IBM Software Customer Intimacy

Business Analytics

Five predictive imperatives

for maximizing customer
value
Applying predictive analytics to enhance customer
relationship management

Introduction
Contents: Whether you call solving the business problems related to customer
profitability “customer relationship management” or just good business,
1 Introduction
you know that strengthening customer relationships is imperative for
4 The five predictive imperatives business success for one simple reason: customers drive profits.

13 Products for maximizing customer value

In today’s increasingly global and competitive marketplace, customers
15 About IBM Business Analytics have more options available to them than ever before. Many analysts
and journalists, in fact, are calling this a “customer economy.” Attracting
customers cost effectively and meeting their expectations for selection,
price, quality, and service are essential to a customer value strategy. It is
equally important, however, to identify and retain profitable customers,
and increase their value over time. This requires the ability to anticipate
customer needs and present attractive offers in the right way, at the
right time. The companies who can do this will be the companies that
thrive in the customer economy.

SPSS was one of the pioneers in the field of data analysis; it was first on
the scene and continues to be one of the most popular and widely used
software applications. As a new member of the IBM organization, SPSS
brings its leading-edge analytic products and solutions to an even
greater number of organizations worldwide.

IBM SPSS offerings include industry-leading products for data mining

and collection, statistics and management that can create predictive
profiles to aid you in meeting the needs of your various customer
segments. These tools are based on industry standards and can easily
integrate with your existing infrastructure to improve accuracy,
decrease manpower and minimize loss. The combined effort brings you
the utmost in flexibility in the kinds of data you mine and how you
deploy results.
IBM Software Customer Intimacy
Business Analytics

Many CRM initiatives fail to generate expected returns

Highlights: Businesses in virtually every industry have implemented CRM
strategies. Some have been massive initiatives, supported by
• Use IBM® SPSS® Modeler to predict significant investments in technology and designed to shift a
the most effective ways to win
customers
company’s orientation from products to customers. Many of these
initiatives, however, are failing to generate the expected returns and
• Anticipate changes in customer deliver significant value. This is partly due to the difficulty of pushing
attitudes and preferences
change through established cultures or processes. But another factor is
• Develop more intimate customer that although operational CRM systems such as sales force automation
relationships or call center systems provide the necessary foundation for better
• Identify and retain customers who are customer relationships, they don’t do much to improve organizations’
likely to leave ability to maximize customer lifetime value.

The lifetime value of a customer is defined as the total profits generated

during the time the customer does business with your company. The
concept behind maximizing customer lifetime value is simple: Deliver
value to customers cost effectively. When your organization delivers
what customers need – what’s valuable to them – customers are more
likely to remain open to future marketing efforts, buy more of your
products and services and, as a result, become more valuable. This is a
Summary: win-win relationship for both you and your customer. However, to
achieve and maintain this type of relationship requires support from
Currently, most CRM systems rely on
both operational and analytical CRM systems.
historical analytics that provide only a
“rear-view mirror” of your customer
relationships, offering little support for Analytics drives CRM returns
the decisions that shape the future. Until recently, analytics didn’t come up often in CRM conversations.
However, with IBM SPSS predictive Now, though, leading CRM experts are nearly unanimous, noting that
analytics you can meet  your
customers’ evolving needs with
analytics not only improves CRM efforts, but is essential to their
forward-looking insights that anticipate success.
changes in customer attitudes,
preferences, and actions. This white
Companies typically start with historical analytics, using a combination
paper describes how following a set of
best practices – five predictive of reporting tools, specialized data warehouses, and online analytical
imperatives – can ensure that your processing (OLAP) solutions. As mentioned above, these solutions
company maximizes the value of your focus on understanding and measuring the outcome of past decisions
customer relationships and sustains
higher levels of revenues and profits. and results, and can be useful in narrowing the scope of further
investigations. But on their own, they can’t provide your organization
with a clear picture of the future.

Industry leaders, however, are evolving their analytical capabilities by

adding data mining and other predictive capabilities to their operational
CRM systems. Data mining is the process of discovering meaningful
and previously unknown correlations, patterns, and trends in large
amounts of data. To make these discoveries, data mining relies on
pattern recognition technologies, and statistical and mathematical
techniques. Because it is forward-looking, data mining enables your
organization to measure the potential of your customer relationships
and develop plans to maximize that potential.

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IBM Software Customer Intimacy
Business Analytics

Evolution of analytical CRM

Measurement (historical) Prediction (future)

Which cities
were they Real-time
located in?
How many personal-
customers

Business value
did we lose?
Data ization
mining
OLAP
What should
Query & we offer this
Reporting Which customer
customer right now?
types are
at risk
and why?

