This document discusses applying a portfolio management approach to customer relationship management (CRM). It argues that CRM and consumer loan management are analytically similar, as both involve managing a portfolio of assets (customers or loans) to maximize cash flows. The document advocates adopting practices from consumer loan portfolio management, such as measuring customer lifetime value and using predictive analytics to manage the long-term health of the customer portfolio.

1. Extracting ROI From The
Engaged Customer
A Portfolio Management Approach to CRM
Keith Shields Laura Benard Jen Boyer
Chief Analytics Officer Client Services Director Marketing Strategy Manager
Magnify Analytic Solutions Magnify Analytic Solutions Ford Motor Company
10/28/2014

2. Q. How related are the following two topics?
Consumer Loan
Management
VS. CRM Marketing
1

3. Q. How related are the following two topics?
Consumer Loan
Management
VS. CRM Marketing
a. Not At All Related
2

4. Q. How related are the following two topics?
Consumer Loan
Management
VS. CRM Marketing
b. Somewhat Related
3

5. Q. How related are the following two topics?
Consumer Loan
Management
VS. CRM Marketing
c. Very Related
4

6. Both Consumer Loan Managers and CRM Managers…
Start with a portfolio of customers
Have access to enormous amounts of customer data
Can manage their portfolio using predictive analytics
Both are responsible for the long term value of their assets
5

7. Why is this an important discussion for us?
We can apply learnings from the Consumer Loan
Industry to manage our customer portfolios…
Spending on Marketing Analytics is expected
to increase 72% over the next 3 years*
Only 32% of marketing projects use analytics
Most companies do not have the right talent
to fully leverage Marketing Analytics
“…77% of marketers surveyed believe data on
customer purchase histories can improve
marketing ROI, yet only 21% actually use it.
Likewise, 88% believe behavioral data can do
the same, but only 20% use it”
Big Data and new tools are quickly
changing this landscape
*2014 February; The CMO Survey.org Highlights and Insights
6

8. CONCEPTUAL NONSENSE FROM THE
SCIENTIST…

9. Defining “Portfolio Management”
A portfolio of consumer loans, not securities.
• Portfolio Management, loosely, is the application of a set of
analytically-driven collections and servicing techniques aimed at
forecasting and maximizing a loan portfolio’s cash flows.
• Quantifying credit risk and predicting future payment is at the heart
of portfolio management.
• Credit Risk and CRM seemingly dominate the Big Data landscape.
Next slide…
7

10. “Big Data” infects the CRM and Credit Risk
disciplines more than almost any other…
Why the pervasive interest in Big Data?
• Largely to satisfy CRM and credit risk needs…
Data: Information Week Analytics, Business Intelligence and Information Management
Survey of 417 business technology professionals at companies using or planning to deploy
data analytics, BI or statistical analysis software, October 2012
CREDIT RISK
NEEDS
CRM NEEDS
8

11. (Re)Defining CRM
A portfolio of customers, not loans.
• Portfolio Management CRM, loosely, is the application of a set of
analytically-driven collections and servicing marketing techniques aimed
at forecasting and maximizing a loan portfolio’s customers’ cash flows
purchases.
• Quantifying credit defection risk and predicting future payment
purchases is at the heart of portfolio management CRM.
• Incidentally, the Wikipedia definition of CRM is:
• CRM is a system for managing a company’s interactions with current and future
customers. It involves using technology to organize, automate and synchronize sales,
marketing, customer service, and technical support.
9

12. Portfolio Management and CRM…
From an Analytics perspective, these are the same. The
only difference lies in the target variable and predictors.
• PD = 1 / (1+e-z), where z = A + Bx1 + Cx2 + Dx3 + …
• Portfolio Management:
• PD = Probability of DEFAULT
• x1 = credit score, x2 = days past due, x3 = loan to value ratio, etc…
• CRM:
• PD = Probability of DEFECTION
• x1 = prior purchases, x2 = months since last purchase, x3 =
unfavorable tweets, etc…
10

13. Others have recognized and leveraged the
overlap…
11
• Auto Pre-Approval
• Merchant Cash Advance and Small Business Loans
• Pier-to-Pier lending
• Student loan servicing
• Business Rules Engines

14. The Portfolio Management Paradigm
1
4
Managing a loan portfolio requires that we turn impaired (high
credit risk) loans into cash-flowing bonds…
Customer’s loan is
rewritten for empirically-derived
optimal amount
CASH FLOWS
Customer makes
partial payment
$A1
$A2
Loan impaired,
collections calls
ensue
Customer pays off
rewritten balance
Time
t=0
t=1 t=3
• The value of this “bond” (loan) is $A1/(1+i)1 + $A2/(1+i)3
• This paradigm applies equally to CRM. The portfolios managed by CRM
professionals are the customer bases of the companies they serve.
12

