Best Practices in Integrating Loyalty Programs

Into the Customer Value Management Strategy

of Communications and Media Providers

Christine Wyatt, IBM

Onil Gunawardana, Siebel Systems

SUW 20 April 2005

2005 IBM Corporation

Agenda

Issues facing telcos, utilities and media service

providers in managing Customer Lifecycle and loyalty

Optimized Loyalty Management: An integrated

approach from IBM and Siebel

Cross-industry case study examples

SUW 20 April 2005

2005 IBM Corporation

Market responsiveness is a key competence required by

Communications, Media and Energy Service Providers in the
competitive
Situationmarket of today
Problems

Customer development as opposed to

acquisition has become increasingly
important in a saturated market
Telcos need to increase revenue
through the sell-on of new products and
services
Increasing competition from other
channels banks, supermarkets,
insurance

Need to implement Multi-Channel

strategy
Need to boost non-SMS data usage
Need to meet strategies set by Group
Legacy systems
Need to match subsidies and marketing
to customer value

Implications

Needs

Need to consider use/appropriateness

of Customers Loyalty Programmes
Need to maximise use of marketing
spend

Objectisation of marketing budget to

deliver customer lifetime value
Synchronisation with back end systems
Need a competitive intelligence capability
Need to obtain true information and
insight

SUW 20 April 2005

2005 IBM Corporation

A variety of approaches aimed at generating deeper

understanding of the customer have been implemented in
But too often key questions from
Telcos
Approaches
Executives remain unanswered:
How have campaigns affected a
Customer Segmentation
customers value or loyalty?

Transaction analysis
Purchase pattern
understanding

Churn prediction and

management

What characteristics do customers

within a segment share?

What is the lifetime value and risk

(volatility) of my customers?

What proportion of each type of

promotion should be offered to which

customers?

How to exploit the correlations between

marketing actions for better budgeting?

How much to invest in each marketing

action?

How do the most cost-intensive

marketing activities contribute to overall

performance?

SUW 20 April 2005

2005 IBM Corporation

Almost 60% of communications companies think their Campaign

Management initiatives have led to either failure or have generated
limited success, while only
11% has implemented CM successfully
Success of CRM Initiatives

Percent of Respondents

Complete
Success

Failure
Not Applicable

Question: How successful have you been at the following CRM and customer-focused initiatives in your company? (Failure = project stopped, on hold, Complete success = project
implemented according to plan, on time and within budget.)
Number of Responses: Meta Analysis, 64 communications sector companies
Source: IBM Institute for Business Value survey and analysis, 2004.

SUW 20 April 2005

2005 IBM Corporation

Why have these approaches been unsuccessful?

Strategically, churn management is a re-active approach

reliant on success in interpreting behaviours as it happens,
versus a pro-active approach of loyalty management

Inability to develop a single view of the customer data has

to come from many sources with all the data quality issues
inherent in this

A lack of tools to use to optimise marketing dollars, eg. Within

a particular segment being confident in a sequence of marketing
actions that will increase long term customer value

A lack of integrated business processes and technology to

execute Customer Lifecycle Management activities across the

enterprise at every customer touchpoint

SUW 20 April 2005

2005 IBM Corporation

Agenda

Issues facing telcos, utilities and media service

providers in managing Customer Lifecycle and loyalty

Optimized Loyalty Management: An integrated

approach from IBM and Siebel

Cross-industry case study examples

SUW 20 April 2005

2005 IBM Corporation

Tools and approaches from IBM and Siebel to address these

customer management pain points
Siebels UCM
Single view of the
customer

Pro-active approach of

IBMs CELM tool

loyalty management

Tools to use to optimise

marketing dollars

IBMs CELM tool

Integrated business
processes and
technology to execute
Customer Lifecycle
Management activities