Time

Figure 1: Every organization has data about its customers. Reporting and OLAP
provide information about past customer interactions. Data mining and real-time
personalization are forward-looking and can be used to guide future interactions.
Over time, as companies move toward these predictive technologies, they increase
the business value of their CRM information.

The most evolved analytical CRM solutions continuously apply

predictive analytics technologies and deploy the results enterprise-wide,
so that whether customers interact with your organization online, by
phone, or face-to-face, they receive the kind of treatment that meets
their present needs and anticipates new ones. This increases their
tendency to remain loyal and make additional purchases, increasing
their lifetime value – and your organization’s profits.

For example, one of the world’s largest airlines relies on predictive

analytics to optimize revenue for each flight, improve service for its best
customers and increase customer loyalty. By using IBM SPSS Modeler
for predictive modeling, its agents and flight staff were able to identify
high-value customers and ensure that their needs were met. The
resulting increase in customer satisfaction boosted annual revenues – an
average of $200 each for its “valuable” customers and $800 each for its
“most profitable” customers. Total revenues for the year after
implementation increased by $40 million. Over the same period, the
airline saved $31 million in operational costs.

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IBM Software Customer Intimacy
Business Analytics

The five predictive imperatives

Based on extensive experience with a wide range of organizations, our
company has identified the following “predictive imperatives” – best
practices used by leading organizations to maximize customer value
with predictive analytics.

1. Base your customer strategy on predictive profiles

2. Predict the best way to win the right customers
3. Predict the best way to grow customer relationships
4. Predict the best way to keep the right customers longer
5. Use predictive intelligence at every customer touch-point

1: Base your customer strategy on predictive profiles

Detailed, accurate predictive profiles are the essential foundation of any
customer strategy and CRM initiative. To understand your customers
better, use analytical tools to create customer segments, and then create
predictive profiles of each segment. These profiles, when deployed
enterprise-wide, enable your entire organization to focus on activities
that are most likely to generate the highest returns.

Identify key customer segments

You can define customer segments based on behavioral information
drawn from operational systems and on attitudinal information
obtained through market research. The two approaches complement
each other, enabling you to gain a more accurate customer
understanding and develop more effective strategies for each
customer segment.

You can segment customers and prospective customers according to a

number of different criteria. For example, you can analyze customers
by the amount they spend with you, by their payment pattern, by the
length of the relationship, and many other factors. You can split
customer segments into smaller sub-segments, even reaching the
ultimate one-to-one relationship, in which you understand each
individual’s needs and preferences. By understanding which customers
are most likely to purchase certain products or services, you can focus
your marketing programs to obtain the highest possible response on
your marketing investment. You can segment customers by value,
behavior, demographics and even by attitude.

• Segmentation by value builds an understanding of who your most

valuable customers are
• Segmentation by behavior helps you know who is most likely to
purchase your products or services, so you can use
marketing funds more effectively
• Segmentation by demographic and other supplemental data provides
additional information that can be used in
predicting customer behavior
• Segmentation by attitude adds another dimension to your customer
understanding. One of the best ways to understand customers’
attitudes is to ask them through survey research.

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IBM Software Customer Intimacy
Business Analytics

Create predictive profiles of each segment

Once you’ve identified the segments of customers who use and value
your products and services, the next step is to understand what products
or services customers in each segment are likely to want next. Adding
this predictive element makes your customer relationship significantly
more productive and profitable.

One of the world’s leading financial services companies initiated a

customer loyalty program using IBM SPSS Modeler. The data mining
solution enabled the firm to analyze its data warehouse of 2.5 million
customers according to 400 different attributes. By defining a number
of different customer segments, the company could focus its marketing
campaigns on the one percent who are not only “extremely likely” to
purchase a product or service, but also have the credit rating to do so. It
recouped its investment in the project within two years.

Customer Lifetime Value

More profit

Grow relationships

Profit
Keep good customers
Less
loss
Loss Win customers cost-effectively

Figure 2: Predictive analytics improves customer profitability from the very beginning
by allowing companies to acquire customers more cost effectively, as this graphic
shows. Then, throughout the customer life cycle, predictive analytics helps companies
design more attractive offers and conduct more effective marketing campaigns,
leading to increased sales. Predictive analytics also helps companies retain custom-
ers, increasing the revenues and profits they obtain from these relationships.

