Chief Marketing Officers (CMOs) and Chief Risk Officers (CROs) may seem to have little in common. The CMO has historically focused on driving growth and brand engagement; the CRO has typically focused on safeguarding the bottom line and minimizing unwanted exposure. But the advent of Big Data, sophisticated modeling techniques, and robust algorithms are opening a door to cooperation and opportunities that have never been possible before.
Both practices have long developed insights into their customers based on data and analytics. But in the aftermath of the financial crisis, risk managers have become increasingly involved in business strategy and decisions. That has coincided with marketing’s increased influence on strategy, driven by the unprecedented level of insights into customer behavior and trends that are now possible through analytics.
This convergence creates a new opportunity for both disciplines, in effect, to pool their understanding of customer behavior and apply a broader range of sophisticated analytical approaches. By working together, both disciplines can provide more value to the business.
We speculate that because CMOs and CROs have historically focused on different aspects of the business, there are few examples of close CMO-CRO collaboration today. We believe, however, that there are several specific ways the two roles can work together more closely and learn from each other:
1. Take a customer–life cycle approach. Marketers recognize that buying behaviors change over time as customers get older, have children, switch jobs, build wealth, and retire. To get a handle on that changing value, marketers use an array of data, from prior transactions to predictive analytics.
By contrast, CROs have traditionally segmented customers through a narrower—and often static—range of data that usually reflects their current financial histories but ignores their brighter, more profitable future potential. CROs can increase market share among underserved customers, such as small business owners and the “unbanked” (i.e., those without bank accounts), by adopting the more dynamic “customer life cycle” view. After the recession, for instance, one large lender made a practice of looking for “rehab” customers whose credit suffered in the downturn but who had since managed to achieve more stable incomes. The lender targeted those customers with more attractive rates—rates that reflected the total life cycle value of these customers—allowing them to grow at a faster pace than peers while keeping losses within acceptable risk levels.
2. Use risk data as an avenue for innovation. CROs are deeply familiar with the troves of risk data, such as payment habits and internal credit scores, that their companies keep. With a little creativity, CMOs can work with them to monetize that data to create new products and, in some cases, whole new markets.
The marketing and sales team of one major technology vendor, for instance, partnered with risk to assemble a range of financing packages to help its mid-market clients fund upgrades, manage invoice payments, and smooth cash flows. The risk team helped run the numbers to ensure the client met the right credit threshold, then marketing prepared the package and
reps went to work. The ability to offer financing gave the technology vendor a point of differentiation that helped it beat its revenue projection for the year.
3. Gauge and influence a customer’s “next best action.” Better analytics and understanding of the customer decision journey have allowed CMOs to discern where customers become frustrated, tune out, or turn away. The CMO of a telecommunications company, for instance, found the biggest spike in churn came when customers moved. When marketing dug into the issue, they found the root cause had more to do with the tedium of calling the company and waiting on hold to reactivate an account—typically a 20-minute exercise—than dissatisfaction with the telephone service itself. By updating its website, the company let customers renew their service online in a matter of minutes and with just a few clicks—stemming the churn by 40%.
The risk function can do the same. Risk managers traditionally wait until a negative event has occurred before taking action, rather than looking for ways to intervene ahead of time to change or take the edge off the outcome. A customer prone to overdrafts, for instance, might receive an email when his account dips below a certain level. Mortgage payers with a track record of being more than 15 days late could receive incentives or loyalty points that reward early payment. By pairing behavior patterns in key segments with macroeconomic and demographic data, risk organizations can predict what those patterns portend—before the customer sinks into the red or starts shopping for a loan elsewhere.
4. Adopt a test-and-learn approach. Marketing leaders know that they have to be prepared to iterate and optimize on the go. Procter & Gamble, for instance, realized it was losing market share by testing its media campaigns exhaustively before releasing them. With its 2012 London Olympics sponsorship it resolved to optimize its ads in real time. When testing revealed its original tagline wasn’t connecting with consumers, P&G swapped it out for one that resonated better. And when tracking revealed one version of an ad was more successful than another, P&G immediately shifted media support to the stronger one. The overall media plan was optimized continuously, with the result that P&G saw a 40% bump in performance over its Vancouver Olympics campaign.
CROs can adopt a similar test-and-learn approach to their risk models, which typically see little modification. The CRO of one B2B, tired of getting stung by customers that ran afoul of the company’s 90-day credit terms, implemented a more dynamic way of anticipating delayed or partial payments. In addition to tracking the normal financial metrics, the risk team also kept tabs on unfolding news and events concerning their core client base. A product recall notice, a downstream supplier going belly-up, news of an acquisition or spinoff, or a sudden spike in the cost of a key raw material were all factors the CRO could use to help price the risk appropriately—and in near real time—before renewing the line of credit.
5. Protect and manage reputations. News travels fast in the age of digital, which raises the stakes not just for blunders but for everyday business activities. A small online retailer, for instance, ran a coupon promotion but neglected to ensure the coupons had individual codes to control their use and dispersion. The oversight exposed the company to a potential financial hit that was much deeper than intended. The company faced the choice of whether to cancel the coupon and suffer the brand backlash or honor the coupon and suffer the gross margin loss.
To figure out which way to go, marketing turned to the company’s head of finance and risk to help quantify the potential exposure. The finance team brought its scenario modeling tools to bear. They compared financial data from past campaigns to estimate the possible uptake of the coupon, then analyzed the estimated lifetime value of the customers who would be impacted by the potential cancelation. Running through a series of best, moderate, and worst-case scenarios improved marketing’s decision-making power and gave them a more concrete way to manage the uncertainty.
Effective risk management and effective marketing share the same analytical underpinning, the same need for sound business judgment to supplement the analytics, and the same demand for an integrated top-management perspective. Leaders who recognize this and act upon it can unlock new markets and earn greater risk-adjusted returns.
Here are a few tips for kickstarting a CMO-CRO partnership in your company:
- Select one or two areas for an internal “joint venture.” CROs and CMOs have a full plate, so single out a few priority projects to demonstrate the value of collaboration and cultivating a team culture. Examples could include integrating risk profiles into customer segmentation, using customer risk profiles to target specific promotional offers, or trialing a new credit scoring model.
- Cross-pollinate your talent. The risk and marketing functions share many similar roles—data scientists, modelers, technology professionals—so with the right incentives employees can learn from both disciplines. This talent- and knowledge-sharing approach can also help you develop a more comprehensive view of your customers.
- Standardize customer data. To improve segmentation and targeting capabilities, CROs and CMOs should work to create a common way of capturing and sharing customer data across risk, marketing, fraud, and finance. Defining common standards can improve how data is shared and how it is understood. Also share your analytical methods and practices—knowing how each practice derives its “most valuable” customer list, for instance, can be an eye-opening exercise into each function’s priorities and decision-making criteria.