Actionable Insights From APT's Retail Practice

5 Testing Principles for Retail Banks

February 23rd, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on 5 Testing Principles for Retail Banks)

It is critically important that banks actually test in market their big ideas to ensure that they really will work.  This can help de-risk big decisions and provide empirical information about how to proceed with the idea.  (Think for example of USAir’s announcement that it would charge for soda and subsequent embarrassed back-pedaling as an example of the harm of not testing.)  Experimenting in market to de-risk ideas is one that is increasingly accepted as common practice. 

However, while testing is important to do, it is very hard to do well.  Retail banking is a noisy environment, making it hard to isolate whether a tested idea caused a change in performance.  As a result, too many banks roll forward every idea they pilot, a sign that they aren’t really learning from the pilot. 

Below are 5 recommendations to test more effectively and maximize value from testing.  

1)  Test the right ideas

Testing resources are limited.  There are only so many tests that a bank can devote attention to at a given time, and there are a limited number of branches and customers available for testing.  Focus testing on ideas that meet at least these two criteria:  (1) is this a big enough idea to matter to the business, and (2) will testing help us make the decision (i.e., have we not already decided we are proceeding regardless but truly want test results before we make the decision). 

2)  Agree on success criteria in advance

A frequent reason banks struggle to decide on whether to roll forward a tested idea is lack of clarity on the definition of success.  Advocates of the idea then latch on to any indicators of success and resistors find data to support that the test is a failure.  The two groups then waste time talking past each other.  By defining success in advance, banks can simplify the decision process and take some of the emotion out of the ultimate decision. 

3)  Design the test well

Tests need to be designed properly to provide accurate results and inform go-forward decisions.  First, the test needs to have the right number of customers, branches, or markets.  If a test is too small, then it will be challenging to confidently measure the impact, and tests that are too large can be more expensive and impose more risks.  It is important to find the sweet spot, which will vary depending on the nature of the action tested.

Second, test customers or branches need to be selected to be representative of the network as a whole across key dimensions.  If the test is biased in some way (e.g. we only test in city center locations), the results won’t hold when we extend the idea across the network.

4)  Measure impact across the household, branch, and business as a whole

Understanding the true impact of a test requires additional measurement beyond the specific product and metric tested.  For example, when testing a new fee strategy, you should measure not just fee income but also the impact on other products, retention, new account generation, customer satisfaction, and more.  Any given action can have broad consequences, and test measurement should examine the impact on the business as a whole.

5)  Identify drivers of success and target rollout

Testing should not only produce a go/no-go decision.  Any initiative will work better with some customers than others or in particular types of branches or markets.  Some ideas need to happen across the business to maintain a consistent brand and customer experience.  However others, such as where to add staff or invest capital or increase marketing do not require uniform treatment.  By only extending the idea to the locations or customers where it will work, banks can generate substantial profit gains over an all or nothing approach.

SKU Rationalization Done Right

February 13th, 2011 | Posted by Marek Polonski in Retail - (Comments Off on SKU Rationalization Done Right)

Washington D.C. – In what has become a seasonal ritual, the Girl Scouts set up shop in front of our office building in March to sell their fabled mix of cookies. Mysteriously missing was one of my favorites: Dulce de Leche. No worries, more money to buy Thin Mints, my thinking went.

It was only after a colleague forwarded a Wall Street Journal article highlighting innovative changes being made in this year’s cookie line-up that I realized how much grocery and convenience retailers could learn from the Girl Scouts.

Girl Scouts and SKU Rationalization

It turns out the girl scouts are in the midst of reducing their assortment. But it is the way in which they are going about the SKU rationalization effort that is truly admirable. To quote from the article:

A dozen councils testing the cutbacks with licensed baker Little Brownie Bakers, which is owned by Kellogg Co., hope to streamline sales, speed up cookie delivery and, ultimately, increase profits. (more…)

Improve Customer Experience and Drive Profit

February 10th, 2011 | Posted by Jatin Atre in Uncategorized - (Comments Off on Improve Customer Experience and Drive Profit)

Jim Miller from Prime Performance recently published research showing customer satisfaction scores across different banks and tiers of banks.  The premise is that delivering a better customer experience will ultimately drive better financial performance.

