Magnify AIMS presentation 2014

Extracting ROI From The Engaged Customer:
A Portfolio Management Approach to CRM
Magnify Analytic Solutions:
Keith Shields, Chief Analytics Officer – Magnify, Chief Credit Officer – Loan Science
Susan Arnot, Director, Decision Sciences
Laura Benard, Director, Client Services
Jen Boyer, Marketing Strategy Manager, Ford Customer Service Division

magnify • simplify • amplifyMagnifyAnalytic Solutions
DMA Detroit 2014: Marketing to The Engaged Customer
“Extracting ROI From The Engaged Customer: A Portfolio
Management Approach to CRM”…
2
Copyright ©2012 Marketing Associates LLC. All rights reserved. Magnify is a division of Marketing Associates, LLC.
• What does the title mean?
• Portfolio Management, loosely, is the application of a set of collections and servicing
techniques (typically analytically-driven) aimed at maximizing a loan portfolio’s cash flows.
• Why managing a loan portfolio, especially a student loan portfolio, is a CRM problem…
www.loanscience.com

“Extracting ROI From The Engaged Customer: A Portfolio
Management Approach to CRM”…
3
• Loans can be thought of as bonds that throw off a stochastic series of
cash flows.
• CRM is the same as portfolio management, and an engaged customer
can be thought of as a bond.

Managing a Portfolio Requires That We Turn Impaired Loans
Into Cash-Flowing Bonds…
4
EVENTS AND TACTICS
CASH FLOWS
$A1
Customer makes
partial payment
$A2
Customer’s loan
becomes
impaired, collections
calls ensue
Customer pays off
rewritten balance
Time
t=0
t=1 t=3
Customer’s loan is
rewritten for empirically-
derived optimal amount
• 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.

An Engaged Customer Is a Bond…
5Copyright ©2012 Marketing Associates LLC. All rights reserved. Magnify is a division of Marketing Associates, LLC.
EVENTS AND TACTICS
CASH FLOWS
$A1
Customer comes
in for service
$A2
Customer signs up
for rewards program
Customer purchases
a new vehicle
Time
t=0
t=1 t=3
Customer visits
company website
• The value of this “bond” (customer) is $A1/(1+i)1 + $A2/(1+i)3
• But that doesn’t tell the whole story…what are the CRM implications?

More Thoughts on CRM and Portfolio Management…
6
• Portfolio Management, loosely, is the application of a set of collections and servicing
techniques (typically analytically-driven) aimed at maximizing a loan portfolio’s cash flows.
• Is it fair to define CRM as the application of marketing techniques (often analytically-driven)
aimed at maximizing the repeat purchases of a set of customers?
• Loans can be thought of as bonds that throw off a stochastic series of cash flows.
• Customers can be thought of as bonds that throw off a stochastic series of cash flows, where
that stochastic element is often estimated by statistical models that predict loyalty and
retention.
• Uncollected debt can be placed in a variety of collections agencies based on which agency
extracts the best cash flow.
• Wouldn’t a CMO be willing to “place” his/her customer portfolio with a new CRM entity
(internal or external) if that entity could extract more repeat purchases from that portfolio?

Does This Change the Way We Practice CRM?
7
• We think so, especially in the following areas:
1. Measuring success
• Metrics should be more bottom-line oriented and exact
• PM example: cash received over time, cumulative default rate
2. Predicting success
• Loyalty and in-market models have value relatively (they rank-order the customers and
enable better targeting), but also in absolute (they tell you the probability a customer
will purchase)
• PM example: actual cash flows are measured against predicted for the purpose of
identifying when and why performance deviates from expected
3. Affecting success
• Remediating and incentivizing measures should be taken based on #1 and #2. If
customers become less loyal over time in a predictable manner, that problem should be
handled differently when they do so in an unpredictable manner.
• PM example: staffing and loss reserves

Measuring Success
8
• Champion / Challenger tests are very important, but serial analysis of Champion /
Challenger tests can lead to the wrong view of the “big picture”.
• Isolated Champion-challenger tests measure enticement, not necessarily engagement.
• Enticement is measured cross-sectionally, whereas engagement is measured longitudinally.
• Measure success at a high-level (all the while inviting segmentation and drill-down). Make
sure the measures are simple, with exact, and computed at over time:
• Example from auto parts and service: “20% of Jan13 servicers returned for service over the
subsequent year. 15% of Feb13 servicers returned for service over the next year. 10% of
Mar13 servicers returned for service over the subsequent year.” What’s the problem?
• A note: in general the most important metric associated with a loan portfolio is the sum of the
cash it throws off over time: both as an absolute amount and relative to the original forecast.