15. Adopting the PM paradigm for CRM…
1
5
An engaged customer is a bond. The effectiveness of our CRM
strategies determines the yield of that bond.
1
5
Customer comes
in for service
Customer visits
company website
$A1 CASH FLOWS
$A2
Customer signs up
for rewards program
Customer purchases
a new vehicle
Time
t=0
t=1 t=3
• The value of this “bond” (customer) is $A1/(1+i)1 + $A2/(1+i)3
• Customer Lifetime Value (CLV) models help quantify the value of customer
behaviors and CRM tactics. The success of CRM can be measured by the
extent to which CLV increases, irrespective of test-control results.
13

16. Marketers already recognize the need to
view their customer base as a portfolio…
Types of Data that Marketers Worldwide Would
Like to Add to Their Customer Data Profile
42%
42%
14
19%
19%
14%
12%
24%
35%
45%
53%
71%
Predictive analytics around lifetime…
Online customer profile
Customer service feedback
User survey and preference data
Social media data
Third-party demographic data
Sales executive insights
Finance / customer payment data
Order history
Analyting is better than what we…
0% 10% 20% 30% 40% 50% 60% 70% 80%
In-store / agent exchanges
(1Q2013)
Source: CMO Council and SAS
% of respondents
• 71% of marketers want
“predictive analytics around
lifetime value” added to their
customer data profiles…
• Lifetime value models are
nothing more than a forecast of
cash flows at the customer
level…
• Survival analysis, vintage-level
monitoring, and other popular
PM disciplines are a must…

17. But CRM trails Credit Risk / Portfolio
Management in the adoption of Big Data…why?
“…77% of marketers surveyed believe data on customer purchase histories can
improve marketing ROI, yet only 21% actually use it. Likewise, 88% believe
behavioral data can do the same, but only 20% use it”
15
• Regulation
• Accountability is “fuzzy”
• Metrics are inexact and not directly reflective of behavior.
• Secondary markets
• What would CRM analytics look like if marketers were
forced to buy, sell, and “value” their customer
portfolios?
• Metrics are inexact and not directly reflective of behavior.

18. What PM practices will help our CRM?
• Take a longitudinal view of the customer. This is the only way to get an
accurate outlook and valuation. Implies a need for a CLV model…
16
• CLV = p(sale at time 1)*E($ profit from sale) / (1 + d)1 +
p(sale at time 2)*E($ profit from sale) / (1 + d)2 +
p(sale at time 3)*E($ profit from sale) / (1 + d)3 + …
• Engagement is measured longitudinally; enticement is measured cross-sectionally.
• Quantify the impact of “mix shift” on outcomes of interest.
• Establish “regulatory-like” rigor around model validation.
• Understand that the two share not only a brain, but also a nervous
system. Next slide…

19. ENOUGH CONCEPTUAL NONSENSE
FROM THE SCIENTIST. NOW SOME
PRACTICAL STUFF THE MARKETER…

20. Does This Change the Way We Practice CRM?
17
We think so, especially in the following areas:
Measuring Success
Metrics should be more bottom-line oriented
and exact
Shift from basing success solely on campaign
performance to understanding performance of
the portfolio
Predicting Outcomes
Predictions should go beyond the “next
transaction”
All available data should be leveraged to
proactively manage customers throughout the
lifecycle to desired business objectives
Influencing Behavior
CRM becomes our “sand box” for going beyond
understanding just correlations; to understanding
causation as a way to change customer behavior

21. Predicting Outcomes
18
Transaction vs. Portfolio Management approach to predicting outcomes….
% In-Market
Short-Term: Optimizing campaign performance to
campaign objectives
Segment Size
Opportunity
Longer-Term: Enables management of entire
portfolio to business objectives (i.e. increasing CLV)

22. Influencing Behavior
Test and learn approach will determine how we influence and change the long term
health of our customer portfolio…
Monitor drivers across
the portfolio…
Design treatments, messaging and investment
based on customer value, individual customer
drivers and predicted outcome
Understand
Drivers of
Desired
Outcomes
Every CRM treatment should be analytically driven…ensuring that every CRM
dollar spent is working to move the customer into a more valuable state
19

23. Measuring Success
Strategic
Operational
Tactical
Portfolio Health
What is the value of my customer portfolio?
What is the mix and risk of my customer portfolio?
Performance and Forecasting
Do I understand both rear-ward and forward-looking performance?
What is the aggregate impact of our CRM initiatives on improving sales?
Dashboard and Diagnostics
Which champion vs. challenger campaign performs best?
Which actions influence customer outcomes both positive and negative?
20

24. Thus Ends the Prepared Remarks…
• Understand that the job of CRM is to extract repeat sales and revenue from the portfolio
of customers. The best way to do this is make sure that customers remain engaged over
a long period of time.
• If a customer is a bond, then improving engagement, in effect, increases the life of the bond.
21
• CRM groups should measure themselves with this standard in mind.
• Keeping customers in their “most valuable state” is a matter of advanced analytics and
strong marketing tactics…both of which are done with an eye towards engagement.
• The disciplines applied routinely to the management of loan portfolios are equally
applied to CRM. Champion / Challenger tests are simply one tool in a larger toolbox.
• Thank you for your time and attention.

25. “JUDGE A MAN BY HIS QUESTIONS
RATHER THAN HIS ANSWERS.” --
VOLTAIRE