Siebel CRM

.Focusing today on CELM and how to use it with Siebels Marketing suite
8

SUW 20 April 2005

2005 IBM Corporation

An integrated, iterative implementation approach we call Optimized

Loyalty Management (OLM)
Siebel UCM
Consolidate Customer Information

Siebel Analytics

Gather Data

Churn rate
Customer Value Index
Offer acceptance rate
Loyalty Index

IBM CELM
Measure

Analyze

Understand customers
Customer Value Index
Loyalty Index

Siebel CRM
Across ALL customer touch points
Marketing
MRM
Campaign Management
Upsell / Cross sell
Lead Management
Loyalty Program Management
Service
Priority Service
Self-service
Sales
Complex Order Management

SUW 20 April 2005

Customer

Execute

Strategy

IBM CELM
Identify series of actions for
each customer segment for a
given budget

2005 IBM Corporation

Marketing managers can leverage their customer information for

optimal modeling and control of Customer Dynamics
State: Medium loyalty & Medium value
Sequence of actions: ExtraP campaign, Cash campaign, Accrual campaign
Revenue: 2000 $
Next state: High loyalty & High value
recommends a
sequence of
specific campaigns

4 The customer

Loyalty Index

2 CELM

moves to a better
state

CC

IBM
CELM

AC

Campaign plan
Revenue

XP

1 - A customer is in
a given state

3 The customer
brings a benefit whe
she responds to the
campaign

10

SUW 20 April 2005

Value index
2005 IBM Corporation

CELM allows marketing managers to dynamically optimize marketing

budget allocation per Customer/Segment
Given:

a time horizon for future

planning

a (sub)set of customers
with associated
value/risk profiles

Determine the optimal portfolio

of customers and offerings which
maximize the value/risk ratio
(ROI) and minimize Saturation
over the given time horizon under
the budgeting constraint.

a (sub)set of eligible
customer offerings (e.g.
campaigns)

a limited marketing
(targeting) budget
11

SUW 20 April 2005

2005 IBM Corporation

The functionality and value proposition of CELM can be

grouped into three key parts: segmentation, prediction of
customer
dynamics and
portfolio optimization Value Proposition
Modules
Functionalities

12

Segmentation

Definition of customer groups based on

demographics and transactional behavior (e.g.
value/ loyalty/ recency/ frequency) or
customized (business) segmentation rules

Prediction of
Customer
Dynamics
(based on
Markov Decision
Processes
(MDPs) and
Reinforcement
Learning
Algorithms

Identification of customer dynamics

(probability to move to a higher/lower value
state)
High accuracy evaluation of customer lifetime
value/risk (volatility) over variable time horizons
Prediction of impact of future marketing
action- sequences on customer lifetime value
Generates optimal future customer targeting
policies because of the consideration of optimal
associations of future actions per customer
vs. next action only
Simulation of change from current to optimized
marketing policies (cost / benefit analysis)

Portfolio
Optimization

Optimally allocate restricted marketing budget to

maximize return on investment and minimize
risk (uncertainty) in customer response

SUW 20 April 2005

Highly flexible state of the art

segmentation algorithms

High accuracy of estimated

customer Financial Profile due to
consideration of value and risk
(volatility)
Better customer targeting policies
because of the consideration of
optimal association of future
actions per customer vs. next
action as its usually the case with
campaign management tools.

Optimized resource allocation per

customer segment in a way which
maximizes the Value/Risk ratio of
the whole customer portfolio.

2005 IBM Corporation

So how does the CELM solution differ from existing products

on the market?

Key difference is the dimension of time

CELM marketing plans consider best treatment for the customer
segment to optimise the eventual value and loyalty of that segment
to the company, rather than the immediate value (and the actions
therefore could be different)

Second key difference is the calculation of the optimal budget

allocation for a marketing campaign within a segment relative to
the likely response and result from that segment of the
campaign

13

SUW 20 April 2005

2005 IBM Corporation

An integrated, iterative implementation approach we call Optimized

Loyalty Management (OLM)
Siebel UCM
Consolidate Customer Information

Siebel Analytics

Gather Data

Churn rate
Value-Loyalty migration rate
Offer acceptance rate

IBM CELM
Measure

Analyze

Understand customers
Customer Value Index
Loyalty Index

Siebel CRM
Across ALL customer touch points
Marketing
MRM
Campaign Management
Upsell / Cross sell
Lead Management
Loyalty Program Management
Service
Priority Service
Self-service
Sales
Complex Order Management