We feel this is valuable information and agree that better customer service often results in an increase in key performance metrics such as new account generation and retention.  Across many banks, we have measured the performance of branches that improved customer satisfaction against a control group that maintained satisfaction levels.  This has shown clear improvements in performance and has held across small banks and large banks.

The question that follows is how best to improve customer satisfaction.  There are a number of options available – increasing staffing, training employees, increasing convenience through longer hours, or improving the branch experience by adding coffee stations or flat screen TVs.  It is important to test different approaches to scientifically determine which improves customer satisfaction and financial performance most and has the highest ROI.

Closing Branches While Opening New Doors to Customers

February 7th, 2011 | Posted by retailblogadmin in Financial Services | Uncategorized - (Comments Off on Closing Branches While Opening New Doors to Customers)

Many banks are now closing branches they acquired in FDIC-backed deals, as a recent American Banker article highlights.  The decision to close branches is often made too quickly and with too little information, and banks need to improve their decision-making process when closing branches.

Certainly, as the article states, sometimes the decision to close branches is “based on a lack of scale.”  But there are many instances in which banks close branches in more central portions of their network, often for reasons of low performance or consolidation.

When deciding which branches to close, there are two key questions: (1) What impact will this have on the bank’s ability to originate new customers in the market? and (2) How will existing customers respond? (more…)

Private Brands: Grocery’s Future?

February 6th, 2011 | Posted by Dan Schreff in Retail - (Comments Off on Private Brands: Grocery’s Future?)

Washington D.C. – Fortune Magazine recently profiled Trader Joe’s, one of America’s most successful “new” grocers. Small assortments of primarily high quality private brand products dominate Trader Joe’s shelves. These private label products are at times sourced from the same manufacturers that make the national brands found in most regular supermarkets. Trader Joe’s business model is one that a number of established grocery chains are looking to emulate – with notable success: recent numbers show store brands attracted a stunning 30% of food servings sold (measured by unit volume) accounting for 17.4% of total dollar volume.  Some analyst predict that this volume could double in the next 15 years.

As is constantly reported, national brands are feeling the pinch as grocers reconsider the power of national brands within their product assortment. AldiTrader Joe’s and Save-A-Lot are have proven that they can retain customer loyalty while offering few brand-name products. Target’s success in differentiating its Archer’s Farms and Market Pantry in-house brands is driving a growing number of retailers to shift assortments to more prominently emphasize private label offerings. (more…)

With the storms of 2010 (both financial and meteorological) receding, it’s time to fully turn our attention to 2011.

In many ways, we expect the trends in 2011 to be continuation of changes that are already sweeping through retail.  We don’t expect any out-of-the-blue bombshells, but the easiest way to lose in retail is to not keep up.


1.  “Gateway” Coupons

The coupon and promotion driven retail environment is reaching some sort of end-game, or at least a nadir.  After all, triple coupons, bounce back coupons, stackable promotions (clearance price + 25% additional discount + 10% coupon + 5% for using the store credit card) and similarly aggressive promotions are so pervasive that they are now the subject of reality TV shows.

In this race to the bottom, the only tactic left is free, as in “Get $10 off a $10 purchase.”  This type of “Gateway” coupon is a straight-up challenge to the consumer (“I dare you to come and cherry-pick $10 worth of merchandise!”).  Surprisingly, there is evidence that this type of offer can actually work very well when used judiciously and infrequently.

2.  Online Convergence

Online and offline shopping convergence has been predicted since the early 2000s and is finally becoming a reality.   The following scenario is now possible:

  1. See or hear ad on TV/radio, reminding you that you need something from a particular store
  2. Search through email in-box or online forums for the latest deal or coupon
  3. Visit store to check-out the merchandise
  4. Buy item at home because the store didn’t have the color, size, or specific item you needed
  5. Have item shipped to store to save on shipping
  6. Visit store, pick-up another item while you’re there

Retailers need to carefully think through the entire shopping experience or risk confusing (with different prices or poorly integrated services) and alienating customers (through poor service somewhere in this chain of events).  The idea that different channels need to be managed independently is defunct.

