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Strategic Planning Consultant, Nick Backhouse, gives his views on the way in which global issues surrounding the current financial crisis have altered marketeer’s approach to business. His opionin piece is featured below, but can also be found in the April/June ’09 issue of the ‘IDM Journal of Direct, Data and Digital Marketing Practice’ 

Opionion Piece
Credit Crunch – Data Crunch?

Nick Backhouse

Journal
of Direct, Data and Digital Marketing Practice (2009)
0, 000– 000.

doi:
10.1057/dddmp.2009.5

When
I started to draft this paper a few weeks ago, I intended to refer
to a few of the financial issues that were happening at the time.These
included the bankruptcy of a UK holiday airline, stagnation of
the housing market and the fall of Bradford & Bingley.

However, it
seemed that every time I picked up my pen, the events of the previous
day were already old news and something more dramatic and unpleasant
was happening in the UK and around the world. So at that point
I decided not to link my thoughts too closely to a list of specific events,
which no doubt would have been superseded by the time you started
reading this paper. What has remained constant, however, is the feeling
that ‘things’ have changed dramatically and in some cases permanently,
which, depending on your own personal outlook, may or
not be a good thing.

As
marketeers involved in relationship and direct marketing, these global
issues will change how we go about our business, especially in
the use of data. What we may be witnessing is a seismic shift in attitudes
and resultant behaviours. These changes are not restricted to us
as individuals, but apply equally to how organisations work and do business, or in the case of bank lending, do not do business.

So,
let’s start with the banking industry. For many of us involved in financial services marketing, we have done well with the incremental growth
in lending programmes. Now that those days have gone, with a
return to the more draconian lending policies of the 1970s and the 1980s,
where does this leave all those very sophisticated and continually refined credit scoring models that use behavioural and transactional data
based on pre-crunch conditions? It can be argued on two counts that
they are not entirely relevant to what is happening today.

First,
lenders have changed the audience and the criteria on which they
want to base their lending criteria. Secondly, our ability as borrowers
to pay has also changed and, as importantly, our desire to
increase our indebtedness. While lending is at rock bottom levels this
may not be so much of an issue as the lending taps are eased, as
they must be to help get the economy back on a stable flight path.

So
hopefully when this happens the modelling experts will have their hands
full rebuilding models that are robust and dynamic, but with little
relevant data available to help them in this task. It’s rather perverse to note that data analysts in the risk management departments
of the major financial institutions around the world may be
to blame for some of our current woes by creating algorithms that drove
automatic trading (‘algotrades’) of stocks, shares and derivatives,including
re-packaged sub-prime debt. These algorithms may have been
built on flawed risk assessments based more on current, and what
has proved to be totally inaccurate, market risk rather than the borrowers’ real and long-term ability to pay.

Staying
with financial services and looking at the other side of the coin
in terms of savings, we can see other challenges for data-driven marketing.
Savings has tended to be a poor relation to lending, but look
at many of our leading banks as they try to rebuild their capital bases
and balance sheets by pulling in additional money from savers.

However,
savers’ attitudes are changing. Research from around 18
months ago showed that inertia was a major element with the average
person in the street when deciding where to place their savings.
While around 40 per cent of those surveyed stated that interest rates
were the most important factor, over 25 per cent had no idea what
rate they were receiving and over 40 per cent stated that they always
used the same bank for their savings. A much more recent update
of this research showed that over half of savers will now consider
much more carefully how much they invest and which institutions
they use, based on bank stability and media comments, rather
than just using headline rates.

This
could result in the traditional attitudinal model used for financial services segmentation, based on a matrix of knowledge and caution,
being blown apart. This style of segmentation traditionally threw
up four groupings of roughly equal size:

Disinterested/Uninvolved  – This segment may well have shrunk as
they are reluctantly forced to think properly about basic financial services
and become more involved.

Hedonists – This high-spending, high-borrowing segment may also have
declined now that they have less disposable income to spend and
reduced access to low-cost borrowing.