14

SUW 20 April 2005

Customer

Execute

Strategy

IBM CELM
Identify series of actions for
each customer segment for a
given budget

2005 IBM Corporation

IBM CELM and Siebel exchange critical information about

customers to provide a closed loop solution

Customer Value
Customer lists and
associated campaigns

Siebel
CRM

IBM CELM
Value-Loyalty cell
migration rate
Offer acceptance rate

15

SUW 20 April 2005

Siebel
Analytics

2005 IBM Corporation

A few sample stories emphasize the tangible business benefits

thatSample
CELM
improve
Story 1can deliver toSample
Story 2 KPIs
Increasing Customer Profitability

Retention Program Enhancement

Problem: 80% of the customer

base consists of customers
with a negative or low
profitability. Those customers
with a negative profitability
should be presented attractive
campaigns to move them to
better profitability levels.

Problem: Customer churn rates

are high, and retention
programs are costly with limited
success rates on retention
offers that are provided.

Solution: Based on the

marketing budget available for
Q1 and Q2, and the risk profile
that is preferred for moving the
customers to a better
profitability level, CELM
predicts and suggests 5 next
subsequent campaigns for
each value/loyalty subsegment

16

SUW 20 April 2005

Solution: Based on historic

transactional data, CELM
predicts trajectory paths that
newly acquired customers will
follow towards the end of their
predicted customer lifetime.
Sequences of campaigns are
identified to treat customers in
the most effective way to
prevent churn behaviour and
make customers loyal, already
in the early stages of their
lifetime.

Sample Story 3

Segment Value Enhancement

Problem: The youngsters
segment is underperforming in
terms of uptake of new
services. No ideas exist as to
better promote new
products/services and increase
campaign response rates.
Solution: CELM re-segments
the youngsters segment into
different value/loyalty
subsegments. Based on this
new, enhanced segmentation,
CELM proposes 3 targetting
campaigns for the next quarter
to drive the youngsters
segment to a better
value/loyalty state

2005 IBM Corporation

Siebel provides an integrated set of tools for

executing Loyalty Management
Customer

Web, Call Center, SMS, IVR, Email, Partner

Sales, Marketing, Service Best Practices
Business Intelligence & Analytics
Employee Alignment
Marketing

Provisioning

Service

Process & Data Integration

HR

17

ERP

SUW 20 April 2005

SCM

Order
Mgmt

UCM

Service

DataMart

Legacy

2005 IBM Corporation

Siebel Marketing Suite 7.7 is the industrys most comprehensive

solution
Customer

Direct
Mail

Call
Center

Web/
eMail

Field
Sales

Partners

POS/
ATMs

Branches
Stores

Wireless

Bills &
Stmts

Intelligent Interaction Across Customer Touchpoints

Industry Specific, Best Practice Enabled Marketing Applications
Planning
Segmentation
and
and
Resource
Targeting
Management

Multichannel
Campaign/
Dialog
Management

Email
& Web
Marketing

Events
Management

Partner
Marketing/
Trade Promo
Management

Lead
Management

Loyalty
Management

Customer and Business Insight

Enterprise Analytics Platform

Legacy/ SAP
Host

18

PSFT

XML Other

SUW 20 April 2005

Siebel
OLTP

Siebel DW
Server
with prebuilt ETL
Programs

Siebel
Relationship
Management
Warehouse

Data
Marts

Data
Warehouse

ODS

2005 IBM Corporation

Siebel Loyalty Program Management

Members

Partners

Loyalty Member Portal

Loyalty Partner Portal

Carrier

Loyalty Manager
View complete member
profile
Define tiers
Enroll members
Reward behavior
Create targeted promotions
Define accrual and
redemption rules
Service a members request