2: Predict the best way to win the right customers

Acquiring customers is costly but necessary. Paying too high a price to
attract customers, however, or acquiring the wrong types of customers,
can have a significant negative impact on your profits.

Using inefficient methods to attract customers will result in higher

costs and profits that are lower than they should be. Attracting the
wrong customers impacts profits, too. For example, if you attract
customers who are likely to leave or “churn,” you may incur the
acquisition cost without ever seeing a profit from the customer
relationship. Other customers may be loyal, but cost so much to serve
that they are only marginally profitable.

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IBM Software Customer Intimacy
Business Analytics

IBM SPSS predictive analytics minimizes your organization’s costs by

directing programs toward the people most likely to respond. You can
further boost profits by focusing on the types of prospects most likely
to become profitable customers.

Create a prediction-based customer attraction strategy

Use predictive profiles to determine what types of customers you want
to attract. Then create a cost-effective attraction strategy that includes
separate plans for each customer segment.

Most companies will want to focus their attraction efforts on winning

over prospects that fit the profile of their most profitable customers.
But other, less-profitable customer segments may have more room to
grow over the long term, or may be more cost-effective to attract – so
marketing to these segments may be an attractive option when
marketing budgets are tight.

Optimize your customer attraction strategy with response

modeling
Fine-tune your customer attraction plans by using response modeling
to predict which marketing programs will generate the highest
response. This benefits your organization in two ways: you attain the
results you want, while avoiding the high costs associated with
unproductive marketing efforts. In this way, you see higher profits for
the money you invest.

A large Belgium-based insurance company saw its profit margin

narrowed and its growth strategy threatened because the cost of adding
new customers exceeded revenues from first-year premiums by almost
50 percent. IBM SPSS predictive analytics and decision management
technologies allowed the firm to first identify groups most likely to
respond to a campaign, and then perform a sophisticated profit-cost
analysis. Using this information the company reduced its direct
marketing costs by 30 percent and made acquisition campaigns
profitable in the first year. In addition, long-term customer profitability
increased by 20 percent.

Improve conversion rates with prospect surveys

Market research can be used to improve customer acquisition both
before and after your campaigns. Beforehand, surveys of groups
identified as likely prospects can clarify their reasons for buying your
products or services, enabling you to refine your campaign offers.
Afterwards, by surveying prospects that did convert and those that did
not, you can learn what worked, and what you need to change, to earn
prospects’ business in the future. By using this type of predictive
intelligence to guide your customer attraction strategy, you can
improve the conversion rate for your best prospects.

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IBM Software Customer Intimacy
Business Analytics

Customer value analytical architecture

Win Grow Keep

Use predictive intelligence

Create predictive intelligence

Figure 3: Build predictive analytics into

Segment and profile your customer relationships and learn
from the data generated by every
interaction. Use your data to know
customers better, create predictive
intelligence on each customer segment
and use that intelligence to improve
customer interactions and maximize
Data customer lifetime value.

3: Predict the best way to grow customer relationships

To maximize customer growth and increase customer lifetime value,
your organization needs to know not only what customers are most
likely to want, but also when and how they will want it delivered. With
IBM SPSS predictive analytics, you can achieve this level of customer
knowledge.

Create a prediction-based customer growth strategy

By using predictive profiles, product-affinity models, segment-
migration models, response models, and even survey research, you can
generate predictive intelligence about your customers. As a result, your
customers will be more satisfied with your service, and reinforce their
decision to buy from you again.

Discover product affinities

Customers often purchase products and services together, or in certain
sequences. By analyzing their “market baskets” – products and services
purchased at the same time – you can offer customers appropriate
additional products at just the right time. Understanding what products
your customers buy together can lead to improved product placement
in retail stores, attractive “bundling” of products in both direct
marketing and online offers, and more timely offers. Not only does this
increase revenues, it generally improves customer satisfaction and
contributes to maximizing customer lifetime value.

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IBM Software Customer Intimacy
Business Analytics

A leading computer retailer in Japan, used IBM SPSS Modeler to build

a recommendation engine that suggests products to visitors to its
IBM SPSS models useful in
website. Recommendations are based on customer profiles and
analytical CRM: information about prior purchases contained in the company’s database.
• Response models predict which The first year it was implemented, the recommendation engine resulted
customers are likely to respond to a new in a sales increase of 18 percent, and a profit increase of 200 percent.
offer

• Product-affinity models predict which Predict segment migration

sets of products customers are likely to Applying data mining techniques to your historical sales data shows you
purchase together who buys what. By combining this information with other data, you can
• Segment-migration models predict which also make other kinds of predictions, such as which customer segments
groups of customers are likely to become will become more valuable and which less valuable, and by what amount.
more or less valuable Predictive segmentation modeling shows you which characteristics are
• Attrition models predict which customers linked to migration between customer value segments. Adding this kind
are likely to leave of predictive intelligence to your customer growth strategy enables you
to realistically plan growth for each segment.