Financial Sophisticates – Another group that may well have reduced
in size. Their wealth has shrunk as their so-called knowledge
failed them, with equity prices, offshore tax havens and
Icelandic banks to name just a few examples .

Cautious Managers – This group must have grown and no doubt will
now need further segmentation as more of them take greater interest
in who has their money and how much debt they have.

Even
sub-prime borrowers are taking more effort to improve their credit
ratings and financial situation as higher borrowing costs hit
home.

The
challenge for data mining is to identify and quantify these trends as
soon as possible, so that as relationship marketing steps up a gear in the
financial sector, it can react to these major changes in attitudes and behaviours
when building actionable segmentation and robust predictive
models.

Staying
with attitudinal and behavioural changes, let’s now look at
another sector that is also going through a time of turmoil: retailing, starting
with retail catchment areas. These have been traditionally based
on a combination of drive times, distance and plots of customers’ home
postcodes. Some recent data for 2008 show that traffic jams were
down by 12 per cent, while average motorway speeds had dropped
by 1 mph to 62.2 mph, combined with motorists’ average journey
times dropping slightly for the first time in several years.

What
is this telling us? It’s not due to less roadworks, so it’s more likely
caused by people travelling less frequently, going shorter distances
and travelling more slowly in an attempt to reduce their rising
motoring costs.

How
could this affect catchment area analytics? It almost certainly indicates
that catchment areas will shrink as consumers think a little
more carefully about setting out in their cars for shopping trips;
and when they do set out, they may well pack in more tasks. This
could mean that local marketing programmes will need adjustment
as catchment areas alter and the customer profiles within them
are subsequently affected. In the longer term, the models retailers
use for investment and disinvestment strategies may also need
rebuilding.

Another
significant change is occurring in the supermarket sector. Until
fairly recently, organics was the big thing, following hard on the
heels of growth in the low-fat and quality food sectors. Waitrose was
on the up, Sainsbury’s was fighting back and Tesco’s blitzkrieg continued
to roll out. Now it’s all change. Shoppers are becoming more
cautious (that word again) about their food bills, which means that
their shopping trolleys are starting to change in terms of types of food
they are buying and the amount they are spending. But the really big
sea change is in the growth of the so-called value chains, such as
Netto, Lidl and especially Aldi, who are increasing market share through
a combination of new stores and genuine like-for-like sales growth.
Why? Because they are significantly cheaper, and as more and more
consumers move their ‘major shop’ to these stores, the word starts
to go around that they do provide good value and aren’t too bad
to shop in at a time when consumers are worried about their food bills.

For those who can remember, Kwik Save successfully grew its  business
during the 1980s on exactly the same premise. The
data analysts working on Tesco Club Card and the Sainsbury’s sector
of Nectar will now be seeing some pretty marked shifts in
shopping patterns, especially those reflecting that old direct marketing
warhorse of ‘Recency, Frequency and Value’. This represents
a challenge for direct marketers, as those well-established segments
based on transactional and behavioural data have now been
significantly altered. This in turn will affect the messaging and
promotional  communications to new segments on the supermarket
databases.

By
the time you read this, more ‘events’ may well have occurred, such
as increased rationalisation in the financial sector, more corporate insolvencies
and perhaps some good news on energy costs. But what will
not have altered are the changes we are seeing in the attitudes and
behaviours of the UK consumer — changes relating to their finances, their housing, their shopping patterns and their future.

Caution
and concern will be their watchwords. How we in relationship marketing
react with effective data solutions relevant to a new order will
be the challenge for 2009. So instead of credit crunch – data crunch,
perhaps we should be thinking credit crunch – data challenge.

Nick Backhouse

(FIDM) is balloon dog’s Strategic

Planning Consultant

…by Chewbacca's wife!

The balloon dog crew were mystified to find three Mrs Chewbaccas pasted onto the side of our offices yesterday. We're pretty sure it's a Norwich Art's School creation, but are still trying to get to the bottom of this conundrum.
There are mixed opinions amongst the BD staff as to their views on the artwork, but I think we're all in agreement that it's a little disturbing! It's definitely a statement though – looks like we have a Norwich Banksy in our midst!

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