Join program

Enroll members

Keep profile up to date

Conduct web transactions

Send transactions to the

host organization

Enroll in loyalty promotions

Approve joint loyalty

promotions

Redeem rewards

Manage service requests

Refer friends

Approve transactions

View statements

Manage products

Create Service Requests

Set contact preferences

Collaborate on servicing the

customer

Loyalty Engine
Rules

19

Rewards

Tiers

Member Profiles

SUW 20 April 2005

Eligibility

Promotions

Transactions Point Expiration

2005 IBM Corporation

Siebel Loyalty supports all the key loyalty program

management business processes
Create a Personalized
Define Targeted
Loyalty Promotions

Business and
Customer Insight

Business and customer analytics

Proactive alerts
Fact-based loyalty planning

Closing The Loop and

Measuring ROI

20

Measure success of promotions

Analyze member transactions
Rate partners, products, etc.

SUW 20 April 2005

Loyalty promotions
Define rules, criteria and actions
Partner approvals

Experience

Personalized web site

Multi-channel campaign
Reward behavior

Update Member Tier &

Behavior Profile

Engine updates tiers automatically

360 degree member profile
Order history and transaction
history is maintained

Collaborate w/
Partners Online

Partner submits transactions

Partner services members
2005 IBM Corporation

Adopting and integrating the Optimized Loyalty Management in

your organisation
low

Project/
integration
effort

Operational
practicability

high

21

Scenario 1 (Proof of Concept),

Provisioning of a pilot study: one-off study performed jointly with IBM
experts on a limited scope to demonstrate value of CELM
Study iterations require involvement of IBM experts on a case-by-case
basis
Scenario 2 (Planning and Set-up)
Provisioning of methodology and a desktop application (e.g. Excel based) or
as a stand-alone tool
Client enabled to perform analyses independently on a day-by-day
basis, input data needs to be imported by user
Planning OLM approach
Scenario 3 (OLM Implementation)
Provisioning of simulation method and (system-) tool which integrates the
modeling with other marketing applications in use or required
Multiple users/processes enabled to use CELM independently on a dayby-day basis to support CRM operations, input data is automatically
imported from appropriate systems and can automatically link to execute
and manage campaigns

SUW 20 April 2005

2005 IBM Corporation

Agenda

Issues facing telcos, utilities and media service

providers in managing Customer Lifecycle and loyalty

Optimized Loyalty Management: An integrated

approach from IBM and Siebel

Cross-industry case study examples

22

SUW 20 April 2005

2005 IBM Corporation

CELM In The Press

Last spring, IBM's Services and Research Labs started working with

FinnAir on a project to use mathematical modeling and optimization

algorithms to try to increase customer loyalty, reduce marketing costs and
improve response rates among members of its frequent-flier program...
FinnAir is pleased with an initial project involving half of its frequent fliers.
Eero Ahola, Senior Vice President for Business Development and Strategy,
says the technology has reduced marketing costs by more than 20 percent
and improved response rates by up to 10 percent... "That can be huge
money in the airline business," Mr. Ahola said. "And it's done with
mathematical modeling. We could never do it ourselves." Such work, he
added, shows another step in the evolution of FinnAir's relationship with
IBM. "They've gone from being a supplier to our data center to a partner,"
Mr. Ahola said. "It's a totally different relationship."
25/01/04

23

SUW 20 April 2005

2005 IBM Corporation

Finnair FFP optimizes targeted marketing

activities
Finnair FPlus, as most of existing loyalty programs, was lacking advanced value and loyalty metrics to
quantify, plan, and optimize targeted marketing activities efficiently

CELM was introduced to optimize marketing planning and budgeting of targeted marketing activities in
Finnair FPlus in order to:

Enhance existing segmentation with customer value/loyalty metrics

Estimate customer lifetime value and risk (volatility) over variable time horizons

Identify customers different life cycle phases and dynamics (e.g. Track the value of a family)

Optimize planning of sequences of campaigns per segment (avoid saturation!)

Optimize marketing budget allocation to maximize the Value/volatility ratio

Deliver quality consistently at all customer touch points (call center, check-in, gates, etc.)