Optimize your customer growth strategy with response modeling

Fine-tune your customer growth plans by using response modeling to
predict which types of marketing programs will generate the highest
response.

A firm that operates 15 vacation parks initiated a growth strategy that

included improving its occupancy rate and cross-selling more sports
and leisure activities to guests. Using IBM SPSS predictive analytics
and decision management technologies, the company added smaller,
more targeted mailings to its marketing strategy. This reduced direct
marketing costs by close to $1.5 million in a single year, while
increasing revenues by $1.65 million.

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IBM Software Customer Intimacy
Business Analytics

Grow relationships by asking customers what they want

Using the data you already have to predict customer needs is a powerful
way to improve interactions and lifetime value. But it is also important
to systematically ask customers what they want. Surveying your
customers and gaining a better understanding of their needs, and why
they buy from you, enables your organization to improve your
customer growth strategy and maximize customer lifetime value.

4: Predict the best way to keep the right customers longer

Studies have shown that customer acquisition can cost five to 12 times
more than retention, and that improving its customer retention rate by
just five percent can increase an organization’s profitability by from 25
to 100 percent. Obviously, improving customer retention can have a big
impact on profits.

Customer attrition is particularly challenging for online retailers and

companies in financial services, telecommunications, and other
industries where customers can change vendors relatively easily.

Create a prediction-based customer retention strategy

Keep your best customers longer by creating attrition models, and then
use these models to determine which customers are at risk of defecting.
You can enrich these models through survey research that adds valuable
attitudinal information.

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IBM Software Customer Intimacy
Business Analytics

Create predictive attrition models

Understand which customers are most likely to leave for competitors
and, more importantly, why. By applying data mining techniques to data
about your customers, you can develop profiles of customers who are
valuable and customers who have previously defected. Then you can
develop strategies to keep your valuable customers from leaving.

A multinational European bank with more than one million customers

successfully reduced customer attrition with data mining. IBM SPSS
Modeler helped it identify the key behaviors of customers likely to
leave the bank, so it could do what was needed to keep them. By
focusing retention efforts on its most valuable customers, the bank
reduced attrition by 15 to 20 percent and increased profits by 10 to 20
percent.

A European telecommunications company also uses IBM SPSS Modeler to

identify customers likely to leave or “churn.” By discovering what types
of customers were likely to leave, the company was able to make
targeted offers that reduced churn by 20 percent, compared to a similar
group that did not receive the offer.

A U.S.-based telecommunications company used IBM SPSS text analytics

and data mining technologies to predict and prevent churn. It increased
the effectiveness of its attrition model by 10 percent, saving hundreds
of thousands of dollars and putting itself in a stronger competitive
position in its industry.

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IBM Software Customer Intimacy
Business Analytics

Conduct and analyze satisfaction surveys

Satisfaction surveys are invaluable in determining not just whether
customers are satisfied, but why, and in uncovering issues that may
affect their future loyalty in time to take corrective action. Even
customers that you aren’t able to retain have potential value to your
organization. By surveying customers that you failed to retain, you can
better understand what you need to do to keep customers like them.

A Netherlands hospital that serves nearly 120,000 patients annually

needed to comply with the requirements of national healthcare quality
legislation. In addition to monitoring mandated quality standards, the
hospital also wanted to monitor patients’ opinions and preferences. The
hospital chose the IBM® SPSS® Data Collection survey research suite
to collect and manage information and IBM® SPSS® Statistics software
to analyze the data. Survey results pointed to several areas in need of
improvement – for instance, a majority of patients indicated they were
insufficiently informed about where they could turn for emotional
support. The hospital used its findings to make improvements and is
extending its evaluation process to its nursing and outpatient
departments.

5: Use predictive intelligence to drive customer interactions

at every touch-point
Monitor and manage customer value
Management gurus tell us that we cannot manage what we do not
measure. This is certainly true of customer relationship management.
Profitable customer relationship management requires precise, timely
measurement of the factors that affect customer success, and your
bottom line. This effort requires a combination of historical and
predictive technologies: predictive analytics, to identify customer
targets for acquisition, up-selling, or cross-selling; and historical
analysis, to monitor the results of marketing campaigns and sales
programs.