Measuring Success - Example
9
• From auto parts and service again…
• “Return Rate”, the % of Servicers Returning in
the Next 12 Months is an exact measure, and
it’s easy to track over time. Graph top right.
• The metric itself also invites segmentation;
allowing insight into mix-shift and untreated
customer populations. This sounds a lot like
portfolio management.
• “Mix-shift” is a very important effect to
understand. See the graph bottom right.
How does this dynamic affect us when
marketing to a portfolio of customers?

Predicting Success
10
• From an analytics perspective, CRM and collections are essentially the same
thing.
• In both cases you collect all the data you know about a customer at a point in
time, predict likely behavior of the next 6-12 months, take action on that customer
based on the prediction.
• Collections calls are the base treatment of portfolio management; private offers
are the base treatment of CRM. Nuanced versions of those are left to champion
/ challenger testing.
• Infrastructure (DW, BRE) can and should be shared. www.zootweb.com
• => A full view of engagement: shared infrastructure allows real-time integration of
CRM and collections.

Predicting Success (continued)
11
• Per the Basel III Accord, a bank must know the probability of default (PD) for
every loan on the portfolio. When the number of defaults exceeds forecast
(PD*# active loans), then there can be a capital adequacy problem. This is a
useful discipline…
• Shouldn’t CRM managers have a forecast of repeat sales / return visits?
Seems like this comes directly from the loyalty & in-market models
already in place.
• Lifetime Value Models are, in some sense, a statement about the worth
of the company. When calibrated properly, they equal the net present
value of the profit stream from a given customer.
• An eroding aggregated score from the Lifetime Value models can be
symptom bad CRM.

Predicting Success - Example
12
• The “probability of return in the next 12
months” (PR12), is a model that can be
applied to the servicer portfolio at the
customer level.
• Aggregating the PR12 for each vehicle
age segment allows us to predict the
return rate for the segment.
• This puts us in a position to understand
when return rates, and thus return
visits, are higher or lower than we should
expect…which in turn puts us in a better
position to evaluate uncontrolled
tests, like national rebate offers or ad
campaigns. See graph right.
A national rebate offer in
1Q2012 creates 700 bps of
unexpected response.

Affecting Success
13
• Back to PM…
• When managing a loan we use the models and analytics to keep the loan in its
most “valuable” state. Example: student loans, forbearance, reduced payment
plans…
• Even small decisions, like the decision to place a collections call is, and should
be, analytically-driven. Example: a pool of 1,000 loans are 15 days delinquent.
• Contacting a 15-day delinquency reduces the probability of default from 5% to 4.8%.
• We lose $5,000 for each default, so a contact is worth 0.2%*$5,000 = $10.
• The contact rate is 5% => calling the 1,000 will generate 1,000*.05*$10 = $500 per day in
value.
• We need three extra collectors to collect the 1,000 loans. Say collectors cost $6,000 per
month…roughly $200 per day. The additional three thus cost $600 per day.
• $600 cost > $500 revenue => we do not call 15-day delinquent borrowers.
• How does this apply to customer engagement and CRM? See next slide.

Affecting Success - Example
14
• A CRM Manager should strive to keep customers in their most valuable state.
Determining the most valuable state is often a matter of predictive modeling.
For example (parts and service again):
• A customer requests $200 financial assistance with a repair that has occurred just
outside of warranty.
• Loyalty and customer satisfaction models tell us that, given this particular
customer’s demographics and past behavior, knocking $800 off the repair will
increase his “satisfaction rating” from 3 to 5, which has the impact of increasing
the likelihood of repurchase by 500 bps (5 percentage points).
• Putting the customer in a more valuable state (satisfaction=5) is worth 5% * $6,000
(the profit per vehicle sale) = $300.
• => The cost of putting the customer in a more valuable state ($200) is less than the
benefit of having him there ($300) , so the assistance is approved.

Closing Remarks
15
• 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.
• 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.

Questions
16
• “Judge a man by his questions rather than by his answers.” -- Voltaire
• So questions please…
Connect with and mention @MA_Detroit on Twitter and stop by the
Magnify booth to stay up-to-date on social listening news and updates!

777 Woodward Ave
Suite 500
Detroit, MI 48226
p 313.202.6324
f 313.965.2800
Keith Shields
kshields@magnifyas.com
kshields@loanscience.com
313.418.2734
Christina Polakowski
cpolakowski@marketingassociates.com
313.202.6355
Meagen Mazur
mmazur@marketingassociates.com
313.202.6347
17Copyright ©2012 Marketing Associates LLC. All rights reserved. Magnify is a division of Marketing Associates, LLC.
Make smarter business decisions by outnumbering the competition
www.magnifyas.com

Magnify AIMS presentation 2014

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