Benefits

24

Reduced marketing costs by 20% while improving response rates by 10%

Achieved 80% accuracy rate for predicting eventual customer value

Helped improve customer satisfaction rate by 10%

SUW 20 April 2005

2005 IBM Corporation

Nestle/Nespress optimizes their promotion policies to

proactively promote up-/ cross-selling and avoid churn
Identification of optimal marketing policies per customer segment to

maximize marketing efficiency across the entire customer portfolio and

decrease churn rate

Solution

Sophisticated approach for using analytics on both a strategic and

operational level

CELM tool for multi-staged marketing campaign planning

Benefits

Optimized customer equity over lifetime and increased revenues due to

actionable plan to minimize defection and/ or transition to low value
segments and to optimally promote and leverage up-/cross selling
opportunities

Enhanced marketing ROI due to optimal resource allocation to maximize

value/risk ratio across the entire customer portfolio

25

SUW 20 April 2005

2005 IBM Corporation

Backup

SUW 20 April 2005

2005 IBM Corporation

CELM is highly flexible and scalable against typical customer

requirements and needs

Scalability for integrating large multi-channel data

Optimization of generated rules across channels and over time
Mapping rules into channel-specific actions

Optimization

Mapping

Estimation
Module
Model 1

Data
Preparation
Module

Value
Iteration

Model 2

Channel
Operational
CRM Rules

Model 3

Virtual Join

Scalability

Demographic
Data

27

SUW 20 April 2005

Selective
Sampling

Transaction Data
(Channel 1)

Transaction Data
(Channel 2)

Transaction Data
(Channel 3)

2005 IBM Corporation

An integrated, iterative implementation approach we call a

loyalty management lifecycle
Siebel Analytics
Process
Members
Transactions
and Accruals
Respond to
Customer
Questions
about
Promotion

Measure
Promotion
Results and
Effectiveness

Create
Flexible,
Targeted
Loyalty
Program

Segment
Members and
Create value
Profiles

Loyalty
Marketing
Lifecycle

Create
Proactive
Marketing
Strategy and
Plans

Create and
Execute
Marketing
Campaign

Siebel Marketing

28

SUW 20 April 2005

Design
Reactive,
Event-based
Marketing

Siebel Loyalty

Optimize
Marketing
Budget
Allocation

IBM CELM

2005 IBM Corporation

Screenshot (1): Data Management Raw Data visualization

Raw Data: temporal

information
visualization

Raw Data: static

information
(demographics)

Raw Data: dynamic

information (transaction
and marketing
activities).

29

SUW 20 April 2005

2005 IBM Corporation

Screenshot 2: Customer Histories build customer profile and

track them over time

Customer temporal
data computed every
time period

Static information
(demographics)

Customer
profile/events over
time

30

SUW 20 April 2005

2005 IBM Corporation

Screenshot 3: Customer Dynamics use customer histories to

model customer response
Customer path along the
market segments (path is
highlighted in red and tagged
with individual marketing
actions)
Market dynamics over time
with some statistics (number
of customers in each
segment, transition
probabilities, etc.)
Searchable list of marketing
actions with statistics
(revenue/profit, coverage)

Transition probabilities over

time from one segment to
another

Market dynamics can be

restricted to only a sub-set of
marketing actions. Allows to
assess the impact on the
value and the dynamics.

31

SUW 20 April 2005

2005 IBM Corporation

Screenshot 4: Marketing Action Planning use the customer

response model to infer the best marketing strategy that
maximize the profit under budget constraints
Expected revenue and
cost of the current
marketing plan
Marketing budget
constraint (user input)
Number of customers to
target in each state with
the selected marketing
actions at specific times
Risk aversion factor (risk
averse = do as before)
Simulate what will be the
customer distribution over
market segments if this
marketing plan is
implemented
Revenue distribution per
state
Revenue distribution per
action

32

SUW 20 April 2005

2005 IBM Corporation

CELM software components are all Java-based and by result

can
be easily integrated with a customers existing CRM
SQL Scripts (*.sql) : SQL command files to perform:
software
components (e.g. campaign management software,
Data model creation and import of core data from files/tables
call center
software)
Basic OLAP functionalities for quick data diagnosis
Data preparation (pre-processing) for CELM algorithms

Discretization, Segmentation and Clustering (CELM.discretization, CELM.segmentation,

CELM.clustering): discretizes customer features and creates segments based on business rules
or on advanced clustering algorithms. Classifies new customers into one or several segments
given the value of their features.