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IBM Software Customer Intimacy
Business Analytics

Power CRM systems with prediction

By deploying the results of predictive analytics to every customer
touch-point from your branch offices to your call center to your
website, you can achieve greater effectiveness and profitability. Build
predictive results into your website, and visitors will be automatically
presented with the offer most likely to result in a sale. Or build
predictive results into your call center, so that sales representatives
know what products or offers are most likely to suit a particular
customer’s needs. Every bit of data you have coming in from these
systems becomes fuel for driving future customer interactions and
realizing higher returns.

2
1
3

Figure 4: This is an example of predictive intelligence deployed to a call center

application. The call center rep has information about the customer, including their
lifetime value (1), risk of churning (2) and the recommendation most likely to satisfy
them (3). That recommendation can even be refined in real time – while the rep is
talking to the customer – by conducting a brief “needs assessment” survey. The
survey results are fed into the call center application, which generates a new
recommendation, based on the application’s predictive model.

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IBM Software Customer Intimacy
Business Analytics

IBM SPSS products and services for maximizing

customer value
Interacting with customers profitably requires sophisticated analytical
techniques and powerful deployment capabilities. IBM SPSS predictive
analytics offers such techniques and capabilities through a broad range
of predictive analytics products and applications. These offerings
provide your organization with the analytical capabilities needed to
maximize customer lifetime value.

Deployment family:
IBM® SPSS® Decision Management for Customer Interactions –
Leverage all of your customer information including transactions,
purchases, call histories and website visits to recommend the best
actions your staff should take in real time.

IBM® SPSS® Decision Management for Claims – Quickly and easily

determine how risk should be assessed, and automates many routine
decisions while you retain full control of the claims handling process.

IBM® SPSS® Modeler Advantage – Enable non-technical users to

incorporate their extensive knowledge of their customers, products and
processes into the model creation process, affording them a larger role
in operational decision-making.

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IBM Software Customer Intimacy
Business Analytics

Modeling family:
IBM® SPSS® Modeler Professional – Solve any business challenge
faster with more accurate results with this comprehensive data mining
workbench and its powerful data preparation, visualization and
predictive modeling capabilities.

IBM® SPSS® Modeler Premium – Apply a broad range of advanced

data mining techniques to all of your structured data plus free-form text
from documents, emails, call center notes, blogs, RSS feeds and other
Web 2.0 sources.

Data Collection family:

IBM® SPSS® Data Collection – Improve the productivity and
effectiveness of the entire survey research lifecycle, from survey
authoring to data collection to reporting.

IBM® SPSS® Data Collection Data Entry – Enable users to create

professional surveys quickly and capture quality data efficiently,
ensuring that you can start analysis and find the insight faster.

Statistics family:
IBM® SPSS® Statistics – Enable business users, analysts and statistical
programmers to work together to support data-driven decision-making.

IBM® SPSS® Amos™ – Test and confirm the validity of claims such as
“value drives loyalty” in minutes, not hours, with this powerful and
easy-to-use structural equation modeling (SEM) software.

Consulting and training services:

SPSS has built more than 40 years worth of analytical experience into
IBM SPSS predictive analytics software. Our expertise is available to
extend your own in-house expertise and achieve the highest return on
your investment. We also offer training, to transfer to your employees
the knowledge and skills they need in order to use our analytical
software most effectively for business problem-solving.

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IBM Software Customer Intimacy
Business Analytics

About IBM Business Analytics

IBM Business Analytics software delivers complete, consistent and
accurate information that decision-makers trust to improve business
performance. A comprehensive portfolio of business intelligence,
predictive analytics, financial performance and strategy management,
and analytic applications provides clear, immediate and actionable
insights into current performance and the ability to predict future
outcomes. Combined with rich industry solutions, proven practices and
professional services, organizations of every size can drive the highest
productivity, confidently automate decisions and deliver better results.

As part of this portfolio, IBM SPSS Predictive Analytics software helps

organizations predict future events and proactively act upon that insight
to drive better business outcomes. Commercial, government and
academic customers worldwide rely on IBM SPSS technology as a
competitive advantage in attracting, retaining and growing customers,
while reducing fraud and mitigating risk. By incorporating IBM SPSS
software into their daily operations, organizations become predictive
enterprises – able to direct and automate decisions to meet business
goals and achieve measurable competitive advantage. For further
information or to reach a representative visit www.ibm.com/spss.

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