (Hastings).
Relationships are usually conceived of in personal terms and banks and other retailers need
to understand how to build relationships not merely in virtual channels but across channels
with quite varied characteristics. Customers can also be defended through the creation of
exit barriers (Fornell 1992) and the Bosworth informant described how mobile phone
technology can be used to create ‘stickiness’ (Bendapudi and Berry 1997) by sending daily
messages to customers about their account transactions.
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Structure
The thrust of the activity for most of the providers in this study is the branch as this bank
describes how they are tying their branches and brand more closely together.
…certainly, the way that we manage our branches has changed so we went through a rebranding exercise probably three years ago now where the way that the branches are
structured in terms of the staff has changed. The layout of the branches has changed to make
it more customer-focused and we did an awful lot of research to try and find out what the
customers expect when they come in the branch? (Culloden)
At the same time, this same bank has developed a specialist ‘arm’ that deals purely with
broker originated business and Stamford Bridge has also made a major commitment to a
particular market for mortgages, developing a structure accordingly.
the main focus is through intermediary network, through mortgage brokers, IFA’s
(independent financial advisers) and the like, and over 90% of our mortgage business comes
in though that channel. Our branch network has shrunk ... (Stamford Bridge)
One of the key features of the retail financial services sector is the intermediary (or IFA),
who sells the financial services of the provider usually receiving commission on the sale. It
can be seen as efficient offensive marketing as the intermediary shares some of the costs
but the intermediary rarely assists in defensive marketing as the Edge Hill informant
explains.
…the way the market shaped up.. far more mortgage business is being originated through
brokers and intermediaries. Well, of course, that source of business for us, whilst being very
important, the strength of the relationship with someone who comes to us through a broker
as opposed to someone who comes through our branch network, is a lot skinnier. And more
and more of our mortgage business that is coming up to the end of its deals, in the future,
will be broker originated. (Edge Hill).
Whilst that the broker brings in new business, this bank acknowledges that retaining these
customers may be more difficult in spite of lower costs incurred by the provider. If seeking
to defend the customers originated via an intermediary, the establishment of a close
partnership between the intermediary and provider is advised (Brown and Chin 2004),
which will extend beyond the payment of commission. An enduring problem of channel
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management is that of conflict between channels (Kotler et al. 2005)) as the Naseby
informant relates,
..often what happens is if you are responsible for the branch network, you will do everything
in your power to make sure that succeeds, now that may not necessarily be to the benefit of
recruitment and retention so I think [what is] overlooked is the way an organisation
structures itself in order to be able to achieve proper acquisition and retention. (Naseby)
This is an example when developing new approaches how individual responsibilities may
not necessarily all pull in the same corporate direction.
Service and satisfaction
The basis for Fornell’s (1992) model of offensive and defensive marketing is customer
satisfaction and its role in retention. The Trafalgar informant spoke of its customer service
excellence team that ‘runs’ across the bank with a remit of continuous service improvement
and advocacy. Edge Hill describes the customer experience that it aspires to as follows and
how it is seen as a source of competitive advantage.
…. the way we want to deal with people in a multi-channel business so, for instance, if you
walked into a branch on Monday morning and asked for a quote for a personal loan you
know, Tuesday, you phone up the call centre, wouldn’t it be nice if we knew that you got a
quote Monday morning in the branch and, indeed, wouldn’t it be clever when you logged on
to your internet on Wednesday, we would put a quote there for you to pick up and maybe,
we offered you a call back from the call centre? So it is a sort of joined up experience for
the customer across all channels, that’s very much what we are shaping and trying to keep
leading edge. (Edge Hill)
Aspects of improving customer satisfaction and value can arise fortuitously which can then
result in a change of operations and metrics as the Waterloo informant relates
[customers] particularly value the fact that they can perhaps handle more than one
transaction in a call. And also we’ve removed traditional call centre measures. They don’t
have a talk time constraint, we are not measuring it for efficiency, we’re measuring it for the
outputs at the end of the day, which will be around the longevity of the customer
relationship. Do we manage to actually keep our customers more satisfied so that they stay
with us longer as a result of spending more money on chasing them? So that’s the kind of a
recent implementation and in addition within the branch network. (Waterloo)
The use of the word ‘value’ echoes an observation that the creation of value can be a link
between distribution and defensive marketing (Perissonotto 2003), evidencing an awareness
of understanding in depth how customers use a particular channels and the benefits that
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they seek. There is scope for integrating channel service with segmentation as suggested by
Zeithaml et al to manage the costs to the organisation and the benefits that consumers seek.
They propose that for the orgn need to manage image and reputation. Black et al (2002)
Discussion and conclusion
The proliferation of channels in banking and retailing creates the opportunity for a business
to rethink radically both strategy and operations from the perspective of offensive and
defensive marketing. Instead of the burgeoning of channels being viewed as a cost, there
are examples, in this study, of an awareness on the part of banks, that channels can be used
creatively to gain competitive advantage (Edge Hill) and to improve levels of customer
satisfaction (Waterloo) through integration of service with channels. The research also
underlines the importance of segmentation with high value customers being managed
across a number of channels (Waterloo). The branch is still the focal point for the
distribution of banking services with continued investment in branches (Culloden) and
constant review in process (Bosworth) and the Internet has potential to delight customers as
Edge Hill’s grey surfers report.
This paper can only provide a brief overview and initial framework for managing channels
from offensive and defensive perspectives but underlines the importance of research into
channel management in highly competitive markets. Insight into how channels may be
regarded as contributors to offensive and defensive marketing i.e. acquiring and retaining
customers. This study shows is that channels are more than a means of distributing
services, they variously provide the basis for satisfactory service experiences, contribute to
the building of relationships, customise or individualise the interaction between the
provider and the customer with the potential for defending customers. It would also appear
that in creating new channels, potential conflict with existing channels should be
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considered from within the organisation and what type of customer the new channel may
attract and how they ‘fit’ with existing segments and strategies. The research also
questions whether the potentially risky strategy of migrating customers is desirable. If
channels can be managed with these five dimensions in mind and appropriate metrics
developed then migrating customers be less important.
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Appendix
Table 1
Participating banks and informants
Code
name
Edge Hill
Description
Principal activity
Job Title of Informant(s)
Mutual
Naseby
Bank
Senior Executive Retail
Strategy
Senior Research Manager
Bosworth
Bank
Home loans but offers
cheque account
All personal banking
services
All personal banking
services
Culloden
Regional
mutual
Home loans and
savings
Hastings
Bank (former
mutual)
Crecy
Regional
mutual
Bank (former
mutual)
Home loans, but range
of personal banking
products
Home loans and
savings
Home loans but range
of personal banking
products
Home loans and
savings
Home loans and
savings
Home loans to
particular segments
Waterloo
Trafalgar
Mutual
Blenheim
Mutual
Stamford
Bridge
Bank division
Type of
interview
Phone
Face to face
Director of Retail
Operations & Head of
Customer Understanding
Customer Contact
Manager & Strategic
analyst
Customer propositions
team member
Face to face
Customer Development
Manager
Head of CRM
Development
Face to face
Manager, Customer
Excellence
withheld
Phone
Operations leader,
Mortgage Contact Centre
Face to face
Face to face
Phone
Phone
Phone
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