Markov Decision Process (MDP) and Reinforcement Learning (RL) (CELM.mdp & CELM.rl): models
the inter-state dynamics (trajectory) of customers as they react to actions (targeting policy) and
generate value (profit). Predicts the best series of actions to take in order to maximize probability
to move to higher value states and minimize the volatility of that value over given time horizon T.

Defector Transition Model (celm.defector): uses the Markov Chain modeling to analyze historical
customer dynamics and produce transition patterns which lead to customer defection

Portfolio Optimization (celm.portfolio): Models customer segments as financial assets in a

portfolio. Finds the best marketing budget allocation strategy which would maximize the
portfolio Return/Risk Ratio (ROI).

33

SUW 20 April 2005

2005 IBM Corporation

IBMs CELM allows CME companies to understand and optimize

customer lifecycle dynamics across value and loyalty states
CELM answers the key question: what are the optimal sequences of actions
which would maximize Customer value and loyalty over some given time horizon?
Campaign E

Campaign C

Campaign A

Valuable
Customer

Loyal
Customer

Loyal
Customer

Potentially
Valuable

Repeater

Repeater

Repeater

Bargain
Hunter

One Timer

Defector

Defector

Campaign B
r1 $

Campaign D
r2$

Present

r3 $
Future

The customers states are represented by the customer/segment features

Actions are represented by the marketing events (e.g. campaigns)
Each transition has a probability (p), generates a revenue (r)

34

SUW 20 April 2005

2005 IBM Corporation

How does it work: The CELM solution generates its actionable

business intelligence based on a predefined two-step approach
Customer
Portfolio

Model
Model
Optimizing

Customer Behavior
Value-based Segmentation
Lifetime Value/Risk profiling
Customer Transition model

Optimized Policy
Optimal Mix Design
Optimal targeting policies
over variable time horizons

period
state
actions
options

p1

p2

pn

S1

S2

Sn

A1
O1

A2
O2

An
On

period
state
actions
options

p1

p2

pn

S1

S2

Sn

A1
O1

A2
O2

An
On

...

t
$
t

...

p1

p2

pn

S1

S2

Sn

A1
O1

A2
O2

An
On

Cost

...
period
state
actions
options

Value
distribution

Discounted cash flows

...

...

$
t

Step1: Find targetting policy ( sequence of campaigns)

Understanding
Simulation
Simulation

Optimization
Optimization

Staged Relationship
actions and options

which maximizes customer value/risk ratio over specified

time horizon T (weeks, months, quarters).

Historical Policy Assessment

Campaign Mix
Product / Customer Mix

Portfolio
Portfolio
Management
Management

Resource Allocation
Portfolio ROI optimization

Step2: Determine when to target, and how much to

allocate to, each customer to implement the policy within
horizon T.

35

SUW 20 April 2005

2005 IBM Corporation

Our team built a model based on the German market data to

analyze the impact of marketing selections on customer
dynamics
Goals:
Analyze the impact of the marketing selections on customer dynamics.

Methodology:
We analyze the German market for a period of 11 months: June 2003 to May 2004.
We started by defining customer histories. A customer history is modeled as a list of
(state, selection, revenue) triplets computed every month as follows:
State: Client position in the segmentation stages given by client. The state value
is computed the first of every month.
Selections: the sequence of marketing actions that have been assigned to a
customer during the whole month.
Revenue: the revenue generated by the customer during the whole month.
Looking at (state, selection, revenue), (next state,), we build the following
transition model:
EKS06/03 + NACC06/03

Active
Member

New
Member

State

36

SUW 20 April 2005

9.7 Euros

Selection

Revenue

New state
2005 IBM Corporation