3.   “In-store” Technology

We’re not talking about an upgraded POS system or an improved IMS.   A big shift in 2011 and beyond is the saturation of smart phones and the resultant change in shopping behavior.  We expect a surge in offerings that allow retailers to target consumers with location based ads and offers.  There is already growing use of 2D barcodes (e.g. QR Code) that link in-store merchandise to online information.  However, adoption of this (or similar technologies that require the customer to take additional action) has been slow.

Instead of asking the consumer to respond to the store, what if the store responded to the customer instead?  For example, suppose that you notice a customer walking towards the exit after having lingered in the electronics aisle for 30 min?  Would it be useful to target the customer with an offer on his way out?  Would a 10% off coupon or an extra year of warranty help “seal the deal”?

As always, this technology cuts both ways.  Consumers will become increasingly competitive and disloyal as their smart phones allow them to inspect in-store and then buy from the cheapest place online.  Brick-and-mortar retailers will never be able to match Amazon’s basket of prices. So, how will traditional retailers fight back?  We haven’t yet seen a cogent answer to this question.


Kmart Joins Wal-Mart in Move into Retail Banking

February 4th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Kmart Joins Wal-Mart in Move into Retail Banking)

The Washington Post recently reported that nearly 30 million households do not have bank accounts. These “unbanked” customers are looking to their local big-box retailer for basic banking services, such as check cashing, money transfers, and prepaid cards. In addition to Wal-Mart, which is already expanding into retail banking, the Chicago Tribune details how K-Mart is now testing new financial centers in 23 stores “where shoppers can cash checks, pay bills, place money orders, and transfer money.”

Banks should have two key takeaways from retailers’ moves into the financial services space. First, additional competitors will put pressure on fees.  Many banks have significantly increased fees in response to regulation, resulting in attrition and lower account generation. Additional competition will only exacerbate this problem, and banks will need to decide if and how they want to compete for accounts.

However, retailers are actually providing banks with a unique learning opportunity.  Banks should determine the impact of competitor actions by measuring the number of accounts lost at nearby branches, as compared to other similar branches where retailers have not opened a financial center.

The number of accounts lost should be looked at in comparison with the profitability of those accounts to determine how to best respond to competitor actions.  If the accounts lost were not profitable to begin with, then no action is required.  However, if profitable accounts are being lost, banks may need to consider new fee structures or other incentives to keep those accounts.

A second key takeaway is to learn from how retailers rigorously test new ideas before rolling them out.  K-mart is testing these new financial centers in 23 locations before rolling the idea out more broadly.  Wal-Mart has been slowly expanding its own financial center program, and as of a September article in US Banker, money centers were still only in 40% of stores. (more…)

Should Banks Be Nicer About Overdraft Fees?

February 1st, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Should Banks Be Nicer About Overdraft Fees?)

US Banker wrote an article on Huntington Bank’s unique policy of allowing customers one day to fix an overdraft before charging the customer a fee.

Huntington’s Director of Products and Pricing, Dave Schamer, has said that this policy has hurt fee income but driven an increase in new account generation and customer retention.  Huntington reports that the policy is successful and overall generating more income.

We think this is a great idea, and Huntington is right to focus not just on fee income but on overall profitability and customer lifetime value.  Other banks are not moving in this direction, though.  Most are focused solely on making up for lost fee revenue due to regulation and have been implementing new fees without thinking about the impact on attrition or new account production.

We recommend that banks try new policies like this in a few well-selected representative markets and measure the impact on attrition, fee income, production, and total revenue.  This will allow banks to focus on long-term profitability instead of being short-sighted and trying to replace fee income at any cost.

Banks should also find the best ways to market these new approaches, as much of the benefit in account production and retention is driven by the positive impression the policy causes.  These benefits will not be realized if customers aren’t aware of the new policy.

Finally, as the US Banker article highlights, customers might also be willing to pay for these types of services, which would provide fee income in addition to other benefits.  For example, to avoid a $39 overdraft fee, customers may be happy to pay a $5 servicing fee to fund the account within 24 hours and waive the overdraft.  Banks should also be testing to determine which services customers are willing to pay for and how much they are willing to pay.